DLF buyback may not be good for shareholders

NEW DELHI: DLF, country’s largest real estate developer on Thursday announced share buyback at Rs 600 per share. The company plans to spend around Rs 1,100 crore in the exercise. Given the background of the announcement and company’s financial position, the move seems to be a knee jerk reaction by the company to prop-up its share price.

DLF has been one of the worst losers in the current market meltdown. The stock has declined by around 60 per cent since the beginning of current calendar year against 32 per cent decline in Sensex during the period. Even after the recent recovery its stock price, DLF is still trading at a 15 per cent discount to its IPO offer price of Rs 525. This put company in an embarrassing situation with regards to retail shareholders.

Though it is debatable as to how much support the buyback will provide to DLF stock price, the move goes against the long-term interest of the company’s shareholders. DLF’s core operations continue to lose cash and company is sustaining its operations though IPO money raised last year, fresh borrowing and raising capital by selling equity in various special purpose vehicles.

During the year ended March 2008, the company had negative cash flow of over Rs 2,000 crore from its operations. The cash shortfall was met through IPO proceeds and raising fresh debt. By the end of FY08, the company has total debt of around Rs 12,600 crore.

This makes case for cash conservation rather than pleasing shareholders with share buyback. More so given the fact that company continues to seek investments from private equity players to funds its various projects. Infact, one of main objectives of the DLF IPO was to fund its various ambitions in real estate space besides allowing it to retire debt and shore up its net worth.

This helped it to reduce its leverage ratio that has touched a high of around 3 by the end of FY07. The cash outflow due to share buy will partly undo this financial turnaround achieved by the company in last one year. This may hurt the company prospects in the medium term given the fact that credit market is tightening the world over and real estate prices are expected to fall.

And its uncertain how much influence can a buyback programme worth 1.5 per cent of DLF current market cap can have on its stock price.