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DLF Mulls Buyback to Shore up Sagging Shares

After losing more than 71% of its market cap in the past six months, the country’s largest real estate developer, DLF, has announced a buyback of its shares. The company is likely to spend around Rs.500 core on the buyback which will result in around 1 crore shares (0.6% equity stake) being extinguished. “Our shares are trading at a huge discount to our NAV (net asset value – an indicator of a realty firm’s health). Today’s prices don’t reflect the internal strength of the company.” DLF CFO Ramesh Sanka told ET, adding the buyback is meant to “reward our investors”. He said the quantum and the price at which shares will be bought will be decided at the board meeting on July 10.

A person close to the development, however, said the company was likely to mop up around 1 crore shares – equivalent to 0.6% stake – at an investment of around Rs.500 crore. The company is likely to buy shares over several months, stretching to a maximum of six monts, at market-determined prices.

DLF’s proposed investment indicates the company is looking at an average acquisition price of Rs.500 per share, which is lower than the issue price of Rs.525.

The promoter group holds 88.17% stake in DLF. As per sebi norms, promoter holding beyond 90% could trigger delisting proceedings. Therefore, the buyback option is limited to acquisition of around 3 crore shares, which will hike promoters’ stake to 90%.

The DLF scrip has slid 71% from its January peak of Rs.1, 255 to reach an all-time low of Rs.350

On Wednesday. Following the buyback announcement, the share rose 14.7% to close at Rs.423 on NSE after touching an intraday high of Rs.439. Over 1 crore shares changed hands on Wednesday.

Analysts feel DLF’s buyback plan will bring little relief to the flagging scrip. “We have already asked our clients to stay away from real estate. The buyback would be a good opportunity for investors to exit DLF.” Said Shailesh Kanani, a real estate analyst with Angel Broking, adding that share prices will fall again as soon as the buyback offer is over.

Companies mostly use surplus cash reserves to buyback shares to shrink capital base and enhance earnings per share. But in the case of DLF, as also in the case of a few other Indian companies earlier, a buyback is being affected to put up a brave front before investors, which may not necessarily work.

The global credit crisis and rising interest rates in the country have made borrowings expensive for realty firms and DLF, like its peers, is facing a major cash crunch. It had to reverse the sale of its office property to the promoter group company DAL, in March quarter after being unable to find investors for DAL. In such a situation, DLF’s Rs.500-crore investment for share buyback will only put extra burden on the company’s balance sheet.

The global turmoil and domestic inflation has hit real estate firms with several realty stocks being hammered out of shape. Unitech has lost 75% while Parsvnath and Omaxe have lid over 80% each. Given the changed economic scenario, most brokerage firms have been revising downwards the NAV as well as target price of real estate firms.

Courtesy: - THE ECONOMIC TIMES dt.3^rd July 2008

Date: 04 July 2008, Friday
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