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Veritas says DLF accounting, biz model suspect

Report mischievous, a/cs in public domain, says company

BS Reporter  |  New Delhi 

Canadian research firm Veritas has slammed realty major DLF Ltd, calling its accounting practices “conflicting” and pointing at gaps in its business model — charges the company termed “mischievous and presumptive”. Earlier, Veritas Investment Research had come out with damaging reports on other Indian firms, including Reliance Industries, Reliance Communications and Kingfisher Airlines.

Veritas has said DLF’s stock is at best worth Rs 100, and the company may have to recast its loan. DLF said “the company adhered to the highest standards of corporate governance and financial integrity”. “We do not generally comment on individual research reports. However, this report in question is presumptive and mischievous as the analysts have never contacted the company to seek any information or clarification,” a DLF spokesperson said . “The audited financials of the company are always in the public domain,” he added. Following the report, the DLF stock price dropped 5.5 per cent on Thursday, becoming the biggest loser on the Bombay Stock Exchange, closing at Rs 214 after an opening of Rs 224.

Analysts said the report may be fundamentally correct but was exaggerated in terms of devaluing the stock to Rs 100. The report titled, ‘A Crumbling Edifice’, referred to the claims made by DLF on its assets during its IPO process in 2007.

It said the company was now divesting the same assets. Veritas, while talking of DLF’s stock price declining 57 per cent within five years of the IPO, said it was a case of a “dream gone sour”. In the same period, the Sensex gained around 28 per cent, the report said.

“Management is scrambling to consummate assets sales, rationalise its land bank and divest non-core operations within five years of a much-publicised IPO — in May 2007 at a price of Rs 525,” said the report. It called DLF an “organisation under duress” and alleged its balance sheet was “stretched”.

“We believe that via its dealings with DLF Assets Limited (DAL), from FY07 to FY11, the company inflated sales by at least Rs 11,236 crore and its profit before tax by Rs 7,233 crore,” it said. Anubhav Gupta, analyst, Kim Eng Securities, said that in 2008, DLF sold commercial assets to its sister arm, DLF Assets, but the payment was never made and was accounted in DLF’s balance sheet as ‘outstanding in the near term’. “DLF Ltd expected a payment of Rs 5,000 crore in 2009-10 from DAL, before it got absorbed by DLF,” he said.

“What the report is saying is nothing new, as the accounting practice of capitalising 60 per cent of interest cost on land banks and unfinished projects is misleading and has caused both inflated earnings and higher book values,” said Gupta. The report pointed to the company's lack of free cash flows, absence of a credible plan to reduce debt on its balance sheet, and overexposure to Gurgaon.

“The report has gone a little overboard in terms of pricing the stock. It should be somewhere around Rs 170-180,” said an analyst, who did not want to be named.

MCA orders inspection of the company’s books
The Ministry of Corporate Affairs (MCA) has ordered the inspection of the books of accounts of realty major DLF in view of complaints received from investors regarding its accounts. “We have ordered the Regional Director (North) to carry out an inspection under Section 209 of the Act. There were several complaints from investors alleging  anomalies in the company's books,” a senior official said. 

First Published: Fri, March 02 2012. 00:41 IST