DLF faces D-Street ire on financial health concerns

Research house questions accounting,share price,management practices

Written by ENS Economic Bureau | Mumbai | Published: March 3, 2012 1:04 am

Realty major DLF faced selling pressure on the bourses as concerns over the financial health of the company unnerved investors for the second day in a row. The company’s share price fell by another 5 per cent to Rs 203.85 on the BSE on Friday. On Thursday,the scrip had fallen 5.17 per cent after Canada-based research firm Veritas termed the company “an organisation under duress”. The report questioned DLF’s accounting standards,while stating that the firm had inflated its accounts and that the company’s stock was worth less than half its current price level.

“Claims made by management about its ability to execute were fanciful. Aggressive accounting approved by auditors,perpetuated and aided by investment bankers during the IPO process,the ill-informed media frenzy surrounding the IPO,and the company’s high profile in Gurgaon … 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,” Veritas said in its report on DLF.

The report has specifically cited corporate governance issues pertaining to the merger of promoter-held DLF Assets (DAL) into listed firm DLF in 2009.

“We do not believe the disclosed book equity and asset base of the company. We believe that via its dealings with DAL,from FY’07 to FY’11,the company inflated sales by at least Rs 11,236 crore and its profit before tax by Rs 7,233 crore,” Veritas said. In a best case scenario DLF is worth Rs 100 per share — less than half its current stock price of Rs 226.9,said the report authored by Neeraj Monga and Nitin Mangal.

Reacting to the Veritas report,DLF said,“we do not generally comment on individual research reports. However,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.”

According to Veritas,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 net debt/ EBITDA multiple of 6.03×2),with no respite in sight and debt restructuring a real possibility,will be the dissuading part,” Veritas said.

“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 FY’11 (negative Rs 936 crore for the year),build a mega convention centre in the NCR region (exited in 2009),and so on,” Veritas said.

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