Edelweiss says Hold DLF as sale of DCCDC equity to slash net debt

By: | Updated: September 4, 2017 1:35 AM

However, this will reduce NAV/share by 5-11%; with DLF’s residential operations slow and Gurugram market sluggish, maintain ‘Hold’.

DLF, DCCDL, DLF promoters, GIC SingaporeDLF promoters are expected to receive pre-tax proceeds of Rs 119 bn from sale of their 40% equity stake (post CCPS conversion) in DCCDL.

DLF board has approved sale of promoters’ 40% equity stake in DCCDL for a pre-tax amount of Rs 119 bn. Promoter will infuse most of the deal proceeds into DLF and the company will need to raise additional public capital as well. Post-deal, we estimate company’s net debt to reduce by Rs 134 bn.

This, however, will come at the expense of significant equity dilution, 36-44%, we believe and negates gains from debt reduction — (-)5% to (-)11% NAV/share impact. DLF’s residential operations remain slow and its mainstay Gurgaon market is sluggish. Maintain Hold.

Deal contours: DLF promoters are expected to receive pre-tax proceeds of Rs 119 bn from sale of their 40% equity stake (post CCPS conversion) in DCCDL. This entails buyback by DCCDL of ~10% of outstanding DCCDL equity held by promoters for Rs 30 bn and sale of balance 30% equity to GIC Singapore for Rs 89 bn. Buyback will be in 2 tranches—one before deal closure, Rs 16 bn and another 12 months thereafter, Rs 14 bn. Post-deal, while DLF will hold 66.66% stake in DCCDL, GIC will hold 33.34%. Promoters are expected to invest most of the post-tax deal proceeds, Rs 100 bn plus, back into DLF, which will lead to their holding rising above the SEBI mandated 75% threshold. DLF hence plans to do institutional placement to adhere to the minimum public shareholding norm and expects to raise additional Rs 30bn funds. DLF expects deal closure in FY18.

Deal impact: We estimate promoter fund infusion and institutional placement in FY18. DLF could raise in all Rs 133 bn. These funds are likely to be utilised towards paring debt in the development business. Depending on share price of Rs 170-210 per share for promoter issuance/institutional placement, equity dilution could vary from 36-44%. In view of significant debt reduction, Rs 134 bn, we expect our FY18 total NAV to increase by ~28%, though given significant dilution, our NAV per share is likely to fall by 5-11%.

Outlook and valuations: Operations remain soft; maintain Hold —The deal arrangement should help address DLF’s stretched balance sheet, though it comes at the expense of significant equity dilution and leads to lowering of our estimate of NAV/share. Its residential operations remain challenging with sluggish new sales, little new launches and persistent slowdown in its mainstay Gurgaon market. Gains from lower interest expense are negated somewhat by loss of 33.34% DCCDL rentals and equity dilution. Rental income should see meaningful uptick only post FY19. We maintain ‘HOLD/SU’.

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