DLF: In the red

The stock dips 29% in 2011, as new sales and land development remain stagnant.

From the start of this year, a segment of analysts has held on to its bullish view on the real estate sector. After eight months and 11 rate increases, things have only worsened for developers. The BSE Realty Index lost 15 per cent of its market cap in August. All these factors have hit the country’s largest developer DLF, too, even as analysts maintained their bullish view in the hope the company would improve its cash flows. However, the Competition Commission of India’s (CCI) August 12 order on DLF has come as the proverbial straw on the camel’s back.

CCI levied a penalty of Rs 630 crore on DLF, which is seven per cent of the average turnover over the last three years. According to Emkay Global, after the recent order on the company due to complaints by Belaire Association, CCI has received more than 10 complaints from other DLF projects’ associations such as Park Place, Magnolias, Aralias and New Township Heights. The commission is scrutinising these. While DLF can appeal to an appellate tribunal and even as CCI’s penalty charges will not increase, the consumer associations can increase their demands for compensation. Even if DLF strikes an out-of-court settlement with consumers, the CCI order will stand, explains Emkay Global’s analysis, on the basis of an interaction with CCI member R Prasad.

On Tuesday, as news of stock downgrades started coming in, DLF shares fell 4.43 per cent to Rs 199. Morgan Stanley downgraded the company’s stock on the belief the company “could remain in a financially tight situation in terms of lower profits and stretched balance sheet for the next few quarters. Hence, we have downgraded our rating to equal weight and our new price target is Rs 177.”

Also, with the macroeconomic situation continuing to worsen, all hopes of the company improving its sales seem to be diminishing. DLF’s new sales have been stagnant for three years at 10-12 million sqft (Rs 6,000-7,000 crore) and the land under execution has been flat for the last six quarters, explains Morgan Stanley. As the older projects get delivered over four-six quarters, DLF will become more dependent on new launches for cash generation. In addition, high input costs and higher interest expense will hurt earnings. Though analysts expect the company to seriously start reducing debt from the third quarter of FY12, it is unlikely to result in a rerating.