DLF plays its last card with Aman Resorts sale

Finally to the relief of journalists and analysts, more than DLF, the company has completed the sale of Aman Resorts. DLF has been trying to sell the asset from the time they acquired it. The market has given thumbs up to the deal by pushing up the share price by nearly 6 per cent, just as it had done every time there was a news article that the company is finalising its sale. And as always this time too, the share price started to slip after the initial euphoria.

 

Here are the reasons for it.  

 

 

Aman Resorts was a good buy at the wrong price. The asset was bought near the peak of the real asset cycle in 2007. DLF group paid $400 million to acquire Aman Resorts which included Lodhi Hotel. Aman Resorts had acquired Lodhi Resorts in its divestment program in 2002-03 for Rs 73 crore and renamed it as Aman Hotel. 

 

After nearly seven years, DLF sells the company back to its original promoter and a partner, Peak Hotels & Resorts Group for $358 million minus the Aman Hotel property. Times of India reports that Aman Hotel is presently worth around $120 million. So in effect, DLF managed to convert a $400 million property to $478 million in seven years, less than 20 per cent return. Surely the largest real estate player in the country could have done better than that as it did in its other real estate projects. 

 

But here we are dealing in commercial properties. The buyer in this trade is perhaps more shrewd than the seller, unlike in a housing project where the buyer has almost no pricing power. DLF has been trying to get rid of this property on account of its huge debt. The buyer, an Indonesian businessman Adrian Zecha, who is the founder of Aman Resorts, knew the pressure points. In December 2012, a deal between Adrian and DLF was almost finalised for $300 million (minus Aman Hotel), but due to some problems, the deal could not be completed. Though the price his higher this time, Adrian has now got a partner to pick up the tab. 

 

For DLF, Aman Resorts is a big load of its back as the asset did not match with the other operations of the company. DLF is a developer and builder of real estate and not an hotelier. It can buy land in bulk, break it into small parcels and sell it or develop it into houses or commercial properties. Managing resorts is not its cup of tea, which is why the company preferred selling it even at a lesser profit than any other parcel of land.

 

However, the sale resulted in a much bigger profit if we take into account the currency depreciation. DLF bought Aman Resorts in November 2007 when the rupee-dollar was around 39.5.  Thus the asset which was bought for around Rs 1580 crore was sold at nearly Rs 2,220 crore, a 40 per cent gain, plus it gets to keep Aman Hotels worth around Rs 750 crore ($120 million). 

 

But an Economic Times report says the deal has a debt component of $70 million, which means the net money in the hands of DLF will be only $390 million or around Rs 1,800 crore apart from Aman Hotel. 

 

DLF is expected to bring down its debt with the sale of Aman Hotel from the present level of around Rs 19,500 crore (September 2013) to its targeted level of Rs 17,500 crore. 

 

DLF paid around Rs 2,300 crore (consolidated) by way of interest in the previous fiscal on its debt of Rs 19,000 crore at the end of FY13, eating away 60 per cent of its operating profit. The reduction in debt is likely to bring down interest burden by around Rs 200 crore. For a company with an operating profit of around Rs 4,000 crore (DLF has maintained this level of operating profit for last 4 years) the interest cost reduction will result in only a five per cent reduction to the profit before tax level.

  

Little wonder then the market discounted the event immediately, resulting in the stock closing at the lowest level of the day, albeit 3 per cent higher than the previous day. 

 

Further, with its biggest asset now sold. there is nothing much for DLF to sell in terms of non-core assets. It will now have to rely upon its business performance to bring down its mountain of debt, which will again rise if its properties are not selling.