After Kingfisher, Veritas demolishes DLF

After tearing apart Kingfisher Airlines’ financials last year — well before the world and its uncle woke up to the reality of the doddering airline — Toronto, Canada-based Veritas Investment Research has now excoriated DLF, dubbing India’s largest realtor ‘a crumbling edifice’.

Shares of DLF plunged as much as 12% before recovering half of that on Thursday as the withering 25-page dissection hit the street.

Analysts Neeraj Monga and Nitin Mangal, in the note released on Thursday, said DLF may need to restructure loans and dilute equity to get out of the hole it finds itself in, adding the company has negative cash flows of Rs936 crore this year.

They questioned the disclosed book equity and asset base of the company, hinting at irregularities in the DLF and DLF Assets Ltd (DAL) merger.

“We believe through its dealings with DAL from fiscal 2007 to fiscal 2011, the company inflated sales by at least Rs11,236 crore and its profit before tax by Rs7,233 crore.”

DLF had announced its decision to merge Caraf Builders & Construction, which then owned DAL, with another offshoot DLF Cyber City. This process was completed in 2010.

A spokesperson for DLF said the company does not comment on individual research reports. Nevertheless, he called the Veritas report “mischievous and presumptive” — just like Kingfisher had done.

“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,” he said.

The analysts alluded that based on the quality of management alone, the share is not worth a buy. And considering all its ills, the stock is worth no more than Rs100.

The report also raises concerns over DLF’s transactions with DAL prior to the merger.

“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 analysts wrote in the report.

DLF’s net debt for the December quarter stood at Rs22,760 crore.
“In the end, we believe DLF will seek assistance from financial institutions to restructure 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,” Monga and Mangal wrote.

Earlier, Saurabh Kumar and Gunjan Prithyani, analysts with JP Morgan had said debt reduction at DLF has been marginal in spite of certain asset sales in the December quarter.

“Net debt reduced by a marginal Rs170 crore during the quarter despite cash inflow of Rs1,200 crore from asset sales. Overall cash flows for the quarter were adversely impacted by high land capex/ Hilton buyout and mobilisation advances to contractors, thereby limiting the debt reduction,” Kumar and Prithyani wrote in a note.

Monga & Mangal said DLF has also failed to deliver on commitments made during its IPO in 2007.

“Since then, the management has faltered at every step in executing its grandiose vision to be a conglomerate with tentacles spread across hotels, build mega townships, become free cash flow positive by fiscal 2011, build a mega convention center in the NCR region and so on,” they point out.