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More pain ahead for DLF stock after Sebi ban

By Puneet Wadhwa and Ram Prasad Sahu
October 15, 2014 10:15 IST
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For a company struggling with sluggish sales and a debt pile of about Rs 20,000 crore (Rs 200 billion), as of March-end, the Securities and Exchange Board of India (Sebi)’s move to bar it, along with six of its top executives, including Chairman K P Singh, from accessing capital markets for three years is seen as a major dampener by analysts.

While business operations won’t be impacted, the move will likely delay the company’s plan to cut debt, leaving DLF with limited options to improve its cash flows.

Not surprisingly, following the Sebi order, which came after market hours on Monday, the stock, part of eight ‘conviction’ ideas of Goldman Sachs (according to a September report), with a 12-month price target of Rs 292, lost about 30 per cent in intra-day deals on BSE to fall to Rs 103.

This was the steepest single–day fall since the company was listed in 2007.

The stock closed at Rs 104.95. The Sebi order is the third setback for the company since August.

The Supreme Court had, in August, directed DLF to deposit Rs 630 crore penalty, after the Competition Commission of India (CCI) found the company violated fair trade norms.

In September, the Punjab and Haryana High Court had set aside the Haryana government’s decision to allot the company 350 acres in Wazirabad, Gurgaon.

And, more regulatory action is likely (see story on the front page). Impact of Sebi order Given the recent developments, analysts feel the company’s cost of debt could rise and its debt-repayment plans might be hit.

“Sebi’s order will effectively prohibit the company from dealing in securities which, we believe, will include issue of equities, Reits (real estate investment trusts), debentures and other such marketable securities.

This might prevent the proposed merger of DLF Cyber City Developers with DLF,” Aashiesh Agarwaal, an analyst tracking the sector with Edelweiss, said in a note.

Also, refinancing the company’s total non-bank debt, about 45 per cent of its FY14 net debt of Rs 19,800 crore (Rs 198 billion), might also come under pressure, Agarwaal adds.

Given new launches have dried up, sale/part-sale of the land bank of 259 million sq ft might also happen at discounted valuations. While DLF had set a target of 7.5 million sq ft new sales in FY15, it sold only 400,000 million sq ft in the quarter ended June.

Analysts say amid this backdrop and a weak demand environment, it will be difficult for the company to meet its estimated new sales of Rs 3,000-3,500 crore this financial year (Rs 4,070 crore in FY14).

“In case the Supreme Court order related to CCI comes through, this will again have an adverse impact on FY15 and FY16 cash flows, which are already under strain.

Since the cash flows will be impacted in a big way, DLF will have to resort to selling non-core assets in a substantial and significant manner through the next few quarters.

To sell the inventory that has piled up, it might also have to reduce prices of residential units,” says Mayuresh Joshi, vice-president (institutional), Angel Broking.

Another concern for investors is the number of legal wrangles the company is involved in and the lack of clarity on the future.

Besides, the development will push back plans for further equity issuance and postpone value-unlocking in rent-yielding commercial portfolio through Reits.

Saurabh Mishra, an analyst tracking the company with Barclays, says DLF can challenge the Sebi order at the Securities Appellate Tribunal (SAT); however, it will likely remain an overhang, unless repealed by the SAT.

“While the sales and operating cash flow trajectory are expected to improve, current high debt levels are a drag on the balance sheet, given current operating cash is not sufficient to service interest costs. An improvement in development business and successful sale of non-core assets is required for any material performance,” he says.

This might not be the end of woes for DLF. Institutional Investor Advisory Services (IiAS) has said this isn’t the first time DLF is facing a controversy or regulatory action.

“A ban from capital markets for a period of three years is indeed serious. Given this, IiAS questions should DLF remain a front-line index stock.

Being part of the CNX Nifty, DLF attracts several equity retail and institutional shareholders. Index funds will also have to hold the stock in almost the same measure as its weight in the index.

But with the recent Sebi order, markets must question whether it should remain a constituent of a principal index,” it said.

While it remains to be seen whether DLF and its key personnel appeal against the Sebi decision, if the voices of those such as IiAS are heard, the DLF counter could see more selling.

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Puneet Wadhwa and Ram Prasad Sahu
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