Thursday, 12 July 2012

DLF has no credible plans to deleverage balance sheet: Veritas


ET Now: If I take the clock back, last year in September you had raised concerns regardingKingfisher Airlines and you believed that the airlines was heading towards bankruptcy. The recent media reports indicate that the lenders are looking to sell non-core assets. So, what is your view on Kingfisher Airlines and do think it is a matter of time that Kingfisher Airlines will actually shut down?


In an interview with ET Now, Neeraj Monga, EVP & HoR,Veritas Investment Research, shares his views on Kingfisher Airlines, RComm and DLF. Excerpts:

Neeraj Monga: All the issues that we had raised in our Kingfisher report of September 2011 have actually come to pass in the marketplace... and it is interesting. It is a small airline carrier, with very little market capitalisation. So I do not believe that the company can survive. Lenders are already signalling their intent by deciding to sell the fixed assets of the company. What is going to be interesting to see is what will be the recoverability on these loans. Meanwhile, the company continues to shrink and I believe sooner or later, it will shut down.

ET Now: You had also raised concerns regarding corporate governance and accounting practices of RComm. What is your view on telecom companies? Will they meet similar fate as KFA?

Neeraj Monga: I do not believe Reliance Communications is going to meet the same fate as Kingfisher Airlines. That has never been the intent of our research, and we have never positioned it as such. The questions we have raised regarding Reliance Communications have to do with aggressive accounting, misrepresentation of financials and the fact that the company has reported book activity which may not be as trustworthy as some people would like to believe it to be... and that perhaps there are a lot of conjectures surrounding the businesses of the organisation.

The market has been focused on the asset divestiture strategy at Reliance Communications and our research suggests the valuation being according to the assets that are most likely to be sold i.e. its Reliance Infra tower business. We have not included the optical fibre cable assets into those businesses or the IPO being considered for the sub-sea cable asset in Singapore. Both these assets we believe are unlikely to get the valuation in the market up. Our valuation of the tower assets is somewhere between Rs 12500 and 15000 crore and our valuation of the sub-sea cable asset is approximately -- in a best case scenario -- $800 million. In both the cases, the market will eventually find out that Reliance Communications' deleveraging strategy is not going to come through as expected; and therefore, the stock is overvalued. That being said, I do not believe Reliance Communications is going to meet the same fate as that of Kingfisher Airlines.

ET Now: At DLF, you now believe that the best case valuation for the company is about Rs 100 per share. That is what you mentioned in your last report on DLF. However, now that the company has started monetising some of their non-core assets, do you think DLF deserves a short term re-rating?

Neeraj Monga: My view on DLF is unlikely to change in the short term, given the significant corporate governance issues that we have already raised about the company. We can also not ignore the fact that the company is in deep financial distress, in terms of the debt that it has on its balance sheet and the cash flow obligations of approximately Rs 3500 crore -- to meet its interest obligations and the preferred and common dividend obligations on its books. We believe that the company has no credible plans to deleverage its balance sheet. If you look at the results reported by the company on May 30th 2012 -- in spite of selling approximately Rs 1750 crores worth of other assets, the company's net debt declined by approximately Rs 33 crores over a 3-quarter period. This suggests that all these asset sales were not able to help the organisation deliver. Currently, the market is anticipating the sale of additional assets, including the wind power assets. Our valuation of Rs 100 a share already incorporates all the valuation of these assets. However, adjusted book value for the company is in a range of Rs 100 to Rs 110 per share, which is a fair value for the company.

ET Now: So do you believe that with the Prime Minister taking over the Finance Ministry, investors globally are expecting some action on the reforms and policy front?

Neeraj Monga: Investors globally are unsure of who is in charge in India and unsure about who will make these decisions that are going to propel the country forward and launch the next phase of reforms. The fact that the Prime Minister has taken charge of the Finance Ministry, it is neither here nor there... because every time a decision is made in India, it is either in West Bengal or in Gujarat or some other state where there is a powerful chief minister -- who actually stands up and talks about it or against it. In terms of a coalition government, where everybody is trying to make all stakeholders happy, nothing ever gets done. So this policy paralysis -- which continues to take place in India -- is detrimental to India's perception as an investment destination, and it is even more detrimental for the people of India who actually have to live there and make a living on a daily basis.



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