Even without Vadragate, the DLF stock should be a sell


The stock price of DLF closed yesterday at Rs 218.9 yesterday. It was down by 9.7% during the week.
None of the major stock brokerages has changed its recommendation on the stock since Arvind Kejriwal attacked the company. Nevertheless there are strong rumors going around that the brokerages are getting their real estate analysts to call up their biggest clients and recommending them to slowly sell out of DLF stock. This may to a certain extent explain why the stock price of the company has fallen by over 10% since Friday.
Stock brokers rarely issue direct sell recommendations on stocks. There are primarily three reasons for the same. The company on whose stock the sell recommendation is issued can limit the access the analyst has with the company. So there might be no information sharing, site visits etc. This can put the analyst at a huge information disadvantage vis a vis other analysts.
An out and out sell recommendation also does not go down well with institutional investors the biggest clients of stock brokers. This is because a sell recommendation can spread and lead to everybody wanting to sell out at the same time. This can lead to the value of the investments falling dramatically. And nobody likes that.
And, finally, any brokerage makes more money by issuing a buy recommendation than a sell recommendation. This is primarily because when it makes a sell recommendation it can only earn commissions from its own customers who sell the stock. Whereas when it makes a buy recommendation it can get it brokers to call on new customers and get them to buy the stock.
Due to these reasons none of the stock brokerages have issued a sell report on DLF, even though great political risk seems to have become attached to the company.
Nevertheless the fact that DLF might have major political risk going with it has only recently been identified and registered into public perception. But even with that the one big reason investors should stay away from the company is the massive debt that it has on its books.
The debt has constantly been building up since the financial year 2007-2008 (the period between April 1, 2007 and March 31, 2008) during which the company decided to re-list on the stock exchange.
The debt as on June 30, 2007, was at Rs 10,436.6 crore. This number five years later stands at Rs 25,060 crore or 140% more. The debt of the company has grown at the rate of 19.1% on an average every year.

DateTotal Debt (in rupees crore)% increase over previous year
June 30,200710,436.60
June 30,200814,220.9036.26%
June 30,200916,32014.76%
June 30,201021,67732.82%
June 30,201123,86310.08%
June 30,201225,0605.02%

Take a look at the above table. It shows very clearly that the debt of the company has gone up year on year since 2007. Any company which takes on more debt does so in the hope that the extra money helps it to expand and thus earn more money in the process. But is that the case with DLF?

DateTotal Quarterly Income (in rupees crore)
June 30,20073121
June 30,20083846.3
June 30,20091746
June 30,20102161
June 30,20112503
June 30,20122329

The table above throws up some very interesting numbers. The total quarterly income of DLF as on June 30, 2007(the period between April 1, 2007 and June 30, 2007) was at Rs 3,121 crore. The total quarterly income of DLF as on June 30, 2012(the period between April 1, 2012 to June 30,2012) was Rs 2329 crore or 25.3% lower.
So the debt of the company has gone up by 140% in the last five years. But during the same period the quarterly income has fallen by a little over 25%. To be fair to the company quarterly sales do not always reflect the annual trend. So let’s take a look at the annual numbers and see how they stack up.

DateTotal Yearly Income (in rupees crore)
March 31,200814655.01
March 31,200910392.55
March 31,20107791.31
March 31,201110091.54
March 31,201210207.88

The table above throws up some very interesting numbers. The total quarterly income of DLF as on June 30, 2007(the period between April 1, 2007 and June 30, 2007) was at Rs 3,121 crore. The total quarterly income of DLF as on June 30, 2012(the period between April 1, 2012 to June 30,2012) was Rs 2329 crore or 25.3% lower.
So the debt of the company has gone up by 140% in the last five years. But during the same period the quarterly income has fallen by a little over 25%. To be fair to the company quarterly sales do not always reflect the annual trend. So let’s take a look at the annual numbers and see how they stack up.

DateTotal Quarterly Income (in rupees crore)
June 30,20073121
June 30,20083846.3
June 30,20091746
June 30,20102161
June 30,20112503
June 30,20122329

As we can see from the above table the total income of DLF has come down by 30% in the last four years. Though it has recovered to some extent in the last two years. What is interesting is that between March 31, 2008 and March 31, 2012, the debt of the company has more than doubled to Rs 25,066 crore.
What does all this tell us? Here is a company which is earning less money than it was in the past but is constantly taking on more and more debt. More debt means more interest to pay as well. As the annual report of DLF dated March 31, 2012, points out “the company’s borrowings from banks and others have a effective weighted average rate of 12.38% p.a. calculated using the interest rates effective as on March 31, 2012 for the respective borrowings.”
This means the company is paying an interest of 12.38% on its debt of Rs 25,066 crore. This translates into a yearly interest of Rs 3103.8 crore. This works out to 30.4% of the yearly income of Rs 10,207.88 crore and is much more than the companies last quarterly income. The interest burden of the company this year is 2.7 times its last year’s net profit of Rs 1,168.68 crore.
Other than the interest to be paid the company also needs to pay off the debt that is maturing. Its total debt of Rs 25,060 crore is a little over 21.4 times its last year’s profit and two and a half times its annual income.
This tells us that the company is in a financial mess. It is highly unlikely that the company will be able to pay off its debts from its normal sources of income and profit after tax. Given this, the only way out for the company is to sell off its various assets as well as non-core businesses.
But that is easier said than done. It has been trying to sell its wind power business for a while now. Media reports also suggest that it is in the process of selling off Aman Resorts its foray into luxury hospitality business. The hotel DLF set up with Robert Vadra is also reported to be on the block. A couple of months back DLF managed to sell off its 17.5 acre land plot in Mumbai’s Lower Parel area to Lodha Developers for Rs 2750 crore. The company also managed to sell off Adone Hotels and Hospitality for Rs 567 crore. All these investments got the company into the financial mess that it is in as it took on more and more debt to expand. The company also claims to have a land bank with a developmental potential of 345million square feet.
In the economic environment that prevails it is becoming more and more difficult for DLF to sell of its assets like land and other businesses.
DLF had listed on the stock exchanges in July 2007 with great fanfare. The stock price reached an all time high of Rs 1207 in January 2008. Anybody who bought the stock at its peak, like a lot of investors did, would have seen the value of his investment fall by a whopping 82.1% by now, making the stock one of the biggest destroyers of stock market wealth over the last few years. Chances are this might just continue in the days to come.
The article originally appeared on www.firstpost.com on October 13, 2012. http://www.firstpost.com/investing/even-without-vadragate-the-dlf-stock-should-be-a-sell-489374.html
(Vivek Kaul is a writer. He can be reached at [email protected] He does not own any DLF stock. Neither is he on short on it. He may have some indirect investment in DLF through the equity mutual fund route)