DLF deal: Speed is of the essence

Finally, on Wednesday, realty giant DLF Ltd announced that it has struck an exclusivity agreement with Singapore’s sovereign wealth fund GIC Pte to buy out 40% of the promoter’s stake in its rental subsidiary.

This much-awaited development has been the only hope for the company to extricate itself from a debt trap. However, the Street was not enthused and the stock plunged 8.1% and closed at Rs141 on Thursday.

Obviously, investors are weary of the tall talk of stake sale that has been doing the rounds for several quarters. Even this time, while it is a done deal with GIC, DLF is yet to report the valuation of the rental subsidiary DLF Cyber City Developers Ltd. The Street estimates it to be valued at around Rs32,000-36,000 crore, which implies that the promoters would get Rs12,000-15,000 crore for a 40% stake sale.

Indeed, this is material enough to trim DLF’s consolidated debt. But speed is the essence. The company’s balance sheet is getting heavier with every passing quarter. In a report, Kotak Institutional Equities Research says that the delay in stake sale and funds infusion from the March 2017 quarter to the September 2017 quarter will lead to an additional debt burden of Rs1,500-2,000 crore that may marginally dilute the impact of the funds raised—a key reason for the stock to fall in spite of positive tidings.

Another concern, although a lesser evil, is that of equity dilution. DLF promoters also hold 75% of the equity in the parent firm, which is the regulatory ceiling. So, funds may have to be infused through a qualified institutional placement or rights issue of shares.

Meanwhile, investor confidence may be boosted if DLF can ring in higher sales in its residential business. Analysts say that it is sitting on an unsold inventory of about Rs14,000 crore. Some analysts believe that a slight shift in the company’s focus to accommodate mid-segment housing in the medium term may help ease operating cash flows. This will help monetize its large land bank.

The worry is less on the commercial lease rental side as it is on a cyclical uptrend. Lease renewals may be at higher rates than in the past years.

Be that as it may, cutting back debt at the earliest is DLF’s only reprieve. Any further delay may negate the purpose of the stake sale and funds infusion.

DLF Ltd