DLF: Deleveraging steps continue

The sale of promoter stake in DLF’s rental subsidiary and investments of the proceeds in reducing debt is a positive move.

Promoter’s have 40% stake in the rental subsidiary, DLF Cycber City Developers or DCCDL while DLF holds the rest. DLF board last week had accepted the audit committee’s report that the promoters sell their holdings in DCCDL to third party institutional investors. The promoters hold compulsory convertible preference shares (translates to 40% stake) which were issued in 2009 when DLF had announced the merger of its subsidiary DLF Cyber City Developers with promoter firm Caraf Builders & Constructions.

The company has indicated that the deal will help remove conflict of interest, create a rental platform with participation of financial investors and reduce debt. However, for the promoters to invest the proceeds from the sale back into DLF, they would first have to dilute their current stake which stands at 75%, the maximum that promoters can hold in a listed entity.

The funds to be raised by the promoters, according to Kotak Institutional Equities Research, will depend on equity value assigned to the annuity business of DCCDL, valuation of residential business and land parcels in DCCDL and debt on its books. Analysts expect the promoters to raise about Rs 6,500 crore for their 40% stake.

The steps the company has taken will help in reducing the debt pegged at Rs 21,500 crore, two thirds of which is attributable to the rental subsidiary and should improve its valuations. This is why over the last month-and-a-half the stock is on an uptrend gaining 46% on moves such as asset sales, investment by GIC in two DLF projects in New Delhi and now the plan to plough back money from stake sale into DLF. However, the critical trigger will continue to be the improvement in operations as sales have fallen by half over the last five years in its residential or development company operations.

Given the land bank, strong annuity flow (Rs 2,400 crore annually) from rental operations and muted stock prices, about 38% of analysts tracking the stock have a 'buy' and about 31% have a 'hold' rating. While lower interest rates and a bit of price correction in property prices are positives, the inventory overhang and slow recovery are expected to play spoilsport at least in the current fiscal. Await meaningful pick up in residential sales before committing to the stock.