DLF borrows money at 12.38%; lends free to Vadra

DLF is India's largest listed real estate company. During the heyday of the company a few years back, such was the craze for the DLF stock that Kushal Pal Singh, its owner, was listed among the 10 richest people in the world. Those days are now gone.

The company has recently been accused by Arvind Kejriwal and Prashant Bhushan of giving interest free loans amounting to Rs 65 crore to Robert Vadra. Vadra is married to Priyanka Vadra, daughter of Sonia Gandhi.

Kejriwal and Bhushan have released documents which clearly show that companies set up by Vadra borrowed money from DLF and then used that money to buy properties from DLF, among other things. (You can access the press release here). The market value of these properties has increased considerably since Vadra bought them.

According to a tweet on the Twitter handle of news channel NDTV, DLF has said that their dealings with Vadra have been completely transparent. Vadra, on his part, had explained his relationship with DLF to The Economic Times in March 2011. "I have a good understanding with DLF. Our children are friends, we are friends. They are seasoned businessmen. They are not daft. They are educated, sensible people and are reasonable and shrewd in their business. They don't need me to enhance them. They've existed for years," Vadra had said. (You can read the complete story here).

On the face of it, this might look like a completely normal business transaction between two different businessmen. But the latest annual report and the analyst presentation made DLF throw up some interesting questions nevertheless.

Here is a company which analysts believe should be cutting down on its debt by around Rs 9,000 crore, and it has been giving out interest-free loans to an individual with zero or very little experience in running a real estate business. Reuters

As per an analyst presentation (dated 6 August 2012) made by DLF, the gross debt of the company stands at a whopping Rs 25,060 crore as on 30 June 2012. At the end of 31 March 2012, the gross debt had stood at Rs 25,066 crore. (You can access it here).

The annual report of DLF points out "the company's borrowings from banks and others have a effective weighted average rate of 12.38 percent per annum, calculated using the interest rates effective as on 31 March 2012 for the respective borrowings."

So what this means is that the company had debt outstanding of Rs 25,066 crore as on 31 March and was paying an interest of 12.38 percent on that debt. The debt outstanding as on 30 June 2012 had not changed much and was at Rs 25,060 crore. It is fair to assume that over a period of three months the interest rate on the debt outstanding wouldn't have changed significantly.

What is also interesting is that during 2011-2012 (i.e. the period between 1 April 2011 and 31 March 2012), the sales of the company stood at Rs 4,582.67 crore. This means that the debt of the company is nearly 5.5 times its annual sales, which is extremely high.

The question that DLF needs to answer is that why is a company which has such huge outstanding debts, paying an interest of 12.38 percent per year on it, giving out interest-free loans? Also it seems to have been having trouble in bringing down its outstanding debt. The outstanding debt between March and June 2012 has gone down by only Rs 6 crore.

The company has been trying to bring down the debt by selling investments that it had made over the last few years. It recently sold a plot that it owned in Lower Parel in Central Mumbai to Lodha Developers for Rs 2,750 crore. The company has been trying to sell several of its other investments over the last few years.

The high debt level has been a huge concern for the analysts who track the company. As Sandipan Pal, an analyst with Motilal Oswal, wrote in a recent report, "DLF's high debt has been a key concern for investors; however, we believe leverage (which means debt in simple English) of Rs 16,000-17,000 crore would be a sustainable level for the company."

So here is a company which analysts believe should be cutting down on its debt by around Rs 9,000 crore, and it has been giving out interest-free loans to an individual with zero or very little experience in running a real estate business. DLF needs to tell us in some detail the "business" reasoning behind this decision.

Another interesting point that comes out while going through the annual report of the company is that it has 65 non-current investments. The annual report of DLF points out that "Investments are classified as non-current or current based on management's intention at the time of purchase. Investments that are readily realisable and intended to be held for not more than a year are classified as current investments. All other investments are classified as non-current investments."

Of the 65 non-current investments only two are joint ventures. One of these joint ventures is with Skylight Hospitality Private Limited, a company owned by Robert Vadra and his mother Maureen. Skylight owns a 50 percent stake in Saket Courtyard Hospitality Private Limited, which runs the Hilton Garden Inn Hotel in Saket, New Delhi. This is the only operational hotel of the company.

When it comes to making non-current investments, joint ventures are not a favoured form of investing with DLF, given that only two out of its 65 non-current investment are joint ventures.

The venture with Skylight is very small by DLF standards. In the annual report of the company the book value of the joint venture is put at just Rs 5.6 crore. Also why would a company as big as DLF enter into a joint venture for a four-star hotel with an individual who has absolutely no or very little prior experience in running a hotel? This is something that needs to be answered.

A recent report in Daily News and Analysis seems to suggest that the hotel run by this joint venture is on the block. (You can read the story here).

The entire Congress party has come to the rescue of Robert Vadra and tried to project the deals between Vadra and DLF as normal business transactions. One senior leader even went to the extent of saying "doesn't Vadra have a right to occupation?" Yes, Vadra has the right to an occupation and so does DLF. But there are too many unanswered questions here that need to be answered.

Vivek Kaul is a writer. He can be reached at vivek.kaul@gmail.com