DLF Buyback - How it is shaping up

Sourced from VCCircle

KP Singh (pictured), the chairman of the country’s biggest real estate developer DLF, is trying to do an Anil Ambani (remember Reliance Power?) for its shareholders. The firm, which went public last year and is currently trading at one third of its January highs of Rs 1,225 (before markets crashed) and about 20 per cent below its IPO price of Rs 525, has announced a share buyback to prop up its price.
Earlier this year Anil Ambani’s Reliance Power had announced a bonus issue for its shareholders to bring down the cost of acquisition for investors who put money in its IPO. However, the gamble has not worked for Ambani as poor market scenario and the power sector stock bubble has ensured the shareholders have not gained much even after the bonus issue.
Will it be the same story for DLF? Analysts have unanimously termed it a ‘desperate action’. One of the key reasons for the decision is to quell market rumours that the firm is facing cash crunch (there is also an unconfirmed murmur that DLF has defaulted on some scheduled payments).

The Buyback
According to the announcement, DLF will buyback a maximum of 22 million equity shares (around 1.1 per cent to 1.3 per cent of the total equity base) at a maximum price of Rs 600 per share. The catchword is ‘maximum’ price and is not a fixed price buyback which can benefit shareholders directly. The company has earmarked Rs 1,100 crore for the buyback which means right at the beginning it is clear that it would not buyback the whole of 2.2 crore shares at Rs 600 as that would mean outgo of Rs 1,320 crore.
After the buy-back, the promoters’ shareholding in the company will go up to 89.3 per cent from 88.1 per cent. This would be marginally short of the 90 per cent limit after which the company would cross the minimum public shareholding limit of 10 per cent which calls for delisting.

What It Means
But does this serve its purpose? One view is that at best the buyback has managed to confuse the market further. However, some analysts VCCircle spoke to said that is has managed to lift sentiments about the stock even though just marginally.
First of all it means the stock could have bottomed out and there is less risk to further slides downward. The stock is already up 10 per cent over a week, though it is till 10 per cent below its price one month back. The stock is trading at Rs 462 level as against the buyback price of Rs 600.
Secondly, it has managed to instill confidence in gullible investors who are not aware of buyback dynamics and feel Rs 600 is the right price and the price would atleast touch that level in sometime.
However, it means that the cash flows would be that much strained by this decision. The management seems to have factored the fact that a large part of the buyback wont be done at all.
The firm’s core operations is not generating additional cash and DLF is managing its operations though the IPO money raised last year besides banking on fresh borrowing and raising capital by selling equity in various special purpose vehicles. For the year ending March’08, the company had negative cash flow from operations of more than Rs 2,000 crore. The total debt had hit Rs 12,600 crore mark in March.
Analysts say such a situation calls for conservative cash management rather than appeasing shareholders with share buyback. If the last attempt by Anil Ambani to come out with such a face saving measure for Reliance Power is any indication it may not help much if the market goes into another tailspin!