DLF - NO CONTRARIAN, JUST STAY AWAY!

By Ruma Dubey

There are many who probably just for the sake of ‘swimming against the tide’ and gaining more sound bites by speaking different, say that DLF now is a good contrarian buy. Really?

For traders itself, the risk on the stock is currently pretty high; one can mumble words like ‘oversold’ but ultimately, irrespective of the technical factors, it is fundamentals which catch up and decide the stock price. Thus going purely on fundamentals, even for the sake of being contrarian, DLF is high risk. For a stable investor, it should not ideally even be on the radar.

The problem with DLF is that this new corporate governance issue is just one of the many and each one, seems to be murkier than the other.  There are many who say that they are surprised that India’s largest listed realty company is facing this kind of music. But isn’t that precisely the point – SEBI probably for the first time has not only shown its teeth but bitten too. It does require a lot of courage to stand up, point fingers and then take action against big companies like DLF. Given the kind of crony capitalism, the huge overhang of wealth and closeness to political parties, no one expected that any action will ever be taken against a company like DLF. But SEBI did it. DLF will most obviously contest this but the tarnish on its name just got more deeply embedded.  

As such, given majority of our experiences while dealing with realtors or builders, trust factor is always a suspect and corporate governance issues are a given. So bigger the company, bigger will be these doubts and governance issues. This is not just a one-off issue. DLF has been constantly in the news for all the wrong reasons. A quick reminder of these…

• It began way back in 2009, when DLF decided to merge DAL (DLF Assets) with itself. DAL was buying commercial property from DLF and collecting lease rentals from those properties. The promised Singapore listing of DAL was shelved and it was merged into DLF at high valuations.
• In August 2011, the Competition Commission of India (CCI) fined DLF Rs.630 crore on charges of abusing its dominant market position. DLF got a stay order from the competition tribunal against that order.
• In March 2012, Canadian research firm, Veritas Investment Research released a scathing report on DLF, accusing it of window dressing. The report said that its dealings with DAL (DLF Assets), from financial year 2006/07 to financial year 2010/11, showed that DLF had inflated sales by at least Rs 11,236 crore and its profit before tax by Rs 7,233 crore." This ‘boosting’ was done to inflate the value of DAL before its acquisition by DLF.
• And mother of all – the very shady land dealings with Robert Vadra, exposed by AAP’s Arvind Kejriwal.  DLF was accused of selling prime land at throw-away prices and giving interest-free loans to Vadra. DLF, however, denied any undue gains for the company or that there was any quid pro quo with the Congress-run governments and clarified that it has only business relationships with Vadra. Yet, the cloud of corporate governance remained.

When a company, time and again, gets caught in one issue after the other, alarm bells should have rung and rung to the extent of driving us deaf. Thus on corporate governance issues itself, DLF is a big no-no.

Well, those who feel that DLF, given its ‘connections’ and money, can get out of anything, then financially it’s no great shakes. Take a good look at its highly leveraged balance sheet. Even with governance issue, purely on financials, given the debt, it makes no sense to buy into DLF. Its debt at end of Q1FY15 stood at Rs.19100 crore and interest outgo was over Rs.590 crore. Thus interest continues to eat away margins and lower demand for realty is also not helping. So for those who pooh-pooh governance issues, the leveraged balance sheet should also indicate a no, right?

To make matters worse, post this SEBI ban, neither DLF nor its promoters will be able to raise any funds from the market till 2017. Its plan of listing through Real Estate Investment (REIT) goes for a toss, which the company had hoped would have helped it bring down its debt considerably. It is now left with the option of selling non-core assets or maybe to boost sales, would have to start offering discounts to increase volumes.  If DLF cuts its prices, others in the NCR region will also be forced to bring down prices – the reason why other realty stocks are down.

Based purely on common sense, it does not make sense to go contrarian on this fallen star. Traders with a strong heart and full pockets may well look at it as ‘oversold’ but we the common people would be able to sleep peacefully at night by keeping away from this stock.

The public image of a company is a reflection of its culture. Thus if good corporate governance is in the blood stream and bones of the company, it will automatically reflect this. Just as a healthy body shows the natural healthy look of a person, so also a company, whose internal functions are healthy, will naturally look healthy.