The stock of realty major DLF tanked by 6.40 per cent on the BSE and by 5.17 per cent on the NSE on Thursday to close at Rs 214.65 and Rs 212 respectively. The benchmark indices closed the day in the red while the realty sectoral index fell by over three per cent on the bourses. The DLF stock has a 12 per cent weightage in BSE's realty sectoral index.
Earlier in the day, a report released by Veritas Investment Research said “In a best case scenario, DLF is worth Rs 100 per share.”
To corroborate its claim the report states that “aggressive accounting approved by auditors, perpetuated and aided by investment bankers during the IPO process, the ill-informed media frenzy surrounding the IPO – have all contributed to the myth that DLF is a corporate pillar of India.”
The report also contests the disclosed book equity and asset base of the company. “We believe that via its dealings with DLF Assets Ltd (DAL), from FY-07 to FY-11, the company inflated sales by at least Rs 11,236 crore ($2,607 million) and its profit before tax (“PBT”) by Rs 7,233 crore ($1,690 million),” it noted. According to Veritas, Canadian-based research firm, DLF has undertaken questionable related-party transactions to boost the value of DAL prior to its acquisition by DLF, thereby subverting the interests of minority shareholders via a higher purchase price for DAL.
“The company has no free cash flow and no credible plan to de-lever its balance sheet. A slowing real estate market in a high inflation environment and over-exposure to Gurgaon – amongst India's most speculative real estate markets – will create tremendous pressure on the company's balance sheet,” said the report. The Veritas report also said that DLF would seek assistance from financial institutions to restructure its loans. “We believe issuing equity in a secondary offering ….and killing the current dividend are the only reasonable options for the company,” it added.
According to Bank of America Merrill Lynch Report, it would not be enough to attract demands even if RBI cuts interest rates.
In its overview report (February 23, 2012), BofA-ML said it expects a 50 bps interest rate cut in second quarter of this calendar year, which will impact the realty sector but would not suffice. “Developers are holding prices primarily hinged on this rate cycle turn for demand to return. However, our analysis shows a 50 bps rate cut equates to mere 3-4 per cent reduction in cost of acquisition; which we believe will not be enough to attract demand,” the report said.
The report also added that waiting for a 100 bps cut in financial year 2013 might be too late. “We believe with poor cash flows, developers will disappoint the market on volume and cash flows in FY13,” it added.