DLF gets partial relief; high debt still an overhang

SAT order will open options for the company, struggling to improve cash flow due to sluggish sales and a high loan burden

Quashing of the Securities and Exchange Board of India (Sebi)'s order against DLF, which banned the property giant from accessing the capital market, has opened new avenues for raising funds and reducing of its debt.

With the ban applicable from October 13, 2014, and now reduced to six months, the company will be able to access the markets shortly, in about a month. Analysts at Axis Capital say over the next two years, DLF's balance sheet could be strengthened considerably through equity raising, monetisation of commercial assets (REIT or real estate investment trust listing), issuance of commercial mortgage-backed securities and stake sale in select projects.

Given the options the company gets to deleverage and the positive impact, the stock had spurted nearly six per cent after the Securities Appellate Tribunal order on Friday. Though the stock could see near-term gains, the Street will also look at a resolution of a couple of other legal challenges. These are the Competition Commission of India's penalty of Rs 630 crore and cancellation of allotment of 350 acres of prime Gurgaon land by the Punjab and Haryana High Court.

However, the biggest overhang continues to be the high debt on the balance sheet. Given the slowdown in real estate sales, lack of operational cash flows and current expenditure, the company has not been able to bring down its net debt. This had risen Rs 400 crore on a sequential basis in the December quarter, to Rs 20,337 crore. The company has been looking at various options.

DLF will be looking at the listing of two REITs, one housing the office/commercial assets and the other of retail assets. The company, expected to be one of the key beneficiaries of the easing in tax norms for REITS, plans to file for listing of at least one in FY16. The commercial assets business is a substantial part of DLF, with Motilal Oswal Securities estimating 43 per cent of its net asset value is attributable to office and retail assets. While leasing volumes for the nine months ended December 2014 jumped 22 per cent year-on-year to 1.4 million sq ft, the company is expected to achieve rental income of Rs 2,100-2,400 crore in FY15. About 70 per cent of the debt is attributable to the lease or rental segment. Annuity income, according to JPMorgan analysts, is expected to rise by 50 per cent over the next three years, driven by new retail mall/office completions and a sharp rise in rental in the Cyber City portfolio as old leases expire.

Most analysts are bullish on the rental assets segment of the company. On the residential front, the company is struggling to improve its sales, with little traction in its core Gurgaon market. Sales there are down 70 per cent from the 2010 levels and near the financial crisis levels of 2008, say analysts at JPMorgan. The company has been able to do better than peers in this market due to some traction in luxury residential projects. These are expected to help it achieve its FY15 pre-sales target of Rs 3,000- 3,500 crore; DLF has achieved Rs 2,700 crore so far. For the nine months ending December 2014, consolidated revenue was Rs 5,695 crore (down 8.7 per cent year-on-year), while net profit came in at Rs 368 crore (down 13.6 per cent).

The response to the two new launches, a middle income project in New Gurgaon and the luxury residential project in Delhi, will decide the growth its residential segment can achieve. Given the slow offtake of its projects and full-fledged growth a few quarters away, the company is also looking at selling stakes in some of its projects in the near term.

Meanwhile, the promoters have deferred conversion of compulsory convertible preference shares (CCPS) into equity till March 2016 and reduced the dividend coupon rate to 0.01 per cent. These were issued in 2009, when DLF had announced the merger of its subsidiary, DLF Cyber City Developers, with promoter firm Caraf Builders & Constructions, holding company of DLF Assets. DLF Cyber City Developers had issued CCPS worth Rs 1,597 crore. The company, given the nine per cent interest rate of these preference shares, will save about Rs 143 crore annually in interest costs on this count.