DLF snaps losing streak, seen subdued near term

Santosh Nair 
Moneycontrol.com

DLF  shares snapped a three-day losing streak on Thursday to close at Rs 222.25, up Rs 9 or 4.3% over their previous close. But players tracking the stock expect it to be under pressure near term as institutional investors may prefer to stay away till the controversy over the company's dealing with businessman Robert Vadra, son-in-law of Sonia Gandhi, and the Haryana government dies down.

Allegations of the company having loaned interest-free money to Vadra and having received favours from the Haryana government had shaved off 12% from its stock in the previous three trading sessions. Brokers attribute today's rebound in the shares to short covering of positions by traders, more than a belief in the company's fundamentals.

Brokerage house UBS has retained its buy rating on the stock saying that the allegations would not have any material impact on the company's business, and that most of the concerns were priced in the stock at current levels. Without mentioning the corruption allegations against DLF, brokerage house Goldman Sachs downgraded its rating on the stock to 'neutral' from 'buy' citing slower regulatory approvals for its projects as a key concern.

Analysts tracking the real estate sector are only too aware of the cosy relations between property developers and politicians. It is a given that political blessings are a must if a real estate firm hopes to flourish, given the large number of regulatory clearances required. In fact, quite a few property developers and construction firms are said to be fronts for influential politicians.

As such, the market would not be too worried about the latest allegations against DLF, unless there is some follow-up action by regulatory bodies that hurts the company's ability to conduct business.

At the same time, there is no compelling reason for institutional investors to rush to buy the stock. The biggest worry for investors is the company's massive debt pile of around Rs 25,000, causing the stock to underperform over the last few years. The huge interest outgo, coinciding with a slump in sales, has strained the company's balance sheet. The company has been selling non-core assets to cut its debt, and for the current financial year, has set a target of raising Rs 5000 crore through such sales.

The company has been in the news for all the wrong reasons in the last 15 months. In August last year, anti-monopoly watchdog Competition Commission of India slapped a Rs 630-crore fine on the company following complaints by aggrieved flat owners in the Belaire and Park Place projects. DLF got a stay on the order in November from the Competition Appellate Tribunal.

In March this year, Canada-based equity research firm Veritas slammed the company`s accounting practices, business model and management integrity, and said the stock was not worth more than Rs 100. Veritas accused DLF of questionable dealings with privately held arm DLF Assets (DAL), and said it led to a higher purchase price for DAL at the time of the merger of the two firms.

Later that very month, the company was again pulled by the CCI, this time for imposing unfair conditions on home buyers in its high-end residential project Magnolia in Gurgaon.

Little has gone the company's way ever since the stock peaked at Rs 1210 in January 2008, barely six months after a hugely publicised initial public offering.

In May 2009, the promoters sold 9.9% stake in the company 9.9% stake at Rs 230 apiece, to buy out hedge fund DE Shaw's investment in its unit DLF Assets Ltd (DAL), and infuse fresh capital into it.

"You'd appreciate that this was a painful and sentimental decision; DLF would have preferred to sell shares when the world was more normal", Rajiv Singh, vice-chairman of DLF said in an interview on CNBC-TV18, after the sale was concluded.

True to his words, the decision could not have been more badly-timed. The return of Congress-led United Progress Alliance to power just a few days after the stake sale, in addition to monetary easing by central banks in Europe and US in response to the global financial crisis, triggered a powerful rally in equity markets across the globe. Barely five months later, DLF shares had risen to a high of Rs 490.