Why DLF Should Be Valued Half Its Current Market Cap: Veritas

Canadian equities research firm Veritas Investment Research, which hit the headlines last year for raising fingers at corporate governance of some of the top business groups in the country, is back doing what it does best – ripping apart companies which it finds overvalued and not shying away or mincing words while doing so.

This time around, the company on the firing line happens to be DLF Ltd, India’s largest real estate developer according to market capitalisation and promoted by billionaire industrialist K P Singh and his family. According to the latest report by Veritas, the stock should be valued at Rs 100 per share.

The report titled ‘A Crumbling Edifice’ and authored by Neeraj Monga and Nitin Mangal, has been released today and immediately created a stir in the market, as it has literally butchered DLF’s stock price. DLF’s shares opened on the BSE at Rs 224.80 a unit on Thursday and crashed to Rs 197.25 in the afternoon, finally closing at Rs 214.65, down 5.17 per cent in a weak Mumbai market.

As the report surfaced in the market, quite a few realty analysts across brokerages agreed with Veritas' research rationale.

When contacted, DLF responded, “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. The company adheres to the highest standards of corporate governance and financial integrity, and the audited financials of the company are always in the public domain.”

The report takes a shot at DLF’s inability to undertake asset sales, rationalise its land bank and divest its non-core assets. It also points out that after the mega IPO of the realtor in 2007 at an issue price of Rs 525 per share, the company has seen its share price declining 57 per cent, compared to an approximate gain of 29 per cent in the 30-stock benchmark market index Sensex in the same period.

Other large companies which have come under the Veritas scanner are Reliance Industries, Reliance Communications and financially stressed aviation firm Kingfisher Airlines.

The report also voices concern about the realtor’s repayment ability of the humongous debt, which it has piled on (Read our report on property developers’ woes here and here).

The Veritas duo believes that DLF will seek assistance from financial institutions to restructure its loans. “We believe issuing equity in a secondary offering, thereby diluting shareholders, and killing the current dividend are the only reasonable options for the company.”

It also questions DLF’s grand business plans and management strategies.

According to the report, DLF has faltered at every step – by selling its hotel assets and exiting mega township projects in Karnataka and West Bengal, to name a few. Also, the report cites an example of its Capital Greens project and abusing the percentage completion method (POCM) in the same. POCM is the most favoured way of booking revenues by realty players in the country but its authenticity has been widely questioned by analysts.

The report does not spare the promoters either. In December 2009, DLF had merged its commercial assets business with DLF Assets Ltd (DAL), a promoter-owned company. While DLF said that it had accepted the recommendation of the special committee, which consisted of independent directors, its independent advisors and valuers for the merger, nowhere had it stated the valuation figure.

Monga and Mangal further wrote, “We also believe that 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.’’

The Veritas duo noted, “Most importantly, we do not believe the disclosed book equity and asset base of the company. We believe that via its dealings with DAL, from FY07 to FY11, the company inflated sales by at least INR 11,236C ($U.S. 2,607M) and its profit before tax (PBT) by INR 7,233C ($U.S. 1,690M).”

Although DLF had been facing brickbats from the analyst community since the DLF-DAL transaction, analysts started upgrading the company since last year as DLF was able to sell off a few land parcels. But it could not meet its non-core asset sale guidance on Aman Resorts and other assets which had, once again, put a question mark on its ability to reduce debt on books. Currently, it has gross debt of around Rs 25,000 crore.