09 May 2009
THIS SINGH IS (NOT) KING
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.
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