DLF’s ball and chain

DLF bit off more than it could chew, say the experts. KP Singh’s company built a fortune transforming Gurgaon from a sleepy village in Haryana, just across the border from Delhi, into India’s ‘Millennium City’, boasting of Fortune 500 companies, glitzy malls and high-end housing complexes and hospitals, among other things. And then, DLF decided to spread its wings beyond, buying up land across the country.

During the 2007-08 property boom, DLF pursued a massive expansion plan, buying land to set up homes, malls and offices in major cities. Even before that, it had begun diversifying into non-core areas such as hospitality, and even into cinemas and wind energy.

To fund its ambitions, the company went in for an IPO, issuing 17.5 crore equity shares at ₹525 apiece and raising ₹9,200 crore. The offer was fully subscribed. By January 2008, the share price had crossed the 1,200 mark. Things were looking good.

And then, the unthinkable happened. The economy slowed down, the property market declined and the stock market went into a downward spiral.

“As it began to acquire land parcels in geographies not in its control, real estate demand went down and it could not monetise those assets in time, leaving it with a massive load of debt. What made matters worse was it entering non-core areas such as hospitality, wind power etc,” an analyst told BusinessLine .

The company’s debt surged from ₹12,260 crore in 2007-08 to ₹20,223 crore in 2011-12. In an effort to reduce that debt burden, in the last few years, DLF has been offloading some of its assets, particularly the non-core ones.

In August 2012, DLF sold a 17-acre land parcel in Mumbai to Lodha Developers for ₹2,727 crore. Over the course of the following year, it sold wind assets in Gujarat, Tamil Nadu, Rajasthan and Karnataka for an aggregate 600 crore.

February 2014 saw the company announce that it had completed the sale of its luxury hospitality chain, Aman Resorts, back to the company’s founder, Adrian Zecha, for $358 million.

Last June, DLF Utilities Limited a group arm, inked agreements to sell its DT Cinemas to PVR Limited in a slump sale, for an aggregate consideration of ₹500 crore.

A couple of months later, it sold a four-acre land parcel in Kochi to a local developer for ₹111 crore

However, the selling spree has not shrunk the debt mountain, with the company using some of the funds for its working capital needs.

At the end of the third quarter of financial year 2015-16 DLF’s debt had actually risen from its 2011-12 level of ₹20,223 crore to a staggering ₹22,995 crore.

Making matters worse, the slowdown in the real estate sector and the challenging macroeconomic environment have affected the ability of the company to advance on the strength of its operations.

DLF’s sales turnover has dropped from ₹9,560 crore in 2010-11 to ₹7,648 crore in 2014-15. Operating profit has come down from ₹3,752 crore to ₹3,023 crore over the same period, while net profit has shrunk from ₹1,639 crore to ₹540 crore. At the same time interest outgo has shot up from ₹1,705 crore in 2010-11 to ₹2,303 crore in 2014-15.

It’s not going to get better overnight. The residential real estate market has been dull for the last few years and experts expect little improvement in the next 18 months for the sector overall.

“The outlook continues to be weak; DLF continues to sell in its existing projects, albeit at a slower pace,” the company admitted in its investor presentation for Q3 of 2015-16.

“The strategy is to continue to remain focused on the execution of live projects to create finished un-launched stock and delivery of legacy projects to fulfil the customer commitments. Once GDP starts to grow at a higher rate and sentiment improves, absorption shall automatically improve,” it had said.

Adding to its woes, DLF has been slapped with a ₹630 crore fine by competition regulator Competition Commission of India for abuse of its dominant position in a case relating to a residential project in Gurgaon. It has approached the Supreme Court seeking to have the ruling quashed.

DLF has been working to develop new business without adding to its load.

It has taken to forming joint ventures, with the partners bringing in funding in exchange for a stake, to develop projects. In September 2015, for instance, DLF Home Developers Ltd (DHDL), a wholly-owned subsidiary of DLF Ltd, and Singapore’s investment arm GIC, formed a joint venture to invest in two upcoming projects in Central Delhi.

Both will be developed by DHDL, with GIC investing approximately ₹1,990 crore.

Currently, the company is shooting for its biggest gamechanger yet. It has sought expressions of interest from several top global investors to sell a 40 per cent stake in its rental assets arm DLF Cyber City Developers.

A successful divestment will leave the company flush with funds, enabling it to lower debt substantially.

According to an industry insider, the stake sale could fetch the company anywhere between ₹9,000 crore and ₹13,000 crore.

Last month, a source close to the development had told BusinessLine that the transactions will take 3-4 months and should close by Dussehra/Diwali after Competition Commission of India approval.

“More than 20 non-disclosure agreements have been signed/confirmed with prospective investors,” the company had said in its investor presentation for the third quarter of financial year 2015-16, adding that many prospective institutional investors, including sovereign funds, pension funds and private equity, supported by their limited partners, have evinced interest to participate in the bidding process.

“The culmination of the transaction will be an important step to create two ‘pure plays’ — a residential business with zero debt and an independent commercial business in partnership of long term institutional investors,” the company said in the presentation.

Recently, the company launched Mall of India in Noida, which is expected to expected to generate revenue of about ₹250 crore per annum.

The stake sale is expected to be followed up by launching Real Estate Investment Trusts (REIT) to better monetise DLF’s rent yielding assets.

“The company / promoters are in the process of getting investors to invest into the rental business by acquiring CCPS currently held by the promoters. REIT would be explored subsequent to that,” Rajeev Talwar, CEO, DLF Ltd, had told this paper in January.

Although REIT regulations were introduced in early 2015, there has not been any action in the space. Regulations, especially by removing dividend distribution taxes, were simplified in Budget 2016, but interest continues to be muted due to a few reasons.

One, sought-after properties are expensive to invest in and may not offer good rental returns on the investment. Two, while the returns from REITs may be attractive in developed economies where interest rates are low, it is not the case in India.

Three, there may be practical issues such as appraising the value of the property and determining the net asset value of the units. 

DLF’s biggest strength remains its impressive land bank, which it built up at very cheap prices. That, say industry experts, should help it weather the storm.

On Wednesday, DLF shares closed at ₹127.50 on the BSE, after rising 2.7 per cent. They will have rise far higher if the company’s market cap is to go anywhere near its 2008 highs.

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