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DLF’s accounting gets a close look

DLF’s accounting gets a close look

New Delhi/Bangalore: The ministry of corporate affairs is investigating the financial statements of DLF Ltd, Press Trust of India (PTI) reported on Thursday, on the same day a Canadian research firm, reputed for hauling up investor-unfriendly firms, slammed the company for its accounting methods, business model and management integrity.

“We have ordered the regional director (north) to carry out inspection under section 209 of the Companies Act," PTI cited a ministry official as saying. “There were several complaints from investors alleging that there are anomalies in the company’s books."

Capital market regulator Securities and Exchange Board of India, too, sent a reference to the ministry in this regard, the official said.

Meanwhile, in a report titled A Crumbling Edifice, analysts Neeraj Monga and Nitin Mangalof Veritas Investment Research Corp. said DLF was under stress and its management was scrambling to consummate asset sales, rationalize the firm’s land bank, and sell non-core operations—all within five years of a much-publicized initial public offering (IPO) of its shares.

“Claims made by (the) management about its ability to execute were fanciful. Aggressive accounting approved by auditors, perpetuated and aided by investment bankers during the IPO process, the ill-informed media frenzy surrounding the IPO, and the company’s high profile in Gurgaon—the outsourcing hub on the outskirts of New Delhi—have all contributed to the myth that DLF is a corporate pillar of India," they wrote.

DLF, India’s largest property developer, reported a 45% drop in net profit and 7.6% decline in revenue in the quarter ended 31 December.

“This report in question is presumptive and mischievous as the analysts have never contacted the company to seek any information or clarification," a DLF spokesperson said in an email. “The company adheres to the highest standards of corporate governance and financial integrity, and the audited financials of the company are always in the public domain." DLF couldn’t be reached late on Thursday for comments on the ministry of corporate affairs probe.

Veritas has, in the past, published similar scathing commentary on Kingfisher Airlines Ltd (saying in a September report that the firm was “teetering on the verge of bankruptcy"), Reliance Industries Ltd and Reliance Communications Ltd among Indian firms.

Monga, in an email, said Veritas officially started covering Indian stocks this year and “picked DLF because it is a large Indian company (that’s) part of the Sensex".

DLF fell 5.2% to 214.65 on BSE on Thursday. The bourse’s benchmark Sensex lost 0.95%.

“We don’t see any instrumental evidence that the company will be able to significantly reduce debt in the coming quarters unless it increases its residential sales and is more aggressive on its asset sale strategy," said Parikshit Kandpal, a senior analyst at Karvy Stock Broking Ltd.

Yogesh Kumar/Mint

Veritas’ Monga and Mangal also accused DLF of “questionable dealings" with privately held arm DLF Assets Ltd (DAL), which resulted in a higher purchase price for DAL when the two were merged in end-2009.

“Most importantly, we do not believe the disclosed book equity and asset base of the company. We believe that via its dealings with DLF Assets Ltd, from FY07 (fiscal 2006-07) to FY11, the company inflated sales by at least 11,236 crore... and its profit before tax by 7,233 crore," the analysts wrote.

DLF’s minority shareholders lost out in the process, they said. “We also believe that DLF has undertaken questionable related party transactions to boost the value of DAL prior to its acquisition by DLF, thereby subverting the interest of minority shareholders via a higher purchase price for DAL," the analysts added.

DLF lacks free cash flows and factors such as the absence of a credible plan to reduce debt on its balance sheet, and its over exposure to Gurgaon will eventually force the company to seek help from financial institutions to restructure its loans, the analysts said. “Since the IPO, (the) management has faltered at every step in executing its grandiose vision to be a conglomerate with tentacles spread across hotels (the joint venture with Hilton has ended and Silverlink Resorts is up for sale), build mega townships, become free cash flow positive by FY11," they said.

devesh@livemint.com

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