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Money Oct 11, 2012

This is not the time to get into DLF or any realty stock

By Sunainaa Chadha

Despite allegations being levelled against India's large real estate players like DLF by India Against Corruption activist-turned-politician Arvind Kejriwal, real estate stocks are trading higher today in a subdued Mumbai market. But that doesn't mean it's time to buy into these stocks.

If the allegations of DLF's nexus with Robert Vadra and the Haryana government are proved true, India's largest listed real estate player will face intense political and legal heat - something that will not be good for the stock. The DLF stock has already dipped 12 percent in the last three days. Even before Kejriwal revealed the "sweetheart" deals between Sonia Gandhi's son-in-law Robert Vadra and DLF, the latter 's credibility has been hammered.

Earlier this year, research firm Veritas had slammed the company's accounting practices, business model and management integrity, and concluded that the stock is at best worth Rs 100. Veritas even accused DLF of "questionable dealings" with its privately-held arm DLF Assets (DAL), which led to a higher purchase price for DAL at the time of the merger of the two firms. DLF's minority shareholders lost out in the process, the Veritas report said. But this did not have any impact on India's real estate market.

Ever since the company launched its IPO in 2007, the stock value has eroded immensely. Reuters

Ever since the company launched its IPO in 2007, the stock value has eroded immensely. From the IPO price of Rs 525, the stock today trades at Rs 217! The company's sales have consistently declined since then, while debt has risen significantly, but the underlying value of real estate is apparently not represented in the stock price. This is evident from the stubbornly high property prices.

This is because unlike the stock market, where a share selloff by someone battling bankruptcy will pull down the price of the stock, hurting all shareholders in the process, the sale of an apartment even at a price that's well below the going market rate is unlikely to impact prices of other flats , let alone cause ripples in the property market.

"This is because large developers have holding power, and can keep off creditors by borrowing from private financiers roped in by wealth management firms in the construction phase and in the pre-launch phase, says Pankaj Kapoor, MD at real estate firm Liasas Foras. While this money is not entirely reflected on the balance-sheet, it's enough to stay afloat and hold on to artificially high prices.

However, now that the battle against corruption is getting louder with even Prime Minister Manmohan Singh saying he is serious about getting to the roots of corporate corruption, realty players sure have a lot to worry about as sector reeks of corruption. The fact is, as Maharashtra CM Prithviraj Chavan himself admitted in a recent interview to The Economist, there is a deep nexus between politics and real estate. This nexus is the prime target of Arvind Kejriwal and India Against Corruption.

Home buyers have already begun venting their anger against DLF for a host of reasons. A dozen investors in Delhi have reportedly dragged DLF to court, accusing it of hurting their investments in an east Delhi mall by converting it into an office complex. Earlier this year, home buyers in DLF's project in Chennai too collectively moved the Competition Commission of India (CCI) accusing the company of extracting additional money under the garb of taxes.

Moreover, one of the allegations against DLF is that the Haryana Urban Development Authority unscrupulously enhanced floor space index in Phase V, Gurgaon, to favour DLF. "This could at the very least delay and hit sales of its planned premium complex-Magnolia II. The first phase, according to analysts, was a runaway success and DLF was planning to leverage the same and launch the new phase in the forthcoming months,"a Mint report argues.

Goldman Sachs has already downgraded DLF to 'neutral' from 'buy', saying slower approvals could result in fewer project launches, while cutting its pre-sale estimates for India's largest property developer. Goldman also removed DLF from its Asia-Pacific buy list and cut its 12-month target price to Rs 224 from Rs 257.

Brokerage CLSA earlier this year had accorded a sell rating on the stock saying the realtor's large asset sales may not be enough to reverse negative cash flows. And Kejriwal's allegations are likely to delay sale deals pertaining to non-core assets like wind mills and Aman Resorts.

SP Tulsiyan, investment analyst, is also not positive on the stock given that the company's corporate governance has been so poor. "There is going to be some kind of smell coming out of this (Vadra) deal which will not get liked by the market and more especially when you have the company saddled with a debt of close to about Rs 25,000 crore. As such, the real estate sector is quite notorious for knowing that there are always the cash transactions element," he said in an interview with CNBC-TV18. Tulsian added that litigation would force the court to direct the government and the regulatory authorities to probe the affairs of the company.

Clearly, stock market players have given the thumbs down to all those companies where Kejriwal has raised red flags. The sharp rebound today is nothing but short covering.

When DLF tanks, it is not unlikely that other realty scrips will also be under pressure. Stocks like Indiabulls, which also came in for adverse comment by Veritas, and Unitech (which is under pressure in the 2G scam case), are politically too exposed to be safe any more.

by Sunainaa Chadha

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