DLF shares in debt spiral: Decoding why the stock fell 28% after Sebi ban

DLFVivek Kaul

The share price of DLF crashed today by 28.5% to close at Rs 104.95. In the process Rs 7439.5 crore of investor wealth was destroyed. Given that promoters own close to 75% of the company they had to bear a bulk of this fall.
In a landmark order, the Securities and Exchange Board of India(Sebi), barred DLF, KP Singh, the chairman and founder of the company, along with five other company executives from “buying, selling or otherwise dealing in securities, directly or indirectly, in any manner, whatsoever, for the period of three years.”
DLF failed to provide information on various subsidiaries as well as FIRs that were pending against it, when it re-listed in the stock market in 2007. (
This blog explains the entire order in a very simple way).
Back then, the company had raised close to $2.3 billion through what was the biggest initial public offering until then. The Sebi order pointed out that “Noticees suppressed several material information in the RHP/Prospectus of DLF and actively concealed the fact about filing of FIR against Sudipti [a DLF subsidary] and others.”
The stock crashed today by 28.5% as investors sold out enmasse. The question is why did the investors abandon DLF today?
As on June 30, 2014, the company had a total debt of Rs 19,064 crore on its balance sheet. In the annual report for 2013-2014, the company points out that the “average cost of debt has continued to range between 12.5% and 13%.” This rate of interest couldn’t have changed much since then.
At 12.5%, the total amount of interest that the company needs to pay per year on an outstanding debt of more than Rs 19,000 crore, works close to Rs 2,400 crore per year or around Rs 600 crore per quarter. This is huge for a company which had sales of Rs 1,851 crore for the period between April and June 2014.
With the company paying huge interest on its outstanding debt, the finance charges stood at 30% of the total revenue during April to June 2014. This number has gone up over the years as the sales of the company have plummeted.
For the period between April and June 2012, the finance charges were at 20% of the total revenue. The net sales for the period had stood at Rs 2,503 crore. The sales since then have fallen by around 26% to Rs 1,851 crore for the period between April to June 2014. The hope was that DLF would be able to bring down the value of its debts by listing a real estate investment trust (REIT), the rules for which were finalized last month. The company has close to 26 million square feet of leased assets. With the Sebi barring the company and its promoters from accessing capital markets, the company will now not be allowed to list a REIT in the next 36 months.
This means that the company will continue with a massive amount of debt on its balance sheet. This explains why the stock price fell by more than 28% today. It was simply adjusting to the new reality.
How did the company end up with so much debt on its balance sheet?
The company essentially borrowed a lot after it got relisted in the stock market in 2007. As on December 31, 2007, the total debt of the company had stood at Rs 3,702 crore. This jumped to Rs 7,066 crore by December 31, 2008, to Rs 12,830 crore by December 31, 2009 and Rs 22,758 crore by December 31, 2011. In a period of four years, the debt of the company jumped by more than six times.
The company borrowed a lot of money during this period to build a land bank and to diversify itself into other businesses which ranged from wind power to insurance and mutual fund to the luxury hospitality business. Since then, the company has been trying to come out of these businesses. During the last financial year, the company sold off its stake in the insurance business as well as DLF Global Hospitality Ltd.
This has helped the company to bring down its total debt marginally. The total debt of the company as on March 31, 2013, had stood at Rs 21,731 crore. This came down to Rs 18,526 crore by March 31, 2014. But has since then again shot up to Rs 19,064 crore.
The company will challenge the Sebi order. As it said in a release today “DLF will defend itself to the fullest extent against any adverse findings and measures contained in the order passed by SEBI. DLF has full faith in the judicial process and is confident of vindication of its stand in the near future.” Nonetheless, a close reading of the order suggests that the company is clearly on a weak wicket here. In fact, earlier this year, the Supreme Court had upheld a Rs 630 crore fine imposed on DLF by the Competition Commission of India. The Sebi order has made the situation worse for DLF.
To conclude, the mistakes made by DLF in the era of “easy money” seem to be catching up with it.

