What lies ahead for DLF?

Last Updated: Thu, Oct 11, 2012 04:32 hrs

The last few days have seen serious allegations being levelled against DLF and Robert Vadra. The markets obviously haven't taken it lightly. Amid high volumes (highest since April 1, 2012), the DLF stock has fallen almost 12 per cent compared to its closing of Rs 242 last Friday (to Rs 213 currently, representing a loss of about Rs 4,900 crore in its market capitalisation.

While both Vadra and DLF have vehemently denied the allegations, the developments have left the analyst community worried. Although some experts suggest that things could get worse from here on for DLF, others believe that it will be difficult to prove charges (of criminal wrong doing) in the court of law. Nevertheless, for investors, experts say that it could be better to avoid the DLF stock, at least till the clouds clear, as they expect the stock to remain under pressure in the near-term. They advise that investors look at other options (regional plays) in the real estate space like Oberoi Realty (Mumbai), Sobha Developers (South), which have the potential to deliver decent returns.

SP Tulsiyan, investment analyst, says, "These are quite serious allegations and now the matter will go to judiciary. Someone will come forward and file a PIL (public interest litigation). There are many issues which have been raised including interest-free loans given to Vadra. In fact, the company has also given clarifications, which are wrong. The corporate governance issue is not tolerable by markets. In the past as well, DLF has various controversies (Veritas report, merger of DAL assets, convertible bonds issue prior to its IPO). The corporate governance has been poor". Tulsiyan isn't positive on the stock.


Financial Year
In Rs crore 2011 2012 Q1'13
Net sales 9,560.6 9,629.4 2,197.7
% change y-o-y 28.8 0.7 -10.1
Operating profit 3,752.7 3,878.9 1,065.6
% change y-o-y 9.8 3.4 -3.8
Net profit 1,542.4 1,210.3 292.8
% change y-o-y -10.3 -21.5 -18.3
Consolidated figures

On the other hand, a fund manager who requested anonymity said, "Mere allegation is not enough. But, if a probe is to happen, then it will become an issue as it could get politicised. It will then prove to be an overhang for the stock".

But, there are some experts who believe that most of the issues raised are already known and are already reflecting in the share price. And, it's the business environment which is worrying them more.

Sonam Udasi, Head of Research- Institutional, IDBI Capital Markets, says, "The bigger overhang will be the Rs 23,000 crore debt on DLF books and the fact that Indian economy is slowing and hence, demand growth for homes will also be under pressure." Udasi adds, "Our rating on DLF is 'reduce', which was even before these events happened as we are concerned on the company's high debt levels. Our target price for the stock is Rs 205."

While there is lack of clarity on how events will shape up going ahead, there could be other potential repercussions for DLF say some market participants. An analyst, who tracks the real estate sector at a domestic brokerage, says, "There could be some delay in sale deals pertaining to non-core assets like wind mills and Aman Resorts. While such allegations don't impact the core business much, it may impact the core management's bandwidth which could have an indirect impact." The analyst earlier had a positive view on DLF due to improving operations and expected decline in debt. "But these recent events could lead to an increase in volatility for the stock which may underperform in the short-term. The stock has been range-bound between Rs 180-240 in recent months, and if it comes down to Rs 180-190 levels, it could be a good entry point", say the analyst.

The sale of non-core assets is crucial to DLF achieving its target of lowering debt. The company had earlier increased its overall target of asset divestment (medium-term) to Rs 10,000 crore from Rs 6,000 crore previously. Aman Resorts and wind mills, which were part of the divestment plan, together are worth between Rs 2,500-3,000 crore, estimate analysts. And, together with Rs 2,700 crore Mumbai land deal (recently concluded with Lodha group) could help DLF cut its debt by Rs 5,500 crore.

The markets would be watching developments on this front too given that the macro environment is subdued and revenues for real estate companies like DLF have been under pressure. Along with higher interest outgo, DLF's profits have been declining in recent quarters. But, as experts say, if interest rates fall in the coming months, it will not only help DLF but the realty sector as well.

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