About the Company
The giant of the reality sector Indian domestic market , who had been the leader amongst the promoters and had a warm welcome in the capital market is passing though the toughest time ever due to overall slowdown in the economy and recession in the reality sector.
Problems In the Company
The cup of woe seems to be brimming and threatening to overflow for DLF. Probably one of the biggest victims of the slowdown in the realty sector, the tight monetary condition is becoming a noose around its neck.
2. Then last week, the company announced the foreclosure of its buy back. This did not go down too well with the market men. Though it was the best thing to do from a financial point of view, it was frowned down upon as bad practice. Many have frowned down upon this move to buy back when this money could have been used in a much better way.
3. Recently, the Income Tax Department raised an additional demand of Rs.400 crore for understating its income for the fiscal year ended March 31, 2006. According to the according to the red herring prospectus available with SEBI, for year ended 31/03/06, the company posted a net profit of Rs.227.4 crore, which doubled to Rs.417.80 crore for year ended 31/03/07. And now in FY09, the company reported a 41% fall in net profit.
The I-T department in December had ordered a special audit to evaluate the tax filings of the company for FY06.And as per the Special Audit, Fy06 was the first year when the company started using percentage of completion method (PoCM) method for recognizing revenues and profits. What this means is that if the project is half complete, but has been sold only 10%, then the revenue will be recognized only to the extent of 20% and rest will be treated as inventory. So what is completed is not recognized as revenue, what is sold is revenue. And prior to PoCM, revenue was recognized only after the entire project was completed. This PoCM has been followed compulsorily by all realty companies from FY06. The discrepancy, leading to the additional tax demand has come during the process of changing from the old method to the PoCM. Naturally, DLF is expected to appeal but for now, we have to assume that there is a contingent liability to the tune of Rs.300-400 crore staring at the company.
4. Another news is that the promoters might raise around Rs.3000 crore through stake sale. K P Singh and family, promoters of DLF, are stated to negotiating with FIIs to sell 6 -7% stake out of their current total holding of 88.5%. A price of Rs.200-230 per share is being worked out. JP Morgan and Deutsche Bank have been appointed to oversee the sale. The promoters will use the proceeds to infuse funds into DLF Asset Ltd (DAL), the promoter-owned real estate investment trust, to pay off private equity firm DE Shaw, which invested $400 million in 2007 and is due to exit by the end of the month under an agreement. Analysts have described the rising receivables from DAL as the biggest cause of concern for DLF.
5. DLF has also got plans to raise around Rs.5000 crore by selling its non-core assets such as power units and hotels.
Well, for now, things look tight for DLF. What is gratifying to see is that the company is working on raising liquidity and does have the means to do so. It will emerge out of all this but will take a while to do so. If the company made super duper profits when there was a boom, it surely is paying a high price for the recession in the realty sector.
It would be better to avail the opportunity of the current rally to book partial profits , though fresh position could be made at more reasonable value.
Disclosure: I do not have any personal holding in this stock.