DLF-The Broken Thigh It was in 300 BC that the Sanskrit poet, dramatist Bhasa wrote-Urubhangam or the broken thigh based upon the fall into decadence and ultimate death of Duryodhana, possibly the darkest character of Vyasas Mahabharata. Here was a warrior prince fostered and patronised by the extremely high ambitions of his blind father Dhritrashtra, and who ultimately pays off by losing it all. With the latest order from Sebi barring most of the Singh family from the Equity and Debt markets for three years, it seems the Kauravas have tasted defeat again at Kurukshetra. Ideally, the DLF stock should have been suspended and the promoters forced to delist at IPO price. The 30 per cent single day price fall in the DLF penalises no-one but the hapless stockholders who have seen the DLF stock lose 90 per cent of its market cap from a high of Rs 1400 in 2006 and Rs 100 now. More falls will come as barred from Capital markets, DLF will be unable to roll-over or renegotiate debt forget being able to Sell DLF Assets or the setting up of a REIT. God save the idiots putting money in DLF Camelia-the Super Luxury project DLF is building in Golf Course, Gurgaon. The SEBI barred DLF and some of its key executives (current and former) from accessing capital markets for the next three years (effective immediately). Aside from derailing DLF’s publicly-announced plans of deleveraging itself (net debt levels of Rs190bn as of June 2014) and substantially raising the indebtedness of the business as well as the cost of debt, this order is likely to cause collateral damage raising a question of unknown unknowns for investors in DLF. We expect this order to manifest itself in DLF losing its relative bargaining power and having to monetise a larger portion of its land bank (259msf as of June 2014) at discounted valuations. As highlighted in our sector accounting thematic dated April 23, 2014, DLF’s adjusted net worth (adjusting for only disclosed contingent liabilities) stands at 0.8x its reported net worth (as of March 2014). We do not have a rating on the stock - however, we expect the stock to correct sharply as investors begin discounting the high probability of unknown unknowns. In a damning censure of DLF’s disclosure and governance practices, the SEBI, India’s capital markets regulator, barred the company and its key executives from accessing capital markets for the next three years, with immediate effect. The complex 43-page order outlines various transgressions by DLF, pertaining to related party transactions and convoluted transfer of shares (and funds) between the company and its key executives. More importantly, the order highlights various disclosure gaps (in the context of such related party transactions) in DLF’s IPO prospectus filed during 2007. What does this order mean? Our discussion with experts (including debt market participants) suggests that DLF cannot participate in any listed issuance such as equity, preferential, debt or REITs, whether primary or secondary, for the next three years. This is also likely to extend to instruments such as CMBS (collateralised mortgage-backed securities) and NCDs (non-convertible debentures) that DLF has actively floated over the past six months. Although the SEBI order does not impose any punitive monetary penalty on DLF for its alleged transgressions, by effectively plugging the capital market route for raising incremental funds, this order derails DLF’s publicly-announced plans of deleveraging itself (including a potential REIT listing of its annuity assets). As of June 2014, DLF’s net debt stood at Rs190bn (on net worth of Rs290bn) and the company had been articulating its plans of a) issuing incremental CMBS; and b) tactically divesting land in order to improve the quality of its debt. Implication 1: Distressed sales from loss of bargaining power Given this setback to its “articulated plans” of improving the quality and cost of debt (through issuance of incremental CMBS), we expect this order to manifest itself in DLF losing its relative bargaining power and having to monetise a larger portion of its land bank (core and non-core) at discounted valuations (as against tactically identifying and divesting non-core land parcels). This would also mean that DLF cannot come up with any REIT issuance until such time that the capital market ban is in place. Implication 2: Rising indebtedness With ~57msf of under-construction projects, our back-of-the-envelope calculations suggest that DLF needs about Rs25bn to fund the construction of its projects every year (assuming 5 years for completion of a project). Given the continued underlying weakness in NCR (National Capital Region), DLF’s home market, we expect the capital market ban to hurt DLF either in terms of delayed pace of construction at its projects or rising indebtedness over the course of the next three years, until the capital market ban is in place.
Posted on: Wed, 15 Oct 2014 03:48:30 +0000
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