Why DLF’s proposed funding from promoters won’t make it debt free

India’s biggest real estate developer by market capitalisation DLF Ltd, which has taken a slew of measures over the years to deleverage its balance sheet, is now banking on the proposed funding from promoter group to prune its debt pile.

But the quantum of debt on its books has remained almost at the same level barring temporary declines due to non-core asset sales by the firm. Analysts look at the latest attempt to cut debt with scepticism given its recent history.

Indeed, the realtor has divested a slew of its non-core assets including land bank, luxury hotels, insurance venture stake, movie theatre chain and wind power business and also raised capital through an institutional placement programme and mortgage backed securities, but it still has a big debt pile to worry about.

For the quarter ended March 31, 2016, its net debt rose nearly Rs 800 crore to Rs 22,202 crore. This is almost the same level as four years ago before it started the asset sale drive. Four-fifths of this debt pile-up is for the development unit of the group while the rest is on the books of the rental arm.

The firm had previously said it would look to reduce debt after its promoters sell their stake in the group's rental property arm. As first reported by VCCircle, top institutional investors are in the race for the big ticket transaction where KP Singh-led promoter group is looking to sell its entire 40% stake in DLF Cyber City Developers Ltd (DCCDL), in which debt-laden DLF Ltd owns the remaining 60% stake.

According to the latest investor presentation of the company, the rental stale sale will help it create a platform with long-term institutional investors to own and develop commercial assets, grow the commercial business and target high equity returns for the shareholders. “It shall be a precursor to setting up of REITs in the medium term. The culmination of the transaction will be an important step to create two ‘pure plays’ – residential business with zero debt and an independent commercial business,” it had said.

This stake sale was originally planned to be completed by March 31, 2016 but the deadline has been pushed back by a year.

Nevertheless, DLF scrip shot up 7.8% to close at Rs 143.95 a share on BSE in a strong Mumbai market on Wednesday.

This followed a report in The Economic Times which suggested that the promoters are looking to make DLF debt free through a two-tiered transaction. It said the promoters would pump in almost all of the money they get from selling their stake in DCCDL into DLF through a preferential allotment and would simultaneously raise around Rs 3,000 crore from other investors.

But, even if the promoters plough in all of the money they would get from DCCDL stake sale and the parallel fundraising by DLF, it would fall way short of the total debt on its books. To be sure, the company would mandatorily need to get large investors on board to allow Singh family to invest in DLF as the promoters already owns 75% stake, the maximum allowed for a listed company.

It is this proposed share sale that may prove to be a tough sell.

Moreover, the firm may not want to cut off all debt anyhow.

A senior executive with international property consultancy firm, who did not wish to comment directly on DLF, said, “Given the size and scale of the company, they would like to keep the maximum level of debt that works from a taxation perspective so they would not like to go debt free.”

But the timing is right.

A senior executive from another real estate consultancy firm said,  requesting anonymity, “(Property) sales have been low over the last couple of years and outlook for the next few quarters does not look positive. So, cutting down on the cost is one of the ways developers are adopting for improving bottom-line.”

He added that what works for DLF is the fact that commercial assets are commanding much better valuation now compared with two years ago. “So, the move to unlock value is timed well,” he said.

According to a brokerage report by IDFC Securities in February, given the continued weak demand in its key market, Gurgaon, coupled with a conservative growth strategy, there won't be any material improvement in development business cash flow at least over the next 12 months.

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