Since the IPO, the DLF management has faltered at every step in executing its grandiose vision, Veritas points out, even as the stock price has crashed 80% from its peak

Veritas, an independent Canadian Research Firm has said in its latest report on DLF that it does not believe the disclosed book equity and asset base of the company. In fact it argues that via its dealings with DLF Asset (DAL), from FY06-07 to FY10-11, the company has inflated sales by at least Rs11,236 crore and its profit before tax by Rs7,233 crore.”

DLF merged with DAL, which was aimed at repaying the massive debt accumulated by DAL. It was tantamount to a bailout, says Veritas, where promoters had to sell their stake to infuse cash in DAL. Most pertinently, DLF had inflated its numbers and Veritas thinks that something is amiss.

According to Veritas, which earlier blew the whistle on the Ambani brothers, “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.” It also stated as a matter-of-factly that “If your investment decision incorporates management integrity, then bypassing DLF will be an easy choice,” Veritas said.

DLF, once the poster boy of Indian real estate, continues to destroy shareholder’s money. As is known, the real estate company is trying to undo every expensive move it has made by selling off  ‘non-core’ assets in order to bring in cash to meet current obligations. As of December 2011, the net debt of DLF was Rs22,758 crore.

“(DLF) is an organization under duress. Management is scrambling to consummate assets sales, rationalize its land bank and divest non-core operations within five years of a much-publicised initial public offering (IPO)—in May 2007 at a price of Rs525, proclaiming DLF as a builder of modern India, and the best positioned company to benefit from India’s great leap forward,” Veritas said.

“Since the IPO, (DLF) 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 (exited Bidadi in Karnatka and Dankuni in West Bengal), become free cash flow positive by FY10-11 (Rs -936 crore, for the year), build a mega convention centre in the NCR region (exited in 2009), and so on,” the report noted.

DLF valuations are out of sync with reality and investors should sell it off, says Veritas. “At its current stock price, DLF trades at a trailing twelve months enterprise value/earnings before interest, taxes, depreciation, and amortization (TTM EV/EBITDA) multiple of 18.9x. The company has no free cash flow and no credible plan to de-leverage its balance sheet. A slowing real estate market in a high inflation environment and overexposure to Gurgaon—amongst India’s most speculative real estate markets—will create tremendous pressure on the company’s balance sheet”, it added.

Veritas said it believes that DLF is worth half the current market price, assuming things do work out as planned. “In a best case scenario DLF is worth Rs100 per share—less than half its current stock price of Rs226.35—from its core operations and investments, which approximates 1x Veritas adjusted book value of Rs101per share.” One can imagine what the worse case scenario might be.

The only way out for DLF, according to Veritas, is to restructure loans. This has eerie parallels to what Kingfisher Airlines has done and might end up comatose. The other option is to raise capital vis-a-vis a secondary offering, which will dilute shareholding and halt dividends. Shareholders will probably not take this in good stride. As of 29th February, DLF was quoted at Rs226.35 nearly half of its IPO price, and has fallen roughly 80% from its peak. During the same time period, the Sensex has gone up by 29%.

In a recent press release, DLF said, “…it believes that due to the current macro environment, it may take a few more quarters for the company to regain full momentum.”