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DLF says cash flow to remain intact, analysts still sceptical

DLF says cash flow to remain intact, analysts still sceptical
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First Published: Sat, Apr 18 2009. 01 15 AM IST

Hopes alive: An underconstruction DLF site in Gurgaon. The firm said that it sees robust demand at the Gurgaon and Chennai projects after it reduced sticker prices on the apartments by up to 18%. Hari
Hopes alive: An underconstruction DLF site in Gurgaon. The firm said that it sees robust demand at the Gurgaon and Chennai projects after it reduced sticker prices on the apartments by up to 18%. Hari
Updated: Sun, Apr 19 2009. 09 56 AM IST
New Delhi: While DLF Ltd, the country’s largest listed developer, maintains its cash flow will not be impacted by a mass exit of buyers from its projects in Chennai and Gurgaon, analysts have started to factor in a contraction of cash flows in the years ahead.
DLF says the exit of buyers from its projects will not impact cash flows—defined as net profit plus depreciation, or a measure of money retained in a business—because the company plans to give refunds to exiting buyers after it gets a new buyer for the apartment that has cancelled bookings.
Hopes alive: An underconstruction DLF site in Gurgaon. The firm said that it sees robust demand at the Gurgaon and Chennai projects after it reduced sticker prices on the apartments by up to 18%. Harikrishna Katragadda / Mint
If the realty firm does not land such a new buyer within six months of the request for cancellation, it has promised to refund the amount so far paid by buyers, ranging from Rs5 lakh to Rs30 lakh, but the developer is confident that it will get buyers.
At DLF’s Garden City-branded project on Old Mahabalipuram Road near Chennai, around 560 customers want to exit from the project.
At its New Town Heights project in Gurgaon, around 400 want to withdraw their bookings, according to representatives of buyer groups at each of the projects. These buyers have paid DLF up to 42% of the cost of the flats, ranging from Rs45-75 lakh.
The Gurgaon project has around 3,000 apartments, of which around 85% have been sold, according to DLF.
DLF said its estimate of the number of people who want to exit was far less. “We will refund the money once apartments are retraded,” Rajiv Talwar, executive director of DLF said. “The number of buyers who want to exit are also very few, for instance in the New Town Heights project, out of 4,000 apartments only 100-200 are asking for a refund.”
The firm said that it sees robust demand at the Gurgaon and Chennai projects after it reduced sticker prices on the apartments by up to 18%.
Experts were not able to estimate the immediate impact on DLF, but three of the four interviewed for this story believe that such customer exits will affect the firm’s cash flow and brand.
“It will have an impact on existing and future cash flow of the company because there will be an outgo of money through refunds,” said Anuj Puri, chairman and country head of realty consultant Jones Lang LaSalle Meghraj. “The developer is losing a buyer…so it is a loss of cash flow.”
He also said there was a benefit for the developer in that the new buyers would likely be those buying for themselves rather than as an investment, as was seen in the past two-three years when realty was seen as a booming asset class.
An analyst with a domestic brokerage said the DLF brand would take a dent. “Going forward, people may not buy a DLF property because of the negative publicity surrounding the company…that feeling could start coming in,” the analyst, who did not want his or his firm’s names taken, said. Such buyer behaviour could hurt DLF’s cash flows in the longer term, he added.
A second equity analyst from Mumbai echoed this view, calling the buyer exits a “serious problem”. This analyst, too, requested anonymity.
A third analyst believes that refunds may have a minimal impact on DLF’s cash flow. “The payout through refund will be very nominal and I think DLF will be able to find buyers for its projects,” Shailesh Kanani of Angel Broking Ltd said. “DLF can raise money through debt and equity…so cash flow need not be a problem.”
DLF’s Talwar said most of the buyers demanding a refund are speculative investors and not genuine buyers. “DLF was the only company which placed two conditions: one that we will only sell to one member per family and the second that buyers cannot sell their apartment within one year of purchase,” he said. “We did this to avoid selling to investors, but investors have somehow bought into our projects.”
Analysts agree that most buyers were speculative investors who want to exit now as real estate prices have fallen. “These are not genuine cases” of buyers being end-users, the second analyst said.
Talwar contends that many times there are common buyers of DLF’s Chennai and Gurgaon’s projects. “This shows the buyer is a speculator and an investor,” he said.
DLF said that while there is no exit clause in the buyers’ agreement, the firm has agreed to refund money to buyers as a goodwill gesture. “It is in order not to earn a bad name,” Talwar said. “Developers are not obligated to refund buyers and refunds happen only in a case where the developer is not able to develop the project at all.”
Buyers at other developers such as Vatika Ltd and Raheja Developers Ltd are also demanding a refund at some of their projects. The companies are yet to make a commitment on the refund.
From 9 March, the stock has gained 66.23% closing on Friday at Rs230.55, outperforming the Bombay Stock Exchange’s (BSE) Sensex that has expanded 35% in the same period. BSE’s 14-stock realty index jumped 66.19%.
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First Published: Sat, Apr 18 2009. 01 15 AM IST
More Topics: Real estate | DLF | Chennai | Gurgaon | Cash flow |