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DLF (Selling Family Silver)

DLF (real estate developer) reported a net profit of 2145 cr on a revenue of 3651 cr for the quarter ending dec 2007. Sounds impressive! Lets dig a bit deeper.
More than half of this profits came from sale of 1850 cr worth land (assets) to a promoter companyDAL (DLF Asset Ltd) whats even more surprising is that this is not the first time this deal happened. In the past 9 months DLF has sold undeveloped property worth 5,000 cr to DAL.

Why do I think as a bad sign?
1. the asset sale is artificially boosting the profits and is hiding the fact that DLF is not being able to develop and sell property (its core business is failing) It is able to do this massive sale now, but this is not a sustainable business model
2. REMEMBER: DLF is trading at a significant premium to the land bank value. So people are counting on the profits it would have made by developing it. And by not doing this duty, DLF is robbing its share holders their rightful due.
3. Sale of assets to the promoter’s firm never happens at market terms. The prices are affordable and the cashflow/payments happen at their own sweet time. No wonder DAL is yet to pay for the land it acquired several months ago.
4. DAL is a separate firm, and none of the profits made by DAL will ever flow into DLF. As a matter of fact DAL is expected to be listed as REIT (real estate investment trust) in Singapore in the coming months.

As Prax pointed out, DLF has a rotten history and have repeatedly cheated the shareholders. Read Sucheta Dalal’s article on it.

26 replies on “DLF (Selling Family Silver)”

What do you mean by the asset sale is artificially boosting the profits? you mean that the proceeds from the asset sale is recorded in the revenue section of the income statement?! That’s a big violation of accounting policies. Do you know where I can see the financial statements?

@ruhi…
exactly…
you can also find a good article http://www.livemint.com/2008/01/31000113/Assets-sale-to-promoter-firm-b.html
6th para 1st line *more than half* of the revenue and profits is coming from transfer of assets to the promoter.
whats worse is that the actual payment has not been made for these sales

try going to dlf website for balance sheets.

//That’s a big violation of accounting policies.//
under close scrutiny half of the indian firms will be found guilty.

//What do you mean by the asset sale is artificially boosting the profits? //
indian firms are traded at multiples of PE. so when the business is bad, firms manipulate the inventory, advertising/marketing/even depreciation charges to cover their tracts….. sometimes firms sell assets (and report it as other income)…
and since majority of the people never read the balance sheets, nobody suspects anything.. and in most of the cases, because of booming economy the next quarter is better … and everything is back to normal

Whoa! That’s totally unacceptable. And most of the Indian public fall for these shenanigans…that’s the sad part. India needs to introduce some SOX-like compliance policies. Plus, the country also needs to update its accounting system to an accrual based method. Lots of other changes…I could go on and on.

//And most of the Indian public fall for these shenanigans//
yups they do…. partly because the disclosure norms are not very strict, so there is no way anybody can smell the rat…
now u know why i lay so much emphasis on revenue (rather than profits)… because it is one figure that is hardest to fudge.

people have no idea when the promoters and management r buying/selling the stocks. and they r often known to manipulate the prices.

Dlf has had a rotten history and record- they are smart rascals
they had issued shares in the open mkts when the mkts were good
and then treated minority sh holders like shit , delisting it
in controvercial circumstances and when things got green …
guess what did they do? One more new ipo- that got oversubscribed and listed with big gains –

So this is nothing new for DLF and from their past record they can be grouped with the Essars of the world

Asset sale is to kill longer term profits – plain and simple legal skimming of future profits .. not only that they performed below their/mkt expectations

//now u know why i lay so much emphasis on revenue (rather than profits)… because it is one figure that is hardest to fudge.

You are wrong there. Revenue (sales) figure can be manipulated quite easily using aggressive accounting, and by changing your inventor accounting methods,and lots of other ways. Actually, Cash Flow and FCF analysis is the best method in evaluating a company.

And didn’t you say in your post that the asset sales are being recorded as profits? The money generated from asset sales will flow down to profits only from the revenue (sales) figure. So, yes, revenue has also been manipulated here.

i have never applied cash flow analysis on companies, but will try.

//revenue has also been manipulated here.//
in most decent companies, the sale of assets is put in other income which i used to remove from the balance sheet while doing the analysis… but ya looks like DLF r masters in fudging the books.

//in most decent companies, the sale of assets is put in other income which i used to remove from the balance sheet while doing the analysis…

Acually…now that’s a wrong thing that you’re doing. It’s very important to see the effect of reduced assets on the overall balance sheet and how they impact the ratios.

