Thursday, July 3, 2008

DLF announces buyback

Circa 2007
DLF did a IPO last year around the same time at around Rs 525 per share. The IPO has a series of controversies around it and took its time to get SEBI approval. It finally managed to sail through. The promoters diluted about 12% in the company and still continue to hold about 88% in the company. The real estate markets were on a song and the promoters got a good price for the dilution.

The objective of the IPO I presume was to raise capital so as to deploy the same in profitable projects earning returns for the shareholders.

Cut to 2008

Property markets are in a slump. Most developers are unable to raise capital from the equity markets, AIM, PE funds etc and the cost of debt has gone up substantially. Developers are facing severe cash crunch as demand has contracted at such high property prices.

So in such a tough environment where capital is scarce, what does the largest real estate company want to do?. It wants to return capital thru a buyback because it believes its share price should be higher.

Guys why did u take it in the first place last year when u didn’t need it? Or
Is managing the share price more important than managing the business?

“U cant fool all of the people all of the time” (or maybe you can). I can lay a bet that not a single share would get bought back. Anyway with a 88% promoter holding, there is only 2% of the capital that can be bought back without attracting the delisting norms.

I think SEBI should start questioning these strings of open ended buyback announcements where nothing happens other than trying to prop up the share price.

PS: Well Mr Ambani did his buyback of Reliance Infrastructure and it doesn’t seem to have helped the share price. Subsidiary Rel Power raised capital because it needed it and parent returns it back because it doesn’t need it. Well they could have transferred it from the parent to the subsidiary and saved us all the trouble. When something is expensive, all the propping up doesn’t help.


Mahendra Naik said...

Hi Ninad,

Point well made. I agree that SEBI should look into this and ensure that the specified number of shares are actually bought back. Here the management has shown its desperation and lack of integrity in trying to support the stock price. Good managements would never act in such a knee jerk fashion.

Ninad Kunder said...

Hi Mahendra

This has become a common practice to take shareholders for a ride. There is a blog post by Prof Bakshi on how SEBI has pulled up the Mastek management on the same.

I really wish SEBI takes a more proactive role and ensures that some of these buybacks see the light of the day.