After DLF, will the Anna factor impact realty stocks?

Two unrelated developments this week have the potential to put a further dent in the already sagging real estate story.

One is the Rs 630 crore penalty imposed by the Competition Commission of India (CCI) on DLF for abusing its dominant position and treating home buyers unfairly. There are fears that if the CCI targets other realty companies similarly, the sector could take another beating on the bourses.

The second is the gathering storm of the Anna Hazare movement against corruption. Real estate is the most corruption-prone sector of them all, with politicians, builders, and criminals involved in the ownership, development and manipulation of realty supply. Any effective Lokpal will have implications for the politician-builder nexus, and, by extension, for the future of the realty sector in the short term.

[caption id=“attachment_63797” align=“alignleft” width=“380” caption=“The DLF stock initially plunged 8 percent before recovering some ground. Reuters”]  [/caption]

For the moment, though, the markets seem to absorb the initial shock relating to DLF while ignoring the Anna phenomenon. The DLF stock initially plunged 8 percent before recovering some ground, and most analysts didn’t seem too concerned with the CCI ruling.

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One brokerage, Edelweiss, while acknowledging that the fine would add to the cash flow worries of DLF, maintained a “sector performer/hold” rating on the stock.“Although we believe that the company has the option of taking the legal course against the order, any adverse development could possibly impact DLF’s cash flows which are already strained by elevated net debt levels of close to Rs 21,500 crore for the June-ending quarter. We currently have a ‘hold/sector performer’ recommendation with a target price of Rs 225/share,” Edelweiss said in a note to clients.

DLF is currently trading at Rs 182, down 52 percent from a year ago.

Kotak Institutional Securities was even more sanguine. In a client note, it pointed out that the CCI had noted DLF’s ‘dominant position’ in the Gurgaon market and that the company had “abused its dominant position” in that market. The brokerage said because the other companies in the sector were not as large or dominant as DLF, the argument that the CCI’s ruling would open the doors to fines for other companies was unrealistic.

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“We believe that there is low risk (although it cannot be ruled out entirely) of other developersgetting impacted,” it said in a client note, pointing out that DLF boasted three times the revenue of the next-largest rival, Unitech. It also said that the CCI had earlier dismissed pleas against two other property developers, BPTP and Parsvanath Developers India Ltd, on the grounds that neither company enjoyed the wide “spectrum of strengths” that DLF did. In addition, another case against a DLF group company was also dismissed, Kotak said.

Deutsche Bank also maintained its “buy” rating on the stock, although it cautioned that the fine was an “overhang on DLF and the sector.”

Be that as it may, the ruling does catapult the troubled sector into the public spotlight at a time when awareness and discontent against unethical practices and corruption have reached a new high among the public.

The real estate sector, in particular, has been at the heart of several scandals that have erupted in the recent past. The Noida land grab (in which the Greater Noida Industrial Authority hoovered huge tracts of fertile land on the pretext of setting up industries and then used those plots for residential use); the illegal iron ore mining scandal in Karnataka and the Adarsh Housing Society scandal (in which apartments in a cooperative society reserved for war widows and veterans of the Kargil war were handed out to politicians, bureaucrats and army personnel who had nothing to do with the Kargil war) are just some of the more recent examples. More recently, Anna Hazare targeted Sharad Pawar for being part of the Group of Ministers to draft the Lokpal Bill. Pawar, who is widely seen as linked to many land scams, opted out of the GoM after that.

Most people readily accept the generalisation that most real-estate developers are a corrupt and money-grubbing bunch. And the cartelisation, and the nexus between politicians and developers, make buyers very wary of dealing with such companies.

In July, the BBC carried a report on India’s property market, pointing out that buying a home, or building one, was a frightening prospect for many home buyers because of the possibility of getting involved in legal battles in the clogged up court system. It also recounted the nightmare situation of one hapless family that had bought land, only to later discover that they had no control of it and couldn’t build on it. The agent who had sold the land to the family had lied about having the power of attorney on behalf of the villagers, who allegedly sold the land. The agent made off with the money and both the family and the villagers lost out.

In other cases, properties are delivered late or worse, abandoned half-built, the report said.

There are, no doubt, hundreds of such horror stories. Because a lot of the developers are protected by politicians, very few of them are ever brought to justice.

So, will the decision to slap a fine on DLF for what are not infrequent practices across the industry (completion delays and making structural changes to projects without taking the consent of property buyers) really change the way in which analysts view the sector?

Perhaps not. For one thing, most analysts believe DLF will contest the ruling (the company has already indicated it might) and, for another thing, they say that since the commission itself does not have the legal power to impose fines, it will be a long-drawn process before DLF ever pays up. Overall, the ruling might not prove to be the wake-up call for the industry that it could have been.

Sentiment towards the beleaguered sector, which has been pessimistic for a while, will continue to remain muted: the BSE realty index has nosedived by 56 percent in the past 12 months, even as the Sensex shed just 9 percent.

Still, in this season of scandals, it feels like a small victory for the common man.