The country?s largest real estate developer set an unreal target for itself when it said it would trim its R25,000-crore debt by four-fifth to R5,000 crore in three years, feel analysts tracking the sector.
In November, in a presentation to brokerage analysts, DLF outlined its plans to reduce its debt by R3,000 crore by March this year and then further reduce it by raising another R4,000 crore in the next three years by selling non-core assets. Additionally, it said it would raise another R10,500 crore through rent receipts as its wing that rents properties will receive six monthly payments of R1,750 crore each amounting to a total of R10,500 crore in the next three years.
Divestment of the non-core businesses include hospitality properties, IT parks and insurance business.
In the first two quarters of this fiscal, the company managed to raise only R400 crore by selling certain non-core assets. However, its debt during the period soared by R1,500 crore. In November and December, the company sold its IT parks in Pune and Noida raising around R800 crore. The October-December quarter earnings of the company which will be declared next month will show its latest debt position.
Sneha Poddar, a real estate analyst at Sharekhan, said DLF would have received about R600 crore as its share from the Pune deal. ?These are like small drops in an ocean as their overall debt burden is so high and such deals may not be of great help,? she said. ?If (the sale of) Aman Resorts happens, it will help them substantially in the short term,? she added.
Apart from Aman Resorts, the company faces the tough job of divesting many such big-ticket investments to achieve its target. In a challenging economic environment, it will become even more challenging, analysts maintain.
?The success of divestments planned by DLF to reduce debt will depend on the liquidity situation of the overall economy. Otherwise, it will be very tough for them to sell these assets,? says a Mumbai-based brokerage analyst. He said in the short term, the company has to find a buyer for its luxury hotel chain Aman Resorts. FE had reported earlier this month that HNA Group of China has emerged as the front-runner to buy Aman Resorts, which DLF had acquired as part of its hospitality foray in 2007 for $400 million.
According to the analyst, DLF is likely to get a valuation of R1,900 crore for the deal, of which its share would be around R1,500-1,600 crore after paying taxes and transaction fees to the deal advisor Goldman Sachs.
?Even after Aman Resorts, they don’t seem to be able to meet the target set for fiscal year 2012,? the analyst said.
If the economic environment does not improve, DLF’s sell-off plans will mirror what happened so far in the current fiscal year, rating agency Crisil said. The agency noted that the company only managed to sell assets worth Rs 400 crore in the first six months of the current fiscal year while its debt ballooned by another R1,500 crore during the same period.
In fact, Crisil last month downgraded DLF’s ratings, flagging its heavy debt pile-up as the reason. Crisil said it was downgrading DLF’s R5,000 crore non-convertible debentures, R11,656 crore of term loans and R404 of overdraft facility from stable to negative ratings. ?The downgrade has been driven by Crisil?s belief that DLF?s debt levels will remain high and that the weak business environment will result in moderate operating cash flows, leading to weak debt protection metrics,? the rating agency said. Crisil said the future rating would depend on its efficiency to bring down debt. ?The company?s ability to unlock value from non-core assets and consequently reduce its debt levels remains a key rating sensitivity factor. Reduction in debt levels will strengthen the debt protection metrics and consequently improve its overall financial risk profile,? Crisil said.
A DLF spokesperson declined to comment to an e-mailed questionnaire and only said the company has ?stated its intent to raise 6,000-7,000 crore through divestment of non-core assets over the medium term and is confident of achieving the same?.
Although DLF is sitting on a huge land bank of 357 million sq ft, only about 53 million is currently under development with more than 300 million sq ft waiting to be developed, for which the company needs continuous capital expenditure. ?This 300 million sq ft land is will not yield any money until it is developed. Even if they are able to build a substantial part of it, I doubt they will find buyers in the current market conditions,? said a Mumbai-based analyst. The real estate sector took a beating as the Reserve Bank of India raised interest rates 13 times since March 2010. The rates are currently near record highs, discouraging home buyers, a core constituent of real estate players like DLF.
