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DLF stock tanks even as Sensex soars

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The stock of the country’s largest property developer, DLF, On Monday fell over 2 per cent as investors and analysts panned the realtor’s move to buy out its real-estate investment trust DLF Asset (DAL) and merge it with itself.

The market reaction was so bad that DLF became the only stock to fall in the 30-share Sensex, which rose by over 5 per cent. Even the BSE Realty Index, which tracks real-estate stocks, closed the day 1.39 per cent higher than Friday’s close.

According to reports, DLF is planning to acquire DAL, owned by promoters K P Singh and his family, for an enterprise value of around Rs 7,000 crore as the investment trust could not rope in private equity funds to raise the required amount.

DAL was expecting to raise $450 million (around Rs 2,250 crore) from JP Morgan and Texas Pacific Group (TPG) by the end of the current quarter to pay off DLF. DAL owes nearly Rs 5,500 crore to DLF for the commercial properties it has acquired from the latter.

DLF’s move to acquire DAL is expected to pave the way for DE Shaw, a hedge fund that had invested $400 million (approximately Rs 2,000 crore) in DAL in 2007, to exit the company. Earlier, DLF promoters had shelved their plan to list DAL on the Singapore Stock Exchange (SGX) due to poor market conditions.

Real-estate analysts termed the move as negative for the company as DAL was a major contributor to the top line and profit of DLF. “Over 50 per cent of DLF’s sale used to come from DAL and the market had factored in this, expecting the money to come in by a stipulated date. But if such a deal happens, visibility of revenues will come down,” said Shailesh Kanani, a research analyst with Angel Broking.

As per the plan, DLF is expected to raise debt of around Rs 2,500 crore from banks and financial institutions by mortgaging receivables from the lease rental of the special economic zones (SEZs) acquired by DAL, mainly to repay DE Shaw, sources said.

But analysts feel it is easier said than done. “DAL valuations were very high in 2007, but now it has come down sharply. Tenants are also renegotiating rentals, which will definitely lead to an erosion in the value of receivables,” said another analyst from a Mumbai-based brokerage.

DLF needs to deliver a total built-up area of 9.5 million square feet to DAL by March 2009, and a total of 19.5 million sq ft in the next two years.

“Investors need to be paid over and above 4-6 per cent coupon rate on preference shares. So, they have to be compensated accordingly, but we do not know how the company or its promoters will do it,” the analyst said.

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