DLF: Deleveraging steps continue

Steps are positive. But, a pick-up in residential sales will be the biggest factor

The sale of DLF promoters’ 40 per cent stake in the rental subsidiary has two positives. One, the proceeds could be used to reduce the debt of the parent and realty firm, DLF.

Two, it will avoid a conflict of interest in the future, which could arise from the conversion of promoters’ compulsory convertible preference shares (CCPS) in the rental subsidiary — DLF Cyber City Developers. In 2009, the promoters had subscribed to Rs 1,600 crore worth of CCPS, when the rental subsidiary was merged with promoter-firm Caraf Builders & Constructions. Now, after the stake sale and conversion into equity shares, the promoters would own 40 per cent in the rental subsidiary, and DLF 60 per cent.

The promoters want to use the sale proceeds to reduce debt in DLF. To do that, they must dilute their stake in DLF, which is 75 per cent, the maximum that promoters can hold in a listed entity.

Kotak Institutional Equities Research says the value of the funds from the stake sale will depend on the equity value assigned to the rental subsidiary’s business and debt. (Equity value offers a snapshot of both current and potential future value.) Analysts expect the promoters to raise Rs 6,500 crore for their 40 per cent stake.

The steps the company has taken might help reduce DLF’s debt of Rs 21,500 crore. Two-thirds of the debt is attributable to the rental subsidiary. Over the last month and a half, the DLF stock has gained 46 per cent on asset sales, Singapore's GIC investing in two projects, and now a debt-cutting plan. But, the critical trigger will continue to be the improvement in operations, as sales have fallen by half over the past five years.

Given the land bank, Rs 2,400 crore a year from rentals, and muted stock prices, about 38 per cent of analysts tracking the stock have a ‘buy’ suggestion and about 31 per cent have a hold rating. Lower interest rates and a bit correction in property prices are positives. But, a large inventory and slow recovery could be negatives at least in the current financial year. Wait for a meaningful pick-up in residential sales before buying the stock.