The article originally appeared on www.FirstBiz.com on Oct 14, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

DLF borrows money at 12.38%; lends free to Vadra

Vivek Kaul
DLF is India’s largest listed real estate company. During the hey days of the company a few years back, such was the craze for the DLF stock that Kushal Pal Singh, its owner, was listed among the ten richest people in the world. Those days are now gone.
The company has recently been accused by Arvind Kejriwal and Prashant Bhushan of giving interest free loans amounting to Rs 65 crore to Robert Vadra. Vadra is the married to Priyanka Vadra, daughter of Sonia Gandhi.
Kejriwal and Bhushan have released documents which clearly show that companies set up by Vadra borrowed money from DLF and then used that money to buy properties from DLF among other things. (You can access the press release here). The market value of these properties has increased considerably since Vadra bought them.
According to a tweet on the Twitter handle of news channel NDTV, DLF has said that their dealings with Vadra have been completely transparent. Vadra on his part had explained his relationship with DLF to the Economic Times in March 2011. “I have a good understanding with DLF. Our children are friends, we are friends. They are seasoned businessmen. They are not daft. They are educated, sensible people and are reasonable and shrewd in their business. They don’t need me to enhance them. They’ve existed for years,” Vadra had said. (You can read the complete story here).
On the face of it this might look like a completely normal business transaction between two different businessmen. But the latest annual report and the analyst presentation made DLF throw up some interesting questions nevertheless.
As per an analyst presentation (dated August 6, 2012) made by DLF, the gross debt of the company stands at a whopping Rs 25,060 crore as on June 30, 2012. At the end of March 31, 2012, the gross debt had stood at Rs 25,066 crore. (You can access it here).
The annual report of DLF 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.”
So what this means is that the company had debt outstanding of Rs 25,066 crore as on March 31, 2012, and was paying an interest of 12.38% on that debt. The debt outstanding as on June 30, 2012, had not changed much and was at Rs 25,060 crore. It is fair to assume that over a period of three months the interest rate on the debt outstanding wouldn’t have changed significantly.
What is also interesting is that during 2011-2012(i.e. the period between April 1, 2011 and March 31, 2012) the sales of the company stood at Rs 4582.67 crore. This means that the debt of the company is nearly 5.5 times its annual sales, which is extremely high.
The question that DLF needs to answer is that why is a company which has such huge debt outstanding and is paying an interest of 12.38% per year on it, giving out interest free loans? Also it seems to have been having trouble in bringing down its outstanding debt. The outstanding debt between March and June 2012, has gone down by only Rs 6 crore.
The company has been trying to bring down the debt by selling investments that it had made over the last few years. It recently sold a plot that it owned in Lower Parel in Central Mumbai to Lodha Developers for Rs 2,750 crore. The company has been trying to sell several of its other investments over the last few years.
The high debt level has been a huge concern for the analysts who track the company. As Sandipan Palan analyst with Motilal Oswal wrote in a recent report “DLF’s high debt has been a key concern for investors; however, we believe leverage(which means debt in simple English) of Rs 16,000-17,000 crore would be a sustainable level for the company.”
So here is a company which analysts believe should be cutting down on its debt by around Rs 9,000 crore, and it has been giving out interest free loans to an individual with zero or very little experience in running a real estate business. DLF needs to tell us in some detail the “business” reasoning behind this decision.
Another interesting point that comes out while going through the annual report of the company is that it has 65 non current investments. The annual report of DLF points out that “Investments are classified as non-current or current based on management’s intention at the time of purchase. Investments that are readily realisable and intended to be held for not more than a year are classified as current investments. All other investments are classified as non-current investments.”
Of the 65 non current investments only two are joint ventures. One of these joint ventures is with Skylight Hospitality Private Limited, a company owned by Vadra and his mother Maureen. Skylight owns a 50% stake in Saket Courtyard Hospitality Private Limited, which runs the Hilton Garden Inn Hotel in Saket, New Delhi. This is the only operational hotel of the company.
When it comes to making non-current investments joint ventures are not a favoured form of investing with DLF, given that only two out of its 65 non current investment are joint ventures.
The venture with Skylight is very small by DLF standards. In the annual report of the company the book value of the joint venture is put at just Rs 5.6 crore. Also why would a company as big as DLF is enter into a joint venture for a four star hotel with an individual who has absolutely no or very little prior experience in running a hotel? This is something that needs to be answered. A recent report in the Daily News and Analysis seems to suggest that the hotel run by this joint venture is on the block. (You can read the story here).
The entire Congress party has come to the rescue of Robert Vadra and tried to project the deals between Vadra and DLF as normal business transactions. One senior leader even went to the extent of saying “doesn’t Vadra have a right to occupation?” Yes, Vadra has the right to an occupation and so does DLF. But there are too many unanswered questions here that need to be answered.
The article was originally published on www.firstpost.com on October 6, 2012. http://www.firstpost.com/business/dlf-borrows-money-at-12-38-lends-free-to-vadra-481727.html#.UG_tdwlmmIs.twitter
(Vivek Kaul is a writer. He can be reached at [email protected]