What is DLFs strategy? First buyback spending 1100 crore and now fundraise of 10000 crore?

DLF has approached its shareholders for an approval to raise Rs 10000 crore ($2.3 billion) through a placement to qualified institutional investors. This is quite surprising given that DLF is still on with a buyback process where it shelled out Rs 1100 crore to prop up its shares. If DLF had significant amount of money to buyback shares, why is it now looking to raise capital. Proves that the earlier strategy was simply to increase the share price of DLF which is currently below the IPO price of 525 at Rs. 487? The buyback price is Rs 600.(Read about the buyback)

The problem that DLF will face while raising funds is that it has to wait for six months after the buyback closes before raising money from the capital market. But the buyback hasn’t even begun and would take at least three months to be completed. In which case, the fund-raising is still some time away and the company is merely using the annual general meeting to arm itself with the necessary approvals. The DLF stock has lost over 60 per cent from its peak of Rs 1,205.

Another thought on why the company could have gone for a buyback was that the buy back will help increase the EPS. This will also lead to a reduction in the price earning (PE) ratio, hence helping to push up stock prices. High stock prices always work to a company’s advantage when it wants to raise funds. However, the buyback hasnt really helped DLF share prices given the market sentiment.

DLF’s June 2008 quarter results were disappointing with the net debt increasing to Rs 13,200 crore from Rs 10,000 crore in the March 2008 quarter, while receivables (net of customer advances) were up at Rs 5,800 crore from Rs 5,000 crore. Operating profit margins fell around 1000 basis points to 61.5 per cent. Sales were up 24 per cent y-o-y at Rs 3,850 crore but were down sequentially. The net profit, too, was up 23 per cent y-o-y but down sequentially. The company’s revenues from DAL (a company owned by the promoters of DLF) have been coming down over the past few quarters and now account for 40 per cent of the total revenues.

These tactics clearly show the pain that India's largest real estate developer is in terms of funds. We can only imagine the plight of the smaller developers who are now at the mercy of moneylenders and other sources that charge over 30% that too with safety conditions to avoid any downsides.


* Akruti City stock continues to outperform the other stocks. The stock was up over 10% in yesterday's trade :)

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