BNP Paribas Report: Indian Real Estate Companies Score Poorly in Corporate Governance..!

Number of outstanding litigations against DLF Ltd  the highest at 128

A report by BNP Paribas on 8 realty companies found that each of them performed poorly on one or /  more of the parameters

 A report by BNP Paribas Securities India Pvt. Ltd on corporate governance at 8 leading Indian real estate firms found that each of them performed poorly on one or / more of the parameters considered for the assessment.

Compensation structure, ability to retain key personnel, financial stability, pending litigation &  trading in own stock were some of the criteria used to assess the management quality of Oberoi Realty, DLF, Unitech , Sobha Developers, Mahindra Lifespace Developers, Godrej Properties, Prestige Estates Projects and Phoenix Mills.

Highlights of BNP Paribas Report...! 

** DLF Ltd and Unitech Ltd lagged behind on many of the parameters including stability of company financials &  outstanding litigation.

**  Oberoi Realty, Mahindra LifeSpaces &  Godrej Properties performed poorly on compensation paid to management, trading in own stock and financial stability, respectively.

India’s real estate sector has often faced criticism for poor corporate governance standards and lack of transparency.

**  Oberoi Realty’s management emerged as one of the lowest - paid leadership teams - the total compensation on average for the past 3 years was 0.5 % of net profit.

** Sobha Developers had one of the highest pay-outs at almost 6 % of net profit compared with the industry average of 2.8 %. Godrej Properties and Prestige Estates were also above the industry average.

** Sobha Developers &  Phoenix Mills stood out for the turnover of key personnel.

 

** Phoenix changed the composition of its board of directors 8 times and Sobha changed its chief financial officer 3 times in the past 5 years.

** A high turnover in management impacts efficiency. More so, it raises concerns over the stability of the organization.

** The promoters of DLF Ltd and Mahindra Lifespaces were the most active traders in the stock of their own companies, with 13 and 8 transactions, respectively, over the past 3 years .We do not think that trading in company stock by promoters or key management personnel is negative or reflects poorly on corporate governance,” the report said.  “However, it can not be ignored and if frequent it also implies promoters are focusing on the stock price rather than the core business.”

** Based on financials such as the earnings before interest, tax, depreciation and amortisation (EBITDA) margin &  profit margin,  Sobha Developers, Oberoi Realty & Mahindra Lifespaces emerged as the most stable companies, and DLF Ltd  and Unitech performed the worst.

** Most of the real estate companies are exposed to so called key man risk - the impact caused by the loss of a key executive and pending litigation / allegations are seen as contingent liability, implying a red flag against the management.

** Sobha Developers had the lowest number of outstanding litigations against it ( 4 ) and DLF Ltd  the highest at 128. However, the report gave Unitech the lowest ranking on litigation risk because of a subsidiary’s involvement in the high - profile 2G telecom spectrum case.

** On other parameters, which include high disclosure levels, non-core diversifications, accounting policy &  history of promoter-related transactions, Oberoi Realty, Sobha Developers and Mahindra Lifespaces had high rankings, while DLF, Unitech and Godrej Properties performed below average.

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