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Never-ending Problems and Permanent Lessons

For Indian equity investors, it may be time to write-off real-estate stocks permanently...

Over the last few days, DLF has been in the news again. Unlike the last round of DLF-related headlines, this time there was some elements that stuck some observers as positive. The company sold off a resort property, a deal which would shave off some Rs 1,600 crore from its total debt of Rs 21,000 crore. By itself, there was nothing remarkable about the news. DLF has been trying to sell-off non-core assets for a while, or perhaps it labels as non-core whatever it can sell. In any case it has had some success in encashing some of its holdings, something that should have some effect on the mountain of debt that it is pressed under.

However, the more interesting part is not the DLF news directly but the stock-markets’ and analysts’ reactions to the news and further reactions to these reactions. At first flush, the news led some analysts and news sources to immediately declare that this was good news for the DLF stock. However, the actual markets seemed to disagree and refused to provide any kind of bump up to the DLF stock. Then came another round of analysts’ comments and news stories based on them pointing out that the DLF stock had not risen in response to the news. Some of them went into great details, implying that good times might be around the corner for the company and seemingly complaining about the markets’ petulance in not recognising this. Do note that I use the phrase ‘good times’ at face value, without any of the irony with which it has been weighed down in recent months.

It seems that years of short-termism have brought things to a pass where a bump up in a stock price is considered by some to be a just reward for generating good news. That the scale of the good news may be utterly unrelated to the actual woes of the company in question seems hardly to matter. DLF’s recent history seems to encapsulate everything that is wrong with this business, in general. The company had an IPO in 2007 at a high Rs 525. It gained the reputation of was a high-flier, one of those that was ‘Building India’, as it claimed. It gained a huge capitalisation and found its way into the bellwether market indices.

However, the decline when it started was steep and permanent. The stock lost 2/3rd of its value and has never really recovered. Along the way, it gained a reputation for opaque accounting. Last year, the Canadian forensic research company issued a damning report that laid bare highly questionable accounting practices and a year later, involvement with the famous political son-in-law didn’t help either.

Equity investors who look at a company for long-term investment often distinguish their approach as being ‘fundamentally-driven’ rather than being driven by short-term news or price momentum or such. However, there’s an attitudinal thing that comes even before fundamentals. It’s hard to give a pithy name to it, but it starts with realising that when you buy the stock of a company, you are becoming a business partner of the promoter. Is the promoter the kind of person you would like as a partner?

There’s something to the fact that real estate business has become the most ignored of the large business in India, as far as serious institutional investors go. Equity mutual funds, for example, eschew the sector almost entirely, with the exception of a handful of small companies that form a very small proportion of the industry. The real moral of the story may be something interesting and sobering. The way the real estate business operates on the ground in India may be fundamentally incompatible with the demands of being a well-governed business with the levels of openness and transparency that is required from being a publicly-owned and listed stock. There are some small exceptions but that’s all there will ever be.