After falling due to poor June quarter results, shares of DLF Ltd jumped 6.4% in Tuesday’s trading, triggered by media reports that the realty company is close to finalizing its 70% stake sale in the commercial information technology park at Noida.
Although the deal is yet to be inked and the amount to be raised is unclear, it’s in line with the management’s statement in the recent analysts’ conference call about its intent to sell large non-core assets to repay the burgeoning debt—about Rs 24,000 crore as on 30 June.
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But is the spurt in the stock price justified? The debt burden apart, other uncertainties have cropped up. Analysts and media reports say that after the recent Rs 630 crore penalty imposed on DLF by the Competition Commission of India (CCI), several other consumer associations have complained about the developer’s violation of delivery deadlines and abuse of dominant position.
According to a report by Emkay Global Research, “CCI has rights to impose penalty up to 10% of the average turnover of last three years, which can amount to maximum penalty of Rs 9 billion (Rs 900 crore) in case of DLF.”
A few months ago, the company had also received an income-tax notice for the payment of a substantial additional amount of tax. No doubt, the firm would appeal and challenge it, but the uncertainties may tarnish its strong brand equity in the realty segment.
Given the deplorable state of the realty market, with oversupply in most regions and firms losing pricing power, these developments could affect sales and revenue ahead for DLF. The company failed expectations on both residential sales volumes and commercial lease rentals during the June quarter.
Its targets on aggressive monetization of non-core assets may also be delayed. So any significant reprieve through debt reduction would be a silver lining in a rather dark cloud shrouding its financial health at present.
Of course, revenue grew by 21% year-on-year. But much of its positive cash flow (after interest and tax) was used for commercial capital expenditure. Analysts say that much of the cash generated from operating activities will go to service its debt, pressures from which will further rise if interest rates are hiked. The company’s interest costs as a percentage of sales are currently the highest since it listed.
The challenges DLF needs to battle out would certainly weigh on the sentiment in the near term, even as there is no significant improvement in fundamentals to justify an upside in the stock price.
Graphic by Yogesh Kumar/Mint
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