)
India’s largest realty company is trading at one-tenth of its peak valuation, thanks to a series of developments affecting its performance and perception. It is now near its all-time low level on news that the new BJP-led government in Haryana is going to probe all land scams, including the deal between UPA chairperson Sonia Gandhi’s son-in-law Robert Vadra and DLF.
While it might sound like political vendetta, the news is certainly not good for DLF. Newspaper reports have quoted senior cabinet minister Anil Vij saying “We would hold a probe into acquisition of 70,000 acres during the 10-year regime of Bhupinder Singh Hooda government. We would inquire whether the land was used for the purpose it was acquired. It would be probed if there was any violation in acquisition to benefit any individual.” The statement could be interpreted as hinting at the deal, cleared by the Bhupinder Singh Hooda government, between Vadra-owned Skylight Hospitality and DLF.
Depending on the outcome of a government probe into its deals, the company could find itself saddled with a massive amount of debt since DLF DLF and six of its senior executives were recently barred by market regulator Securities and Exchange Board of India (Sebi) from accessing capital markets for three years. The Sebi penalty was for failing to disclose key information at the time of its record-breaking 2007 IPO.
Reports say that DLF will be unable to redeem mutual funds worth Rs 2,500 crore in view of Sebi's ban on the largest builder. Mutual funds, however, have said that the capital market regulator should not enforce all its rules on them.
Rating agency Crisil had said that the ban threatens to hinder the builder’s efforts to reduce its debt burden by replacing bank loans with cheaper funds raised from securities markets. Crisil has put DLF’s credit under rating watch with negative implications following Sebi’s action. Not only will access to new funds be a problem, but a ban on raising funds from capital markets will also affect the company’s plans of rolling over its existing debt.
DLF had been hopeful following the NDA government’s Budget announcement on REIT (Real Estate Investment Trust). In an analyst presentation on July 31, 2014 DLF said that the new government’s “‘speedy’ move to consider tax incentives for REIT’s is a positive move and a recognition that if India was to urbanize, attracting institutional capital will be key to that success”. The company was hoping to monetise its rent-yielding assets through this route.
According to Goldman Sachs, DLF’s rental income has increased by three times between FY10-15 (estimated) while its debt has remained constant during this time. Further, the report dated October 20, 2014 says that the company has been maintaining cash balances to meet debt/interest servicing requirement for 2-3 quarters. This signals that there is no immediate liquidity crisis for the company.
But in the medium term the company will have to increase its sales. The only option left with DLF now is to speed up sales of its assets (land bank and developed property) most of which are in Gurgaon, Haryana. Abhishek Bhandari of Macquarie said in a report that DLF may have to resort to large asset sales to reduce debt. But if the Haryana government starts looking into all dealings of DLF, questions will be raised on possibility of such sales, at least in Haryana.
There is little doubt that both DLF and its promoter Kushal Pal Singh’s image has taken a beating. A Bloomberg article quoted real estate analyst Anubhav Gupta of Kim Eng Securities on the ban as saying that “This ban raises red flags regarding corporate governance at the company. Investors have all the reasons to be concerned about the governance practices there. The company is left with no choice but to sell assets to tide over the liquidity crunch in the offing.”
Given the current scenario, will it mean that DLF will have to resort to selling its assets at a distress price? The Goldman Sachs report says that even if the company sells its developed projects at a 20% discount and its land parcels at a 50% discount to prevalent prices, DLF will still be valued at Rs 150 per share as compared to the current price of Rs 110.50.
Of course, it is entirely likely that the market has overreacted. Unless a sizeable chunk of DLF’s operations in Haryana are caught up in litigation, the stock can be a contrarian bet.
