DLF reducing burden by selling non-core assets

DLF, the country’s largest real estate company, decided many quarters ago that divestment of non-core assets would be the route to its debt reduction.

Even as it slipped on some self-imposed deadlines on the way, the firm is closer to the goal.

The FY13 fourth quarter (Q4) earnings, however, fell short of analysts’ expectation, as debt was still high at Rs 21,730 crore (Rs 217.3 billion), with much of the targeted non-core sales done.

While the company has sold non-core assets for about Rs 6,500 crore (Rs 65 billion) in the past two years, its debt is down just nine per cent from the end of FY12.

The Q4 ended March was also a disappointment for another reason.

For the first time since going public, DLF posted a consolidated net loss, at Rs 4.1 crore (Rs 41 million).

Company officials say the divestments will start showing full results in terms of cutting debt during the current financial year.

“We are focused on reducing the debt by half in the next three years,” executive director Saurabh Chawla recently said. DLF’s group Chief Financial Officer, Ashok Tyagi had recently told Business Standard the perfect debt level should be five-and-a-half times the annual rental flow of a company.

Currently, DLF's rental assets give a revenue of around Rs 1,800 crore (Rs 18 billion).

In that sense, the ideal debt level should not be more than Rs 9,900 crore (Rs 99 billion).

The company is trying to be close to that number in the next three years, at a level of Rs 11,000-12,000 crore (Rs 110-120 billion), assuming the rental revenue will improve with time.

Critics argue there is only so much of non-core businesses you can sell and the company must raise money from its core business.

There is consensus that things will be easier for DLF only if real estate demand picks up.

Realistically, pending receipts from the institutional placement programme of Rs 1,860 crore (Rs 18.6 billion) and from non-core asset sales in FY14, debt would come down further, analyst firm JM Financial said.

DLF’s promoters reduced its shareholding in the firm in May through IPP by around five per cent to reach the 75 per cent level in accordance with the guidelines of the Securities and Exchange Board of India, which mandate private companies have a minimum public shareholding of 25 per cent.

According to Anubhav Gupta, analyst at Kim Eng, the debt situation will improve once money from IPP and sale of non-core

assets such as Aman Resorts starts coming.

“DLF would perform better in the second half of the current fiscal when it is able to book revenues realisation from the various projects,” Gupta added.

Experts are optimistic of the project targets being set by the company.

DLF is looking at sales bookings of eight million sq ft worth Rs 6,000 crore (Rs 60 billion) in the current financial year.

This will come from the two existing projects in the national capital region and new projects in Lucknow (Uttar Pradesh), Panchkula (Haryana) and Chennai (Tamil Nadu), among others, said Tyagi during an analyst conference call.

In FY13, the company did sales bookings of 7.23 million sq ft, worth Rs 3,815 crore (Rs 38.15 billion).

In FY14, it will spend Rs 3,300 crore (Rs 33 billion) on construction and Rs 1,500 crore (Rs 15 billion) in land and capex.

DLF hopes to achieve a net debt of Rs 17,121 crore (Rs 171.21 billion) by March 2014 through sale of Aman Resorts, wind energy divestments, etc.

Explaining the trend of high debt that realtors accumulate, an expert said it could be linked to their craze for land acquisition, which could serve as long-term inventory spreading over 15-20 years.

This is in contrast to other Asian companies, which do not buy for more than one or two years at a time. But in India, developers buy land far in excess of what is needed.

The companies did not feel the impact of debt when real estate demand was good.

Things changed when demand dropped and interest payouts put pressure on the balance sheet, the expert added.

DLF began its non-core asset divestment in September 2011 with the sale of a 28-acre plot in Gurgaon to M3M, a real estate developer, for Rs 440 crore (Rs 4.4 billion).

Among the major non-core sale transactions are divestment of stake in Aman Resorts to founder Adrian Zecha for Rs 1,650 crore (Rs 16.5 billion), NTC land in Mumbai to the Lodhas for Rs 2,700 crore (Rs 27 billion) and an Information Technology Special Economic Zone in Pune to private equity firm Blackstone for Rs 810 crore (Rs 8.1 billion).

Besides, the part— sale of its wind energy business in the first few months of this year for Rs 520 crore (Rs 5.2 billion) would add to the kitty. However, DLF has been facing rough weather on other counts.

It was slapped a penalty of Rs 630 crore (Rs 6.3 billion) by the Competition Commission of India, after a group of up-end DLF apartment owners at Belaire (Gurgaon) petitioned on company’s alleged misuse of its market leader position.