And OCI (other comprehensive income) includes lots of other things including Leases, translation gains/losses etc. So, I would advise you not to just “remove” it. 🙂

Ankur, if that’s the only information that’s available on such a big company…then I don’t know what to say. Indian’s accounting system sucks.

Anyway, you can take any interemediate accounting book/financial statement analysis book and read the chapter on Revenue Recognition methods, Cash Flow Analysis, the chapter on Ratio analysis etc. I think I have a PDF of Analysis of Financial Statements; I can send that to you. but it’s really advanced and it’s better if you first read some intermediate accounting book before reading that one.

//Indian’s accounting system sucks.//
I know 🙁

I know a bit about ratio analysis and reading of balance sheets, but the whole problem is that i never had any formal education 🙁 maybe engineering was the worst choice i made

There r a lot of information available at BSE/NSE, but nobody cares to put it into a readable format.
eg: http://bseindia.com/Insidetrade.asp
Yahoo would take this data and for any US listed firm, you will know what the promoters did for the past 2 years.
Similarly volumes….
unless u actually store ET for the past 2 weeks, there is no way you could find whether the particular intraday trade happened at rising/lesser volumes. And that is the best way to detect bear/bull market.

//i do think u trust rediff too much//
i could have never searched ur riddhi siddhi on yahoo/moneycontrol (i do not know any other website) So even though Rediff is not the best, it is good enough for me.

all i want is trust worthy data, hot links that i can quote, searches based on partial matches and graphs that can load in a jiffy.

the NSE link which u provided does not have any reference to the balance sheets/PE ratio/ moving average etc.

//i was thinkg about makin a pf there but dont yet know what it looks like//
nething that works is fine… and i am not advertising rediff.
http://i10.photobucket.com/albums/a145/ankoo/portfolio.jpg (for intraday movements i still rely on my broker )

hey thanks shucks
that was lots of effort on ur part
ur bang on about the stats put on the exchange sites
i didnt fully mean what i said about rediff
a very long time ago i had a pf with walletwatch, then i went through
equitymaster and rediff and then to yahoo and lastly mc
rediff at that time was not that great thus my inference

yahoo has an india fin portal now and when im done with the
watch pfs ill inform u lets see how they turn up

i still like the mc pf which gives me a lot more data than rediff.
but is slow..

here is a watch of my mc watch pf its small cause of all the adds
i just cut out the imp stuff
http://www.flickr.com/photos/[email protected]/2233486736/

u kidding me?????
http://in.finance.yahoo.com/q?s=TATASTEEL.NS
for a sensex company, they didn’t care to compute the Market Cap, PE, EPS etc…..

//i didnt fully mean what i said about rediff//
who cares, they r far from perfect… only plus is that their website updates fast enough for me not to lose my chain of thought

//i had a pf with walletwatch,//
why don’t u try ur broker… the benefit is that that portfolio gets updated automatically the moment u make a trade.. hence saves u of a lot of trouble.
only other thing u need is a watchlist.. a list of 20-30 companies u might be interested in.

btw as we had predicted, the market has continued to slip.. and by budget the prices should start becoming just ripe for investments.

kotaks site pf is not that good not much stats i think the way to go is to mix and match –firstly the stats and charting is better with yahoo
i can get 10/20/30/50/100 dma data 52 wk hi low
and make or change the pf very very fast which is a plus
they are bad with corporate info like u stated they didn’t care to compute the Market Cap, PE, EPS etc…..

the corporate info is good with kotak(will have to chk and see how much they share with their customer base)also have to chk indiainfoline (they had a good database) mc and rediff(as recomended by u) r also good

http://in.finance.yahoo.com/q/ta?s=TATASTEEL.NS
now i get it…. yahoo has finally implemented what i had always desired…. clubbing intraday volumes with the price movements. 🙂
now all they need to do is provide all the fundamental info like PE, market cap, balance sheets.. and i get all what i need 🙂

ICICI has a very rudimentary portfolio manager:
it just lists the no of stocks of a particular company that u have, transaction history, todays price and unrealized gain/loss.
but that is all i want right?

@ram…
good to see you again, we were worried about u.

yes, i would stay out of DLF.
about HDIL, its a good company… i had applied to its IPO.
//Now should I average it?//
it usually is a good strategy. but use it in moderation.. sometimes people ed up throwing too much good money after bad.

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