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Money Dec 20, 2012

DLF's debt cutting drive does nothing to cheer investors

By Firstbiz Staff

If DLF is on the right track towards reducing its debt to Rs 18,500 crore by the end of financial year 2013, why is its stock trading lower on the bourses today?

The stock is down 1.13 percent at Rs 223, while the Sensex is down 0.39 percent at 19399.

On Monday DLF sold its stake in Aman Resorts luxury hotel chain back to its original founder Adrian Zecha for around Rs 1,650 crore, while retaining Lodhi Hotels, Aman Resorts' flagship property in New Delhi.

Shouldn't the market be enthused that India's biggest property developer is finally paring down its debt by getting rid of its non-core assets?

Perhaps investors still haven't forgotten the realtors' political linkages. For, ever since its links with firms promoted by Sonia Gandhi's son-in-law Robert Vadra hit the headlines, investors have hammered DLF shares as the sweet-heart deals raised many doubts about the company's corporate governance.

After roping in Lodha to buy its NTC Mill land in Mumbai in August for Rs 2,700 crore, the real estate player was hoping to see better times. In June, it sold its entire stake in Adone Hotels and Hospitality for Rs 567 crore and the management is confident of selling its wind power business by the end of March for around Rs 500 crore. By the end of October, DLF managed to reduce its debt to around Rs 21,200 crore .

But a Mint report highlights that since the time the Lodha deal was announced in mid-August, DLF shares have risen less than 4 percent, while the BSE Realty index has risen over 27 percent.

Last month, the Competition Commission of India (CCI) rejected a complaint of alleged abuse of market dominance against real estate major DLF, related to a housing project in Chennai. And last week, the Supreme Court vacated its stay on DLF's Pinjore-Kalka Urban Complex. DLF is now gearing up to proceed with construction of its 227-acre township called 'DLF Valley. Earlier, the Pinjore-Kalka Urban Complex Project had run into rough weather when farmers of Islam Nagar, Bhagwanpur and other affected villages alleged that their land was forcibly acquired by the Haryana Urban Development Authority for the project.

But just when things were looking up for the company, a report in the Economic Times today once again brought to fore the close links between corporates and relatives of politicians in real estate.

Analysts have time and again cautioned investors to only bet on players with minimal debt-to-equity ratio, strong cash flows, no share pledges and high governance standards. If one were to look at these fundamentals, DLF is a clear loser.

According to the ET report, companies controlled by close relatives of Haryana's Chief Minister Bhupinder Singh Hooda, who was earlier in thespotlight for having cosy relations with DLF, have gained a foothold in the state's property sector via transactions with Unitech and CHD Developers.

As per the report, Havelock Developers, a subsidiary of Unitech procured land in Fazlipur and Badshahpur areas in Gurgaon and Haryana. However, the company got an unsecured loan of Rs 6.7 crore from Unitech before the ownership was transferred to Hooda's daughter and son-in law.

So even if DLF does manage to pare its debt and kick start the sales process form its new launches, it continues to remain in spotlight for all the wrong reasons. While it was easy for the company to expand when the money was easily available and the going was good, selling out when the tide has turned around has not been easy, which is perhaps why it may note find further divestitures easy.

The Mint report quoting analysts at Nomura Financial Advisory and Securities also says that the company's fund raising plans will be partly offset by the company's negative operating cash flow. "Expected payments of Rs 600-800 crore on land purchases, and outflows on account of preference and equity dividend worth Rs 600 crore. Totally, this amounts to outflows of Rs 1,700-2,000 crore, which will wipe out 35-41% of the amount raised through the two above-mentioned deals."

Also, analysts have time and again cautioned investors to only bet on players with minimal debt-to-equity ratio, strong cash flows, no share pledges and high governance standards.

If one were to look at these fundamentals, DLF is a clear loser.

by Firstbiz Staff

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