By Ruma Dubey

A research report can pummel down the stock price of someone as big as DLF? Apparently yes! While many were shocked at the frankness with which this Toronto based research firm – Veritas Investment Research presented its report, frankly, it came forth as a breath of fresh air. Calling a spade a spade never goes out-of-fashion.

The mess that DLF is in, is not exactly a secret. Everyone knew and knows that it will take a while for it to crawl its way up from this self-dug abyss. So why was the market shocked at all? Probably it was more to do with the clarity and audacity with which Veritas presented the facts. More than anything else, the market was spooked by the report stating that DLF through its dealings with DAL from fiscal 2007 to fiscal 2011, has inflated sales by at least Rs11,236 crore and its profit before tax by Rs7,233 crore. Further shocking was Veritas saying that based on the quality of management alone, the share is not worth a buy, worthy of nothing more than Rs.100. Understandably, DLF has called this report as ‘mischievous’. Well, the same research firm, in FY10 had similar and harsher words for Kingfisher Airlines and it too had refuted the report but look where Kingfisher is today?

This report, for a company like DLF which is India’s largest realtor is difficult to digest. Well, truth for many, most of the time is difficult to digest.  The company, which was essentially a Delhi based realty company, shot to the number one slot, thanks only to its highly expensive IPO. Preposterous pricing at a time when the market was at its boom, made its promoter, Mr.KP Singh, overnight, amongst the richest men in India. He stands at 130th position in the Forbes’s list of world’s richest people, released in 2011, and has a personal wealth of $7.3 billion. And all because of one expensive IPO!

Caught within its own vanity, the company like a shark chomping away anything that came in is way, bought land wherever and everywhere, at any price. To a large extent, it would be no exaggeration to say that DLF, in some way, escalated the realty prices by buying land at unheard of prices. And today, that is what has come to haunt it back. Well, its kaliyug, you have to bear for your actions, sooner or later.

This incessant land buying at exorbitant prices and with demand coming down, has finally caught up with the company. Its net debt as at 31st Dec 201 stands at a gargantuan Rs.22,760 crore. You cannot help but wonder how could it have got into such a huge debt? Gumption that it is so big that it is invincible?

Like a true politician, promising the earth and the sky when coming to garner votes, DLF, at the time of its IPO, had promised the universe. But sadly, like the politicians, DLF too has reneged on its promises. The management since the 2007, has failed on almost all counts in executing its promised grandiose plans to build mega townships, become free cash flow positive, build a mega convention center in the NCR region and the list is endless.  Just because a politician is big and powerful with no performance, would you re-elect the same when performance is highly questionable? Ditto for DLF. It has run till now on its past ‘glory’ but it needs to do more than sell land parcels and stakes to PE funds. It needs to understand that it is in trouble and it needs a concrete plan to get out of this self-created mess.

What this also means is that with the top notch realtors suffering, the sector is probably worse off than what we are seeing on the surface. Another big realtor, HDIL is saddled with a debt of over Rs 4,000 crore and is selling land parcels. But surely today, HDIL will be feeling better knowing that big brother DLF is in a much bigger mess. Unitech’s debt as at 31st Dec 2011 stood at Rs 5,190.26 crore. Debt of Parsvnath at the end of Q3FY12 stood at Rs.1300 crore. The total accumulated debt of the top 12 realtors of India at the end of the third quarter stands at a huge Rs.50,000 crore, of which DLF is responsible for 45%.

DLF has no concrete plans, apart from selling land, to get out of this mess and that is the worrying part. DLF’s duress today is a reflection of the entire realty sector of India. A mess which is largely of one’s own making and partly due to economy.  It is said greed eats oneself up, and DLF has proven this to be true.

Highlights of the Veritas Research report:

• DLF may need to restructure loans and dilute equity to get out of the hole it finds itself in, adding the company has negative cash flows of Rs936 crore this year.
• Questioned the disclosed book equity and asset base of the company, hinting at irregularities in the DLF and DLF Assets Ltd (DAL) merger.
• Through its dealings with DAL from fiscal 2007 to fiscal 2011, the company inflated sales by at least Rs11,236 crore and its profit before tax by Rs7,233 crore.
• Based on the quality of management alone, the share is not worth a buy. And considering all its ills, the stock is worth no more than Rs100.
• DLF has undertaken questionable related-party transactions to boost the value of DAL prior to its acquisition by DLF, thereby subverting the interest of minority shareholders via a higher purchase price for DAL.
• In the end, DLF will seek assistance from financial institutions to restructure loans. Issuing equity in a secondary offering thereby diluting shareholders, and killing the current dividend are the only reasonable options for the company
• DLF has also failed to deliver on commitments made during its IPO in 2007. Since then, the management has faltered at every step in executing its grandiose vision to be a conglomerate with tentacles spread across hotels, build mega townships, become free cash flow positive by fiscal 2011, build a mega convention center in the NCR region and so on.