 "The Aman Resorts sale is just a question of when: Ashok Tyagi")
DLF, the largest developer in the country, admits its profit margin will remain squeezed for another three to four quarters because of the new revenue recognition mode. But Group Chief Financial Officer Ashok Tyagi tells Mansi Taneja and Nivedita Mookerji the Aman Resorts sale will conclude this financial year and the debt target of Rs 17,500 crore will be reached. Edited excerpts:
The Aman Resorts divestment will help DLF reduce its debt substantially. But what is your back-up plan for meeting a debt target of Rs 17,500 crore by the end of FY14 if the Aman deal does not happen?
We have passed that stage of what if Aman sale does not happen. It is just a question of when. We should be able to conclude it within this financial year, definitely. Hopefully, we will hit the Rs 17,500-crore debt level, it is on course. We do not have any uncertainty that Aman will be part of that number. If, hypothetically speaking, there's a one in a million chance that Aman's sale does not happen, we have a couple of back-up pieces.
How many plots are you looking to divest? Are all those located in the south?
The Hyderabad one is around 16-17 acres and estimated to be worth around Rs 550 crore. There are a couple of more land parcels, which we need to focus on and sell. The target disposals are mainly located in non-NCR (non-National Capital Region) regions.
Is it true that the south realty market is not doing well compared to NCR? Are you looking at exiting south markets?
That the south market is not doing as well (as NCR) is a statement of fact. But we are heavily invested in south markets - Chennai, Bangalore, Hyderabad, Kochi.
In terms of land bank we have there, it will take us a few years before we can fully execute, develop and sell those. Maybe a seven-10-year cycle.
Clearly, we are not looking at expanding significantly in those markets beyond the existing land banks. We will stay invested and not put any more money but there may be a few interesting transactions that we may do.
The increasing focus is clearly on NCR.
Aman Resorts' performance has improved over the past few quarters. New Aman properties are also being opened. Do you think the valuation of the property will go up?
Valuation clearly will not go down. Whether there is a slight upside or not, these are still early days since negotiations are going on. But we stay committed to the figure of $300 million for the sale that we had given to stock exchanges. We have been opening new properties and expanding, which clearly demonstrates that despite the fact that it is on the block, we are ensuring its health doesn't suffer. We are continuing to invest and expand even though the benefits will go to the buyer eventually. We are talking to three-four international bidders, including a consortium led by Aman's founder Adrian Zecha. There is a lot of documentation that needs to be done but we are expecting a closure very soon.
Are you looking at reducing DLF's debt to less than Rs 17,500 crore?
As rentals keep growing, entitlement of self-liquidating debt will grow. But we will have to further reduce debt by Rs 3,000-4,000 crore in the medium term. With operating cash flows and other non-core disposals, we will be able to do that. We are looking at a debt that can be serviced by our rental portfolio.
We will have a rental revenue of Rs 2,700 crore three years from now, up from Rs 1,900-2,000 crore this financial year. So, we should ideally look at Rs 12,500-13,000 crore in the next three years as a comfortable debt level.
What launches are you planning in 2014?
For 2014, we had given an outlook of Rs 6000 crore of sales against Rs 3,800 crore last year. In the first half this year, we have already done Rs 3,200 crore of sales. For the rest, we will do two residential launches in Gurgaon — one will be Ultima Phase-II and another a group housing project. Then, there will be one commercial launch in Gurgaon. And, we will continue to sell Camellias and unsold stock in other citieslike Kochi, Hyderabad, Lucknow, Chennai, Chandigarh and Indore. In terms of leasing, we have already done one million sq ft of net leasing in the first half against 1.2 million sq ft last year.
Do you expect real estate prices to drop?
Overall macroeconomic sentiment, continuing increase in interest rates and withdrawal of upfront subvention scheme are clearly things which have impacted demand from a fencesitter’s standpoint. Even so, untapped demand potential still exists. Because of approval bottlenecks, fully approved supply continues to be strained in many micromarkets.
Would you continue to buy land or is your land bank enough?
We have development potential of about 314 million sq ft and it is good enough for the next 30-35 years at the current pace of launches. Occasionally, we will buy land for contiguity sort of things. Some of the development potential of these land banks will change as these are based on today’s assumptions, which will evolve over time. But this is definitely adequate, more than adequate. With the new land acquisition policy, it will progressively become tougher for new players to create large land banks. Then, it will be an advantage to the existing players.
Your profit margin is under pressure. When do you expect it to bounce back?
Profit margins will stay squeezed for the next three-four quarters. None of the new projects — Skycourt, Ultima, Crest, Camellias — will hit the revenue threshold for the next three-four quarters because of the new revenue recognition mode. Under the new accounting policy for real estate, it creates a far higher threshold for a project to start recognising revenues than what existed earlier. From the time we launch a new project, typically it will take at least five-six quarters before it hits a threshold when it can qualify for revenue recognition. Between Crest, Ultima and Skycourt, there is about Rs 1,300-1,400 crore potential margin but not a single rupee has been booked so far. All this will correct as the new cycle comes into play.
DLF has a little over Rs 3,500 crore cash in hand. What is the ideal cash in hand for a company like DLF?
We want to ensure that we have adequate cash in hand that will take care of our mandatory payments for the next six months. This will be our strategy at least for the medium term till the economy is in uncertainties. The ideal cash flow will be around Rs 3,000-3,500 crore, in normal times. But whether this is normal time or not, only coming months will tell us. If there is acute liquidity crunch in the market, we will want to have higher cash in hand. We will look at disposal of non-core assets and continue to launch and sell more to increase cash flow.
The Aman Resorts divestment will help DLF reduce its debt substantially. But what is your back-up plan for meeting a debt target of Rs 17,500 crore by the end of FY14 if the Aman deal does not happen?
We have passed that stage of what if Aman sale does not happen. It is just a question of when. We should be able to conclude it within this financial year, definitely. Hopefully, we will hit the Rs 17,500-crore debt level, it is on course. We do not have any uncertainty that Aman will be part of that number. If, hypothetically speaking, there's a one in a million chance that Aman's sale does not happen, we have a couple of back-up pieces.
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Potentially, some of the non-Aman disposals will anyway happen such as the insurance company sale, subject to IRDA (Insurance Regulatory and Development Authority) approval, and some of the land disposals in Hyderabad, etc. The Rs 17,500-crore number is not being compromised.
How many plots are you looking to divest? Are all those located in the south?
The Hyderabad one is around 16-17 acres and estimated to be worth around Rs 550 crore. There are a couple of more land parcels, which we need to focus on and sell. The target disposals are mainly located in non-NCR (non-National Capital Region) regions.
Is it true that the south realty market is not doing well compared to NCR? Are you looking at exiting south markets?
That the south market is not doing as well (as NCR) is a statement of fact. But we are heavily invested in south markets - Chennai, Bangalore, Hyderabad, Kochi.
In terms of land bank we have there, it will take us a few years before we can fully execute, develop and sell those. Maybe a seven-10-year cycle.
Clearly, we are not looking at expanding significantly in those markets beyond the existing land banks. We will stay invested and not put any more money but there may be a few interesting transactions that we may do.
The increasing focus is clearly on NCR.
Aman Resorts' performance has improved over the past few quarters. New Aman properties are also being opened. Do you think the valuation of the property will go up?
Valuation clearly will not go down. Whether there is a slight upside or not, these are still early days since negotiations are going on. But we stay committed to the figure of $300 million for the sale that we had given to stock exchanges. We have been opening new properties and expanding, which clearly demonstrates that despite the fact that it is on the block, we are ensuring its health doesn't suffer. We are continuing to invest and expand even though the benefits will go to the buyer eventually. We are talking to three-four international bidders, including a consortium led by Aman's founder Adrian Zecha. There is a lot of documentation that needs to be done but we are expecting a closure very soon.
Are you looking at reducing DLF's debt to less than Rs 17,500 crore?
As rentals keep growing, entitlement of self-liquidating debt will grow. But we will have to further reduce debt by Rs 3,000-4,000 crore in the medium term. With operating cash flows and other non-core disposals, we will be able to do that. We are looking at a debt that can be serviced by our rental portfolio.
We will have a rental revenue of Rs 2,700 crore three years from now, up from Rs 1,900-2,000 crore this financial year. So, we should ideally look at Rs 12,500-13,000 crore in the next three years as a comfortable debt level.
What launches are you planning in 2014?
For 2014, we had given an outlook of Rs 6000 crore of sales against Rs 3,800 crore last year. In the first half this year, we have already done Rs 3,200 crore of sales. For the rest, we will do two residential launches in Gurgaon — one will be Ultima Phase-II and another a group housing project. Then, there will be one commercial launch in Gurgaon. And, we will continue to sell Camellias and unsold stock in other citieslike Kochi, Hyderabad, Lucknow, Chennai, Chandigarh and Indore. In terms of leasing, we have already done one million sq ft of net leasing in the first half against 1.2 million sq ft last year.
Do you expect real estate prices to drop?
Overall macroeconomic sentiment, continuing increase in interest rates and withdrawal of upfront subvention scheme are clearly things which have impacted demand from a fencesitter’s standpoint. Even so, untapped demand potential still exists. Because of approval bottlenecks, fully approved supply continues to be strained in many micromarkets.
Would you continue to buy land or is your land bank enough?
We have development potential of about 314 million sq ft and it is good enough for the next 30-35 years at the current pace of launches. Occasionally, we will buy land for contiguity sort of things. Some of the development potential of these land banks will change as these are based on today’s assumptions, which will evolve over time. But this is definitely adequate, more than adequate. With the new land acquisition policy, it will progressively become tougher for new players to create large land banks. Then, it will be an advantage to the existing players.
Your profit margin is under pressure. When do you expect it to bounce back?
Profit margins will stay squeezed for the next three-four quarters. None of the new projects — Skycourt, Ultima, Crest, Camellias — will hit the revenue threshold for the next three-four quarters because of the new revenue recognition mode. Under the new accounting policy for real estate, it creates a far higher threshold for a project to start recognising revenues than what existed earlier. From the time we launch a new project, typically it will take at least five-six quarters before it hits a threshold when it can qualify for revenue recognition. Between Crest, Ultima and Skycourt, there is about Rs 1,300-1,400 crore potential margin but not a single rupee has been booked so far. All this will correct as the new cycle comes into play.
DLF has a little over Rs 3,500 crore cash in hand. What is the ideal cash in hand for a company like DLF?
We want to ensure that we have adequate cash in hand that will take care of our mandatory payments for the next six months. This will be our strategy at least for the medium term till the economy is in uncertainties. The ideal cash flow will be around Rs 3,000-3,500 crore, in normal times. But whether this is normal time or not, only coming months will tell us. If there is acute liquidity crunch in the market, we will want to have higher cash in hand. We will look at disposal of non-core assets and continue to launch and sell more to increase cash flow.