DLF (real estate developer) reported a net profit of 2145 cr on a revenue of 3651 cr for the quarter ending dec 2007. Sounds impressive! Lets dig a bit deeper.
More than half of this profits came from sale of 1850 cr worth land (assets) to a promoter companyDAL (DLF Asset Ltd) whats even more surprising is that this is not the first time this deal happened. In the past 9 months DLF has sold undeveloped property worth 5,000 cr to DAL.
Why do I think as a bad sign?
1. the asset sale is artificially boosting the profits and is hiding the fact that DLF is not being able to develop and sell property (its core business is failing) It is able to do this massive sale now, but this is not a sustainable business model
2. REMEMBER: DLF is trading at a significant premium to the land bank value. So people are counting on the profits it would have made by developing it. And by not doing this duty, DLF is robbing its share holders their rightful due.
3. Sale of assets to the promoter’s firm never happens at market terms. The prices are affordable and the cashflow/payments happen at their own sweet time. No wonder DAL is yet to pay for the land it acquired several months ago.
4. DAL is a separate firm, and none of the profits made by DAL will ever flow into DLF. As a matter of fact DAL is expected to be listed as REIT (real estate investment trust) in Singapore in the coming months.