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Doesn’t Look Favorable = DLF. India’s largest real estate developer DLF announced their 3rd quarter earnings this past week and it was not pretty.  I think we all understand the economic environment is grim and the real estate market is REALLY grim but hearing Rajiv Singh, DLF Vice Chairman, speak on CNBC-18 you get the sense it ain’t so bad…whatever.

There is no denying it, most real estate developers around the world and in India are living on borrowed time and borrowed money. Rajiv also stated in the same interview that he doesn’t expect homes prices to get cut beyond 20% yet they have a hugh amount of excess inventory.  Rajiv mentioned people are not buying because bank rates are too high, I think what’s high is either home prices or Rajiv or probably both.

Real estate projects can simply be classified as:

1. New – in today’s environment only a complete moron would loan a dime to a new project
2. Partial – Hugh dillema, throw good money after bad?
3. Completed – sell or lease at rock bottom prices, this screws up the initial project cash flow calculations. Existing tenants will ask for a rate negotiation (read – lower prices)

For DLF the numbers don’t add up and they are massively over leveraged which is not a good thing.  Will DLF or any Indian real estate company file for bankruptcy?  No chance, Indian corporate law is so convoluted that filing for bankrupty doesn’t seem to be an option, instead the company will just be a zombie of it’s former self.

Previous posts on DLF:
May 2, 2006 - India’s next crorepati (billionaire): KP Singh
June 8, 2007 - Yes, DLF. Really?
Oct 10, 2008 - Boom to Bust

Debt is the new four letter word. Debt is affecting everyone from Mr. Consumer to private equity firms like Carlyle.  More precisely, massive debt is the real killer.  Mr. Consumer for years had been charging up a storm on his credit card, buying 4 dollar lattes, hitting the mall and buying every retarded gadget from the Sharper Image and then to top it off he went and bought a home with very little down.  The technical term for Mr. Consumer’s situation is called clusterfu!@#$.  The recipe to get out of this situation is almost like losing weight – eat less (earn more) and exercise more (spend less).  Easier said then done, most companies are cutting back on raises or just getting rid of people.  Any sort of government refund check will most likely go to paying down his debt and not new spending. That is the catch-22, most of the world economy revolves around the American consumer spending and not saving.  But, for the American consumer to get back on track they have to save and not spend. Policy makers around the world seem hell bent on lower interest rates and approving fiscal stimulus packages to boost the economy.

If I’m not mistaken, this whole credit crisis was about cheap money and loose lending practices.  Take India for example, the government has been reducing interest rates but no one seems to be buying houses.  The banks fault the property developers for overpriced inventory and the property developers blame the banks for high interest rates. Who is right? Both share some blame but it’s also the real estate companies that over built which is leading to excess capacity in most Tier 1 (Bombay, Delhi, etc…) and Tier 2 (Poona, Indore, etc…) cities. I don’t think stimulus packages will work and the only thing that will help is just the natural progression of the business cycle.  But, policy makers can’t sit around and wait, they have to show they are doing something which just seems to make things worse…think TARP.

It’s earnings season in India, but most companies aren’t earning a dime so I like to call it “losing season.”  People are rapidly losing trust and the latest revelations from Satyam that over 14,000 employees were really just phantom employees doesn’t help. The biggest company in India Reliance Industries announced their quarterly numbers on Thursday and as expected they were good.  And that is the problem, if Satyam can manage 14,000 “employees” then what is really happening behind the scenes at Maker Chambers 4, the HQ for Reliance. Actually people do know what is happening but rather not talk about it, Reliance is too big to fail.  After the Satyam scam research analysts were all over the books of other IT companies, but  when Reliance announced their numbers not a single question. To ask a question is the equivalent of suicide, the Reliance machine is too big and powerful. Reliance = India = Reliance.

Other companies that are reporting their numbers seem to be using the “forex losses” line item to account for their pathetic performance. It’s almost comical how they say it with a straight face, it’s similar to “the dog ate my homework” excuse. As I’ve said before many of these companies were using their excess cash to speculate in the markets and now that the market has gone against them they are screwed. Currency fluctuations can slam a company but that is what currency hedging is all about if it’s done correctly. Instead many tried to speculate in the currency markets as well and ended with “forex losses” that would appear legitimate in a companies normal business operation. Of course, they can’t say they were speculating so they just use the “forex loss” line item to wash away their sins…for now.

Cook as in cooking the books. Satyam is the 4 largest IT major in India and was started by Rama Raju. Today he dropped a massive bombshell that involved an accounting scandal which sent the stock tanking 77%, it closed at Rs 40.25 a share (the 52 week high was Rs. 542). Rama faxed a letter to SEBI Wednesday morning where he outlined the level of fraud and why he did what he did. The letter tries to show him as the knight in shining armor trying to rescue the company…what a crock of sh!@#. According to the letter he is solely responsible and nobody knew anything but him, even though Satyam has over 53,000 employees, had 9 directors on the board and PwC as the auditor.

The meaning of Satyam in sanskit is truth, which brings me to this point about trust. Who can you trust? The founders of the company? The board of directors? The auditors? The analysts? The regulators? The ratings agencies?

To quote a line from my spiritual advisor – LA rapper 2Pac Shakur:

Before I go to sleep
Tell me, who do you believe in?
Who do you believe in?

So why did he do it? The usual culprit is pump up the numbers to drive the stock price up (aka pump and dump). Based on my extensive research (using google and talking to one person) I have two theories:

1. The numbers for the past several years were pumped up by using the cash on the balance sheet to play in the equity markets. When the markets fell last year, that cash disappeared. Is this likely, maybe. When I came to India a couple years ago, I met with a pharma company that had Rs 50 CR on the books and wanted to invest in the equity markets. They said “why invest in our business when we can make 30-40% in the markets.”

2. Government payoff (read bribe). IT companies in India are usually free of corruption but infrastructure and real estate companies are the exact opposite. Rama has two sons – Teja (runs Maytas Infra) and Rama Jr. (runs Maytas Real Estate). Where did Maytas Infra get the money to “win” the contract for the Hyderabad Metro project?

I would highly recommend reading the letter he faxed to SEBI, below is the best line from the letter:

It was like riding a tiger, not knowing how to get off without being eaten

Update:
The lead partner from PwC who handles Satyam is Srinivas Talluri, you can email him at srinivas.talluri@in.pwc.com to get all your questions answered.