DLF plans to derisk with pre-sale project completion

NEW DELHI: DLF Ltd could be looking at a new business model where it will build and complete residential projects before selling apartments in them once the deal by its promoters to sell 40% stake in the company's rental arm for Rs 12,000-14,000 crore goes through, two people with knowledge of plans said.

DLF had said last week that the promoters would reinvest a substantial amount of money from selling their stake in DLF Cyber City Developers (DCCDL) back into the company after paying tax and other charges.

This would increase their stake in the company beyond the maximum 75% that markets regulator Sebi allows promoters to hold in public companies. The company would simultaneously pare stake through either a QIP/preferential allotment or a rights issue to bring down promoter shareholding to 75%, which would also bring in some more money. The company intends to use this money from both sources to wipe out the debt (of around Rs10,000 crore) in its development arm, which will then be left with a cash surplus.

"The company's development arm will then look at a business model in which it will build and complete residential projects and only then sell apartments in those. Initially, it will do this for already launched projects and then when markets improve, the same strategy will be applied to all its new launches as well," said one of the people, asking not to be named. "This would take away the risk of creating third party interest in a project."

In its already launched projects, DLF has an unsold apartment inventory of around Rs 15,000 crore, which includes finished and under construction unsold apartments. Saurabh Chawla, senior executive director-finance at DLF, said this is a model the company could look at once the deal is done, subject to board approval.

"This would totally derisk the business model on the residential side," he said. Sandipan Pal, real estate analyst at Motilal Oswal Securities, said this is an interesting model but a very risky one that not many developers would want to adopt.

Experts feel this strategy could add risk to the company's balance sheet and it will have to take on debt again to develop these properties.

Since the audit committee chaired by KN Memani was entrusted "to comprehensively evaluate, review and recommend strategic options to drive sustainable and long-term growth and development to the rental business" many large institutional investors have been in talks with DLF to create a rental platform.

The person quoted above said the likes of GIC, Blackstone, Abu Dhabi Investment Authority (ADIA), Qatar Investment Authority (QIA) and Canada Pension Plan Investment Board (CPPIB) have evinced interest and now with clarity on the way forward, talks with these players will be formally initiated.

DLF is expecting the deal to be signed by the end of this financial year, after which the rental business will be grown in partnership with the new investor, along with a plan to launch a real estate investment trust when there is greater regulatory clarity on the matter. DLF has a rental income of around Rs 2,200 crore and is targeting to reach Rs 2,400 crore by the end of FY16.

"Our constraint so far was that we could do limited capital expenditure because of related party provisions of the Companies Act. After this deal, we would have freedom to put in more capex to develop new commercial assets to grow the rental portfolio with the new partner and also continue to build out our residential projects to create a strong finished apartments inventory," said Chawla.

The promoters of the company, the KP Singh family, hold compulsory convertible preference shares (or around 40% stake) in DCCDL alongside their shareholding in DLF Ltd. These were issued to the promoters at the time when DLF had merged DCCDL with Caraf Builders & Constructions, a company held by the promoters, in 2009.

Chawla pointed out that the home sales market is still a little soft, so new projects will be launched only when the scenario improves over the next few quarters as the positive impact of lower interest rates creates a conducive environment on the ground.

Over the last few years, DLF has been trying to reduce its debt that had reached close to Rs 23,000 crore. It has been able to reduce its debt by selling off several non-core assets. In 2013-14, it achieved non-core sales of Rs 5,930 crore.