 "DLF cuts itself down to size")
Hammered by recent controversies surrounding its linkages with Robert Vadra, DLF laid low for some months. The company's debt, that looked unmanageable, along with delay in selling the non-core assets only compounded its woes, with analysts and brokerages writing it off for several quarters. But, the realtor has begun showing signs of return to health, cutting its net debt by Rs 1,870 crore in the October -December 2013 quarter, thereby bringing it down to Rs 21,350 crore in the quarter from Rs 23,220 crore in the previous quarter. The reduction in debt in Q3 can primarily be attributed to the Mumbai NTC land deal struck in August 2012 with the Lodhas for Rs 2,700 crore.
Even as the figure of Rs 21,350 crore is big enough, what gives DLF heart is that more money is going to flow in by the end of this financial year from the deals already completed to offload non-core assets. For instance, the sale of Aman Resorts to its founder Adrian Zecha for Rs 1,650 crore was announced in December 2012, but the fourth quarter results of DLF would reflect the transaction. Offloading part of its energy business to Bharat Light & Power for Rs 282 crore in January 2013 will show up in the January to March 2013 quarter. With those resources, it plans to further cut the debt to around Rs 19,000 crore by the end of this financial year.
Laying out a road map
That's not all. The company is banking on offloading its stake in the wind business completely, that may fetch it another Rs 500 to Rs 600 crore over the coming months. Plus, by June, DLF promoters will shed their shareholding in the company by around 5 per cent to reach the 75 per cent level in accordance with the guidelines of the Securities and Exchange Board of India (Sebi) that mandate private companies to have a minimum public shareholding of 25 per cent. The company may go for a follow-on offer to issue around 5 per cent fresh equity shares of the paid-up capital.
Although Tyagi refuses to indicate any figure as to how much DLF could raise from the Sebi-compliance exercise, estimates suggest around 80 million shares would be offloaded at the ruling market price. This could mean anything between Rs 2,000 and Rs 2,500 crore for the company at the current level of stock price. DLF share closed at Rs 277.55 on BSE on Wednesday, up 8.2 per cent from the previous day's close. The debt level of the company could be cut substantially by June, if a part of the FPO proceeds is used for the purpose.
If all goes according to plan, by the end of the first quarter of 2013-14, DLF will be much leaner with a net debt of Rs 17,000 to Rs 17,500 crore, though still a long distance away from the ideal debt level.
Tyagi offers a formula for the perfect debt level that a company should have. "It should be five-and-a- half times that of the annual rental flow." Currently, DLF's rental assets give the company a revenue of around Rs 1,800 crore. Going by the formula, the ideal debt level of the realtor should not exceed Rs 9,900 crore, which is nowhere close to the reality. But, the company expects to be there in the next three years, at a debt level of Rs 11,000 to Rs 12,000 crore, considering that the rental revenue will improve with time. Tyagi explains, debt level should be such that it can be adequately serviced by rental assets.
While the DLF management is gung-ho about turning its focus back on the core business of launching real estate projects and improving the operating cash flow of the company, not everybody is as excited. Jigar Shah, head of research at Kim Eng Securities, a leading brokerage in Asia, says, "Things would be better for DLF now, than they have been in the past three to four years. But it is not great yet." The debt pile-up, huge interest payout on the debt and absence of real estate demand in recent times have taken a heavy toll on the company. "It will be easier for DLF only if the demand improves," argues Shah, adding that the "commercial overhang is still there".
Sanjay Sharma, managing director, Qubrex, a brokerage and consultancy, too, thinks there's still a long way to go for DLF before it can be comfortable with its finances. "There are only those many non-core businesses that you can sell," says Sharma. The company must raise money from its core business, he says, adding that its case at Compat (Competition Appellate Tribunal) over charges of misuse of market monopoly in Gurgaon was a thorn for DLF.
Slew of launches
The company, meanwhile, has lined up aggressive launch plans. In a bid to set the balance sheet right, DLF is looking at eight to ten launches over the next three to four months. "But, we will be selective in launches," Tyagi says, indicating that DLF won't go mass market.
Sanjay Dutt, executive managing director (South Asia), Cushman & Wakefield, pulls no punches in pointing out the positive factors in DLF managing to reduce its debt. "DLF is a role model in its current form. A lot of real estate companies will follow it for strategies on risk mitigation among other things," according to Dutt. Having cut down on the debt and expenses, DLF management will now have the bandwidth to focus on strategic decisions, he adds.
The high level of debt, true for most leading developers, could be linked to their craze for land acquisition, that could serve as long-term inventory spreading over 15 to 20 years. "Other Asian companies 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," according to Shah of Kim Eng Securities. When the real estate demand was good, developers did not feel the pinch. But with demand vanishing and huge interest payouts putting pressure on the balance sheet, realtors felt stranded with debt.
High debt has been an industry phenomenon in real estate, but the numbers at other companies are nothing compared to DLF's. Unitech reported a debt level of Rs 5,421 crore, and Housing Development and Infrastructure Rs 3,467 crore as of December 31, 2012. On an average, the minimum capex required is around Rs 300 to Rs 400 crore a quarter for a company like DLF, according to experts. Any money beyond that limit that the company raises from sale of non-core asset goes into debt reduction.
In an interview to Business Standard in March 2012, DLF's Tyagi had expressed confidence about the next financial year (2012-13), saying the company was at the cusp of a great execution opportunity. While indicating that the debt level and interest cost (touching up to Rs 500 to Rs 600 crore in recent quarters) were set to decline, DLF had claimed then it was going to come back to its full potential in two to three quarters. It was perhaps not too off the mark.
GOING ASSET-LIGHT
Recent sale of non-core assets by DLF
- Sep 2011: 28-acre land in Gurgaon sold to M3M for Rs 440 crore
- Dec 2011: Offloaded stake in Galaxy Mercantile to its JV partner, IDFC, for Rs 450 crore
- Dec 2011: DLF and JV partner Hubtown sold an IT SEZ in Pune to private equity firm Blackstone for Rs 810 crore
- June 2012: Divested entire stake in Adone Hotels & Hospitality for Rs 567 crore to Avani Projects and Square Four Housing & Infrastructure
- Aug 2012: Sold Mumbai NTC Mill land to the Lodhas for Rs 2,700 crore
- Dec 2012: Stake in Aman Resorts offloaded to founder Adrian Zecha for Rs 1,650 crore
- Jan 2013: Part of wind energy business sold to Bharat Light & Power for Rs 282 crore
Source: DLF, industry