BackIs DLF set for a much-awaited turnaround?
Plan to raise about `10,000 crore by selling stakes in two projects, monetizing profitable portfolio could well be the turnaround plan investors have been waiting for
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Bengaluru: DLF Ltd’s plan to raise about ₹ 10,000 crore by selling stakes in two residential projects and monetizing its profitable portfolio of rental assets could well be the turnaround plan investors have been waiting for as India’s most valuable realty firm battles both a massive debt pile-up and a slowdown in the real estate sector.
On Wednesday, DLF said its subsidiary DLF Home Developers Ltd will raise ₹ 1,990 crore from Government of Singapore Investment Corp. Pte Ltd (GIC), as the two form a joint venture to invest in and develop two upcoming residential projects in central Delhi. The projects have a combined development potential of about 5 million sq. ft.
DLF also said its shareholders had approved a proposal by the company to pledge more than 50% of its shares in three of its units to raise as much as ₹ 7,500 crore, and create third-party rights, at its annual general meeting on 28 August.
Having built a sizeable rent-yielding business, with an asset base of 30 million sq. ft in 2015-16, DLF wants to either set up a private rent company with third-party shareholders, where its promoters can exit and private equity (PE) investors can come in, or put the assets directly in a real estate investment trust (REIT) platform and opt for a listing, whichever is faster. DLF plans to raise both debt and equity against its rental portfolio.
The deal with GIC is in line with the firm’s plans to unlock value in the development business, which is witnessing sluggish demand, by bringing in PE investors.
“The GIC deal shows that we can also bring in investor partners for our rental portfolio in the future. If we dilute even 40-50% stake in our rental assets, it will help bring down the debt of our development portfolio by about 60-70%," said Saurabh Chawla, senior executive director, finance, at DLF.
The capital from the GIC transaction will be used for operations and to pare debt.
Chawla said that of the ₹ 3,000 crore that DLF had planned to raise from PE funds, a substantial amount has already been raised.
On 5 August, DLF said it will seek shareholders’ approval to pledge more than 50% of the company’s shares in three of its wholly-owned units—DLF Cyber City Developers Ltd, Caraf Builders and Constructions Pvt. Ltd and DLF Assets Pvt. Ltd—through which it runs its annuity or leasing business of office space, information technology (IT) park, IT special economic zone and retail mall properties. The company said it wanted to raise as much as ₹ 7,500 crore to lower debt.
DLF’s net debt increased by ₹ 633 crore to ₹ 21,598 crore in the quarter ended 30 June. Of this, ₹ 7,598 crore of debt belongs to its development company (that includes residential projects) and the remaining ₹ 14,000 crore to its rental portfolio.
Its net profit declined by 16% to ₹ 540.24 crore in 2014-15 from ₹ 646.21 crore in the previous year. Total revenue fell by 17% to ₹ 8,168 crore in 2014-15 from ₹ 9,790 crore in the previous financial year.
DLF entered into a definitive agreement to sell DT Cinemas, its cinema exhibition business, to multiplex chain PVR Ltd for ₹ 500 crore in the June quarter in a bid to exit non-core assets and businesses to boost cash flows and reduce debt. In August, it sold four acres of land in Kochi for ₹ 111 crore.
Some property analysts believe that DLF is on the right path with its focus on debt reduction and jumpstarting projects so that cash flows start coming in. A few said this is the only option DLF is left with.
“DLF has two key problems right now. Poor sales and high debt, and due to the latter, the interest cost is a big hit to the company. If these measures are implemented as planned, DLF would have taken care of the debt issue in some way, to focus on the operational part of the business," said an analyst with a Mumbai-based brokerage firm, who asked not to be identified.
This person, however, doesn’t think these measures are adequate.
“Will these help in realizing the full potential of the company and help it grow? We are not so sure," he said.
The DLF-GIC transaction, when concluded, will give the company some relief from a balance sheet perspective in the short to medium term, but until the weak real estate sector pulls itself out of the rut it finds itself in, there won’t be much to cheer about, said Sandipan Pal, analyst at brokerage Motilal Oswal Securities Ltd.
“DLF has been bogged down by negative cash flows for a long time now and close to ₹ 700 crore of quarterly interest payments. If it manages to bring down debt and the cost of borrowings, it will allow the company to breathe, but in the long term, actual sales need to happen for it to generate positive cash flows," said Pal.
The real estate market has been slow for more than two years now. The National Capital Region (NCR) centred on Delhi, DLF’s primary market, has been the worst hit with high levels of unsold stock. The slowdown has seen investors flee real estate in NCR, as prices remain stagnant and the number of incomplete projects grows.
Gurgaon-based DLF said in an analyst presentation in August that it is planning to go slow on fresh project launches and focus on finishing existing projects. “...Once the demand comes back, the company shall be able to sell completed, finished products," it said in the presentation.
DLF’s portfolio of rental assets has been a boon for the realty firm. The company said after its June quarter results that it is on target to achieve an annual rental income of ₹ 2,400 crore on an asset base of 30 million sq. ft in 2015-16.
If DLF manages to raise up to ₹ 7,500 crore against its rental portfolio, and the promoters go ahead and dilute their 40% stake in DLF Cyber City Developers (DCDDL), that money will be put in DLF Ltd.
DLF promoters face a March 2016 deadline to convert their compulsorily convertible preference shares (CCPS) in the subsidiary DCDDL into equity shares.
“Given the CCPS conversion deadline, it is also beneficial to provide an exit via asset sales rather than through equity dilution. The company plans to use most of that capital to make its development portfolio debt-free," said a second analyst, who didn’t wish to be named.
On Wednesday, shares of DLF Ltd closed at ₹ 109.60 each on the BSE, up 3.4% from their previous close, while India’s benchmark Sensex fell 0.95% to close at 25,453.56 points.
PTI contributed to this story.
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