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India Equity Research Reports, IPO and Stock News
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A CRUMBLING EDIFICE
DLF Limited (“DLF” or the “Company”) is an organization under duress.
Management is scrambling to consummate assets sales, rationalize its land
bank and divest non-core operations within five years of a much-publicized
IPO – in May 2007 at a price of INR 525 ($U.S. 10.70) per share - proclaiming
DLF as a builder of modern India, and the best positioned company to benefit
from India’s great leap forward. Since the IPO, the stock price has declined
57% compared to an approximate gain of 29% in the SENSEX1. What transpired
in the interim? We remove the façade to reveal the bare shell in the pages
that follow.
Claims made by management about its ability to execute were fanciful.
Aggressive accounting approved by auditors, perpetuated & aided by
investment bankers during the IPO process, the ill-informed media frenzy
surrounding the IPO, and the Company’s high profile in Gurgaon – the
outsourcing hub on the outskirts of New Delhi – have all contributed to the
myth that DLF is a corporate pillar of India. Management also garnered some
national awards subsequently, thereby cementing its position in the annals of
Indian business stalwarts.
Most importantly, we do not believe the disclosed book equity and asset base
of the Company. We believe that via its dealings with DAL, from FY07 to FY11,
the Company inflated sales by at least INR 11,236C ($U.S. 2,607M) and its profit
before tax (“PBT”) by INR 7,233C ($U.S. 1,690M).
Since the IPO, management has faltered at every step in executing its
grandiose vision to be a conglomerate with tentacles spread across hotels
(the JV with Hilton has ended and Silverlink Resorts is up for sale), build mega
townships (exited Bidadi in Karnatka and Dankuni in West Bengal), become
free cash flow positive by FY11 (INR -936C, $U.S. 191.2M for the year), build a
mega convention center in the NCR region (exited in 2009), and so on.
We also believe that DLF has undertaken questionable related party
transactions to boost the value of DAL prior to its acquisition by DLF, thereby
subverting the interest of minority shareholders via a higher purchase price for
DAL.
If your investment decision incorporates management integrity, then
bypassing DLF will be an easy choice. For those willing to look past aggressive
and conflicting accounting policies, self-enrichment and inability to deliver on
promises, then perhaps a balance sheet stretched to the limit (TTM netdebt/
EBITDA multiple of 6.03x2), with no respite in sight and debt restructuring
a real possibility, will be the dissuading part.
At its current stock price, DLF trades at a TTM EV/EBITDA multiple of 18.9x. The
Company has no free cash flow and no credible plan to de-lever its balance
sheet. A slowing real estate market in a high inflation environment and overexposure
to Gurgaon - amongst India’s most speculative real estate markets -
will create tremendous pressure on the Company’s balance sheet3. In the
end, we believe DLF will seek assistance from financial institutions to restructure
its loans.
We believe issuing equity in a secondary offering thereby diluting
shareholders, and killing the current dividend are the only reasonable options
for the Company.
In a best case scenario DLF is worth INR 100/share ($U.S. 2.04) - less than half its
current stock price of INR 226.9 ($4.62) - from its core operations and
investments, which approximates 1x Veritas adjusted book value of INR 101
($2.06)/share.
SELL.
1 All stock price data pertaining to DLF is as of February 24, 2012 close. Exchange rate is
average for reported five years.
2 Net debt of INR 22,758C ($U.S.4647.9 M)from Q3-F12 presentation, and TTM EBITDA of INR
3,772C ($U.S 770.4 M) from Bloomberg
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
A CRUMBLING EDIFICE
DLF Limited (“DLF” or the “Company”) is an organization under duress.
Management is scrambling to consummate assets sales, rationalize its land
bank and divest non-core operations within five years of a much-publicized
IPO – in May 2007 at a price of INR 525 ($U.S. 10.70) per share - proclaiming
DLF as a builder of modern India, and the best positioned company to benefit
from India’s great leap forward. Since the IPO, the stock price has declined
57% compared to an approximate gain of 29% in the SENSEX1. What transpired
in the interim? We remove the façade to reveal the bare shell in the pages
that follow.
Claims made by management about its ability to execute were fanciful.
Aggressive accounting approved by auditors, perpetuated & aided by
investment bankers during the IPO process, the ill-informed media frenzy
surrounding the IPO, and the Company’s high profile in Gurgaon – the
outsourcing hub on the outskirts of New Delhi – have all contributed to the
myth that DLF is a corporate pillar of India. Management also garnered some
national awards subsequently, thereby cementing its position in the annals of
Indian business stalwarts.
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).
Since the IPO, management has faltered at every step in executing its
grandiose vision to be a conglomerate with tentacles spread across hotels
(the JV with Hilton has ended and Silverlink Resorts is up for sale), build mega
townships (exited Bidadi in Karnatka and Dankuni in West Bengal), become
free cash flow positive by FY11 (INR -936C, $U.S. 191.2M for the year), build a
mega convention center in the NCR region (exited in 2009), and so on.
We also believe that DLF has undertaken questionable related party
transactions to boost the value of DAL prior to its acquisition by DLF, thereby
subverting the interest of minority shareholders via a higher purchase price for
DAL.
If your investment decision incorporates management integrity, then
bypassing DLF will be an easy choice. For those willing to look past aggressive
and conflicting accounting policies, self-enrichment and inability to deliver on
promises, then perhaps a balance sheet stretched to the limit (TTM netdebt/
EBITDA multiple of 6.03x2), with no respite in sight and debt restructuring
a real possibility, will be the dissuading part.
At its current stock price, DLF trades at a TTM EV/EBITDA multiple of 18.9x. The
Company has no free cash flow and no credible plan to de-lever its balance
sheet. A slowing real estate market in a high inflation environment and overexposure
to Gurgaon - amongst India’s most speculative real estate markets -
will create tremendous pressure on the Company’s balance sheet3. In the
end, we believe DLF will seek assistance from financial institutions to restructure
its loans.
We believe issuing equity in a secondary offering thereby diluting
shareholders, and killing the current dividend are the only reasonable options
for the Company.
In a best case scenario DLF is worth INR 100/share ($U.S. 2.04) - less than half its
current stock price of INR 226.9 ($4.62) - from its core operations and
investments, which approximates 1x Veritas adjusted book value of INR 101
($2.06)/share.
SELL.
1 All stock price data pertaining to DLF is as of February 24, 2012 close. Exchange rate is
average for reported five years.
2 Net debt of INR 22,758C ($U.S.4647.9 M)from Q3-F12 presentation, and TTM EBITDA of INR
3,772C ($U.S 770.4 M) from Bloomberg
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