DLF: Reducing balance sheet stress

After deleveraging, the Street will watch out for the pace of inventory sale

DLF gained one per cent in trade after the company gave the go-ahead for equity infusion and a qualified institutional plan (QIP) aimed at reducing its consolidated net debt of Rs 28,000 crore. The company is expected to raise about Rs 3,500 crore through a QIP, while the promoters are expected to pump in about Rs 10,500 crore. 

The promoters are expected to receive about Rs 11,900 crore from the sale of their stake in DLF Cyber City Developers (DCCDL) to GIC as well as a buyback. Of the sale proceeds to GIC, about Rs 8,900 crore will come by the end of this month while the rest will come from a buyback by DCCDL. The company is expected to use the Rs 9,000 crore it receives from the promoters (who will be issued warrants/debentures) to reduce its debt. This will be followed by a QIP in the March quarter which will help maintain the promoters’ stake below 75 per cent. After the infusion by promoters and the QIP, debt is expected to come down by half. 

Parvez Akhtar Qazi of Edelweiss Securities says the GIC deal/fundraising (expected in Q4FY18) should de-lever the balance sheet meaningfully with net debt to equity falling to 0.4 times from 1.1 times currently. This will not only reverse the persistent deterioration in leverage metrics happening since FY14 but also reduce the cost of capital and cash burn pegged at Rs 750-Rs 800 crore per quarter, giving the company significant operational flexibility, according to him.

The company’s focus now is to sell its existing inventory, worth Rs 15,000 crore, rather than launch new projects. The shift in sales model to completed inventory would mean that the company will have to depend on sales momentum at its Gurugram projects to boost revenues. The company expects to complete ongoing construction within this fiscal year. The only major residential project underway will be Capital Greens, which is a joint venture with GIC. 

However, the worry for the company, according to analysts, is that the current environment for the Gurugram market remains weak and sales growth will be gradual especially in the high-end residential market the company operates in. Unless demand improves, Edelweiss Securities says it will take about four years to liquidate the current inventory. The positive from DLF’s portfolio are the rental assets, which, given the improvement in India’s office market with falling vacancies, is expected to generate about Rs 3,000 crore of income in FY18, according to ICICI Securities. Given DCCDL will be treated as a joint venture after the GIC deal, DLF will only account for its share of earnings and DCCDL’s balance sheet (about 60 per cent of total debt) will be deconsolidated from DLF.

While the balance sheet deleveraging is a near-term trigger, any improvement in the pace of liquidation of its unsold inventory will be the key to watch out for and will help sustain the gains.