The deal to integrate two of the country’s largest lease-rental entities, DLF Cyber City (a subsidiary of DLF) and Caraf Builders (majority owned by DLF promoters), hasn’t gone down well with the markets.
While some analysts say the valuations are fair, an equal number are questioning the valuations and terming them unfavourable for DLF’s minority shareholders. Additionally, the company has not provided sufficient details about the absolute valuations of the two entities.
Analysts believe the deal valuation looks skewed in favour of Caraf Builders & Constructions Private Ltd, the holding company of DLF Assets Private Ltd (DAL). In a December 18 report, Amit Adesara of Emkay Global says, “Given the current portfolio as well as future development portfolio of both the entities, we believe the ratio is marginally in favour of the promoters.” The analyst has valued Caraf at Rs 2,550 crore and DLF Cyber City at Rs 5,120 crore, which translates into a 67:33 ratio and not 60:40 as arrived at by the company.
A Mumbai-based analyst says, “Given the rise in debt levels (by about Rs 1,500 crore) of DLF Cyber City since March 2009, it is quite likely that the funds would have been used to create more assets.
| HOW THEY COMPARE | ||
| (In mn sqft) | DCCDL** | CARAF |
| Ready assets | 6.73 | 9.65 |
| Additional development | 11.83 |
Nil
|
| TOTAL | 18.56 | 9.65 |
| (In Rs crore) | DCCDL$ | CARAF# |
| Rental income* | 416 | 555 |
| Net current assets | 715 | 2,192 |
| Net debt | 4,140 | 2,460 |
| **DCCDL has also notified SEZ land of 18 acres approx. Aggregated nos from Pro forma Balance Sheets for: $DCCDL & retail subsidiaries; #Caraf, IT Parks in Chandigarh & Kolkata, and DAL *Annualised net property income (post tax) | ||
Considering this as well as some dip in rental rates in the current year, many analysts find it difficult to digest that DLF Cyber City has an annualised net rental income of just Rs 416 crore; the company had reported total revenues of Rs 1,442 crore in 2008-09. They believe there could be a case of undervaluation of assets of the company, and hence, the need for more information on the deal.
Surely, the analysts said, there would have been more clarity had the company provided the actual valuation figures and all the parameters, rather than just mentioning the 60:40 ratio and a few figures.
While the company justified the strategy behind the move, market observers were not convinced.
In a statement, the company said that the key strategic objective of integration was to consolidate the group’s lease rental assets under DLF, which would further enhance the stable rental incomes and cash flows of DLF. Besides, it would eliminate the perceived conflict of interest between the promoter entities and DLF, while facilitating management integration and overlap elimination.
However, market experts, who did not wish to be identified as they acted as advisors to the group in some manner, observed that the deal was also to save the debt-ridden DAL. They said, “DLF has been the contractor for assets developed by DAL, wherein the most lucrative assets were purchased in DAL and DLF was appointed only as a contractor, to construct the property and give ready possession to DAL. Currently, a lot of money is outstanding from DAL to DLF on this account and DLF may have paid tax on such money.” The company, however, stated that DLF was supposed to construct the property, lease it out to potential customers and hand it over to DAL. Only then, DAL was supposed to pay for the property.
It was due to this reason that even as DAL paid DLF Rs 8,200 crore, its books showed advances to DAL worth Rs 2,800 crore as it claimed to have received only Rs 5,400 crore worth of property. On the other hand, DLF booked the entire amount of about Rs 11,000 crore as income, and hence, its books showed over Rs 2,500 crore as receivables from DAL.
Experts, however, recall, “In 2007, the group wanted to list DAL on the Singapore-based exchange as a real estate investment trust (REIT), which could not happen due to market conditions. Now, to get the money from DAL, Caraf Builders is being merged with DLF Cyber City in a no-cash deal. Later, DAL will be listed overseas and that is how DLF shareholders will get their dues. This is a move to save the debt-ridden DAL at the cost of DLF shareholders.” If the listing happens, SC Asia, a PE investor which has bought compulsorily convertible preference shares (CCPS) worth Rs 2,725 crore in DAL, will also perhaps get an exit. Else, Caraf will either have to buy the CCPS or convert it into equity.
Among the few gains that most analysts believe could accrue to DLF is that since yields are lower in overseas markets, DLF Cyber City is expected to gain from the listing of DAL on the Singapore exchange, which is expected around March 2010. Says Aashiesh Agarwaal, analyst, Edelweiss Securities, “In the current deal structure, upsides from cap rate compression will accrue to DLF, adding upside risk to our valuations.”
As against the higher cap rate of 9.5-11 per cent assumed for valuing the properties, analysts said the cap rate for entities listed in Singapore would be around 5.5-7 per cent, which according to their estimates worked out to an upside of Rs 1,600-2,000 crore for DLF, based on its 60 per cent holding in DAL post integration.
