09 May 2009
DLF traces its history to 1946 when it was founded by the Late Mr Raghavendra Singh and the current promoter, Mr KP Singh. However the milestone we are interested in is 1981, when DLF Universal commenced development of DLF City in Gurgaon. Gurgaon then, was ages away from what we now know it as. One used to wonder why someone would go so far away from Delhi to live. Especially considering that Dwarka, an address in Delhi (unlike Harayana for Gurgaon) and which had land, access and problems (water and electricity), similar to that of Gurgaon, was still not developed. Why and how this preferred order of development occurred (first farway Gurgaon and then Dwarka, the destination nearer to home) is a question that the Indian polity, bureaucracy and Mr KP Singh must answer someday. But that is a subject of another post.
With the development of Gurgaon, DLF passed from being an obscure rival of Ansals to being the premier real estate company in the country and after its IPO, one of the largest companies too.
However, of late, it has been in the news for all the wrong reasons. First came the fall in realty prices. With it went the era of easy sales at any price asked. The stock price tanked, 'outperforming' the index on the way down also! A large number of questions were being asked - about its debt, its financial strength, the status of its ongoing projects and its very future.
The latest result i.e. for fiscal 2009 and the concomitant news flow also raises a number of red flags especially for a long term investor. But first an analysis of the result.
Net profit declined by 41% but the EBIDTA (Earnings before interest, depreciation, taxation and amortisation) margins were at 57% (down from 67%). Revenue declined 28% from Rs 7812 Cr to Rs 4629 Cr. All else remaining same, net profit should have declined by 33%. This higher than normal fall was attributed by the company to three issues :-
(a) Fall in margins from DLF Assets Ltd.
(b) One time price correction for existing buyers.
(c) A shift to affordable housing.
The Red Flags
Two out of the three issues mentioned above are potential red flags.
Firstly. DLF Assets Ltd (DAL). This is a company owned by the promoters. It buys assets created by DLF and sells these in the market. At last count DAL owed DLF Rs 3382 Cr. Now let me understand this correctly. DLF sweats it out to create an asset (using my money as an investor). It then sells the asset to the promoters' personal company(DAL), at a price determined by .......????? DAL then sells these in the market. And it doesn't pay DLF back for goods it sold. This arrangement is interesting to say the least, and juicy (at least for the promoter). Not to forget the fact that DAL generates cash flow from lease rentals of commercial space 'bought' from DLF and tax free rental income from SEZs. I wonder why DLF can't do that? Instead DLF ventures into the totally 'related' business of wind farms. WOW!
Secondly. A one time price correction to existing buyers is like offering a discount after making a sale. The closest analogy I can think of is debt restructuring carried out by banks for a failing company. It also smacks of profiteering - on the part of the company when the going was good; and blackmail. This can be a potential catastrophe especially when DLF goes to sell similar assets again in the future (and in a softer market).
The Pink Ones. There are numerous issues which can be classified as 'Pink' - like withdrawal from two large projects totalling 327 Mn sq ft i.e. a fall of 43%, the likely 7% stake sale by the promoters and the Rs 16,358 Cr gross debt against a market capitalisation of Rs 40, 823 Cr. In addition, it is exiting from township projects in two states, a convention centre project in Delhi and other long gestation projects. Doesn't say much for foresight and sagacity.
The Bottom Line
The property market does not look to be changing course for the better, at the moment. Coupled with the red flag scenarios mentioned above and the 70% rise in the stock price since Mar 09, I would give this stock a wide berth for the moment.
02 May 2009
Whenever I speak to someone who is not an investor in the stock market (hereinafter called as the 'disbeliever'!), the oft heard refrain is that there is too much risk in the stock market. "See what happened last year", I am told before being given the 'look' which says, 'I know what I am doing with my money thank you. Nothing good ever came out of risking it in the market'.
There is risk in the stock market.
As there is in bonds, realty, commodities and heck, even in gilt.
The first risk in the stock market is of expectation. If I expect the stock to give 20 % dividend and it gives 10%, well that's a risk I had taken when investing. This risk arises not out of the losses, a business is going to suffer but my lack of understanding of the issues at hand. Businesses will fluctuate and I must understand the fluctuations and invest accordingly. For if I understood that the business would not generate enough profit, I could either lower my purchase price or give it a go-by altogether.
So in order to lower my expectation risk, I have to :-
(a) Increase my depth of understanding.
(b) Be conservative in expectation/ assessment.
Both of the above are cornerstones of value investing.
The second risk a stock investor takes on is temporal. If I expect the stock to deliver 25% Compounded Average Growth Rate over five years and it does so for four of those and not for the fifth (remember 2003 to 2008!!), I run the risk of being forced by events (in this case, my cash flow requirements) to sell at an inopportune moment.
Temporal risk occurs as a result of loss of value of a stock. However, unless this value is realised through actual sale, it remains notional. Hence it stems from the DNA of the funds used. If they were meant for the college education of the daughter, t'were better if not invested or if invested, then extracted when the going was good and not be timed to perfection.
So in order to overcome temporal risk, I must be prepared to go to the mattresses and wait out for the long haul. Hence the need to invest in the stock market with money, the requirement of which, does not dictate your sell decision.
THE BOTTOM LINE. Invest in the market after understanding what you are doing, with money you do not need for the investment horizon.
AN ASIDE. One thing good about the concept of risk is that it allows a lot of people to earn their daily bread and then some more, by carrying the stage name of a 'risk manager'!
RISK, LIKE GOD, IS INSIDE US
This blog should not be construed as investment advice, either on behalf of particular stocks or in regard to overall investment strategies. It is a site aimed at understanding competitive advantages and valuing businesses. The information provided here comes from publicly accessible sources, but errors in these sources and in transcription may occur. Any investment decisions you make should be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs.