While recent non-core asset sales are a positive, DLF will have to make big-ticket sales to meaningfully dent its debt.
Despite the recent recovery in its share price on asset sales, the DLF stock is still down over 25 per cent from the start of the year on slowing sales, high interest rates and debt. Though the macroeconomic outlook does not look very good, the Street will watch for news on new project launches and higher volumes, as these should help improve cash flow.
While the company has made some progress on sale of non-core assets in recent weeks, sale of big-ticket assets, such as Aman Resorts, will be crucial in meeting its divestment target of Rs 3,000 crore for 2011-12. For, unless such sales are undertaken or business volumes pick up dramatically, DLF may remain saddled with its huge debt, of a little over Rs 22,000 crore as at the end of the September quarter. Says Kejal Mehta & Dhrushil Jhaveri (in a report on December 7), “Although recent actions are directionally positive with regard to DLF’s strategy of non-core asset monetisation, they are not quite triggers for the stock.” At Rs 203.70, most analysts continue to have a bearish (either sell or hold) view on it.
Reducing debt, slowly
The company’s debt increased in the September quarter by Rs 1,500 crore as sales proceeds were deferred to the December quarter and higher taxes and forex fluctuations also played spoilsport. While realty markets remain subdued on lower volumes, consequent to weak economic activity and high interest rates, asset sales by DLF in the second half should help bring down overall net debt of Rs 22,500 crore to about Rs 19,500 crore.
| NO DEEP VALUE | |
|
Rs /share | |
| Residential projects | 222 |
| Retail projects | 28 |
| Commerical projects | 55 |
| Leased assets | 58 |
| Non-core assets | 41 |
| Gross net asset value | 404 |
| Less: Net debt | 109 |
| Less: Land payments | 7 |
| Net asset value | 288 |
| Discount (15 %)* | 43 |
| Price target | 245 |
| * Discount varies between 15% and 25% Source: BofA-Merrill Lynch Global Research and analyst reports | |
While the company expects to get Rs 350 crore each for its stake in the Noida information technology park and its hospitality joint venture, its stake in the Pune SEZ (special economic zone) is likely to fetch it about Rs 600 crore (see table). These deals add to Rs 1,300 crore, but Edelweiss Research analysts Aashiesh Agarwaal and Adhidev Chattopadhyay note that key monitorables remain progress on the Aman sale (Rs 2,000 crore) and a pick-up in new launches in the second half of the current financial year.
| WHAT’S ON THE TABLE | |
|
Rs crore | |
| Noida IT park | 350 |
| DLF Hotels & Hospitality | 350 |
| Pune SEZ | 600 |
| Aman Resorts | 2,000 |
| Total | 3,300 |
| Source: PL Research | |
The company plans to raise Rs 6,000-7,000 crore over the next two to three years and a large part of the divestment proceeds will be utilised to reduce debt. While the debt coverage ratio (earnings before interest and tax/interest costs) at 2.3 times is comfortable as of now, any delay in monetising land assets and a further slowing in new project launches could make it tough to maintain profitability, which has been under pressure in the current fiscal.
DLF's consolidated revenues at Rs 4,978 crore for the six months ended September 2011 were up 13.2 per cent year-on-year, but slower rise in operating profits (up 8.4 per cent to Rs 2,387 crore) and a 24.4 per cent jump in interest costs (to Rs 1,022.7 crore) saw net profits decline 11 per cent to Rs 744 crore.
Banking on volume growth
After a disappointing September quarter, when it recorded residential sales volumes of 1.28 million sq ft as against an expected two million sq ft, DLF seeks to improve this in the second half. The company was unable to launch new projects due to a lack of approvals. However, executive director, finance, Saurabh Chawla, said in an investor call that the company was confident of achieving seven-eight million sq ft in the second half. More than half of these are likely to come from sale of plots.
While volumes across key Indian cities have fallen in the current year till now, DLF’s presence in Gurgaon should play to its advantage. Bank of America Merrill Lynch analysts, Abhishek Kiran Gupta and Gagan Agarwal, in a report (November 14) say the Gurgaon market will outperform all other markets in 2012-13. Given that 40 per cent of DLF’s net asset value comes from this area, the analysts feel volumes are likely to rebound.
While the sale of assets and volumes are essential for any visible improvement in the financial position, the external trigger would be turning of the interest rate cycle. This should help lower interest costs for company and consumers, and improve the demand environment. A decline in interest rates could also lead to a refinancing of its debt at lower rates from the current 11.75 per cent.
