New Delhi: The promoters of real estate firm DLF Ltd have sold close to a 10% stake in the company in a move vice-chairman Rajiv Singh described as a painful decision. They will use the proceeds of this to bail out DLF Assets Ltd (DAL). CNBC-TV18 met Singh soon after the deal was announced, to discuss the implications. Edited excerpts:
You must have tried other alternatives. Why did you choose this particular one?
Frankly speaking: DLF Ltd’s Rajiv Singh says the best way to show our commitment to DAL and to DLF was actually to put cash into the firm. Harikrishna Katragadda / Mint
Well, in terms of the structures, there are two issues to it. One is...removing the “relationship issue” which has an independent committee of directors already examining it. This decision we have taken doesn’t change that. That process continues. (The) second was the question of funding it. Any structures that are legally devised do not provide funding. Our desire was to provide funding. We, as promoters, believe in DAL. We believe in the quality of assets DAL holds and the best way to show our commitment to DAL and to DLF was actually to put cash into the company. And that the best asset we felt we had to achieve that goal was shares of DLF. We consulted with our major shareholders and most of our large shareholders, in fact, encouraged it.
Who are the parties that bought this stake?
Capital International, Fidelity... A number of funds have participated in this transaction. The point is we basically got high-quality institutional investors and, maybe, not too many trading accounts.
Did you consider selling more than 10% as well?
No. You know, it was a somewhat sentimental and painful decision to take but mentally I was always conscious that somewhere down the line DLF must become a company which has about a 25% free float in the market. We could have have done this in better times... But now, at about 22% free float, we are close to that goal that will make our company, in the longer term, a much more transparent listed entity.
Maybe (this will make) institutional investors more comfortable. With 10% float, they were not too comfortable to take large positions in our stock. I have been reassured by most of my institutional investors that they will up their holdings and build large positions because of this larger float.
The promoters still hold a large part of the company at 78%. Would you consider diluting promoter equity any more from here?
No. I don’t think so (and) I would hope not.
I have said 75% would be a valid goal for us so 2% or 3% (sale) over time for some reasons, maybe, but (there is) nothing in the near horizon.
Before we come to what you will do with DLF Assets, how will this money you are putting into DLF Assets be used—Rs3,800 crore? Can you give us a break-up?
One is the buyout of DE Shaw... We expect a reasonable amount of money will go into that buyout.
It could be somewhere around Rs2,000-odd crore. The balance of it would come into DLF from DAL.
The entire Rs1,800-odd crore?
Yes, Rs1,800 crore. There is no leakage in this transaction except for payment of fees, brokerages and taxes are paid.
So DLF will get Rs1,600-1,800 crore?
DLF will get, in addition, the Rs2,000 crore which I have already mentioned in presentations. So basically DLF, by the end of this year, will be receiving from DAL somewhere between Rs3,500-4,000 crore against an estimated liability of Rs4,900 crore. So, I think, the receivables story (DLF is owed money by DAL) will also be a closed chapter.
What happens to the remaining receivables?
About Rs1,000-odd crore will remain. As the leasing continues (DLF sells property to DAL which leases it out) and if markets recover, we will quickly raise debt on it and pay it off . That will depend on how fast the leasing takes place— maybe six to eight months more after the end of this financial year if markets don’t revive. If there is a strong revival in economy, we can pay it off this financial year itself.
Why do you say Rs1,000 crore, because even if you pay Rs1,600 crore or Rs1,800 crore, the total receivables is... Rs4,900 crore?
Rs2,000 crore we have already contracted for; we have leases with us and debt is in place. As the debt covenant moves, the bank gives us the money and we pay it on to DLF.
So, within this year we will be paying DLF a total sum of Rs2,000 crore from the leases and about Rs1,500-1,600 crore from this transaction—so basically about Rs3,500 crore-plus will be paid into DLF within this year itself.
Why did you have to buy out DE Shaw’s stake in DAL? Was it a written arrangement you had with them or did you think it was the prudent or honourable thing to do?
Well, there is nothing prudent or honourable about this, but, yes, we do value our commitment seriously.
They came in at a good time; they supported us. The intention was to list the company. But obviously it did not work out.
There was no written commitment to DE Shaw that you would buy back its stake if DAL is not listed?
There is no commitment but the option was given to us.
Any such option with Symphony, the other large shareholder?
We have an option again with them but their desire is to stay invested and still proceed for a greater upside.
So, you won’t need to buy them out?
I don’t think so...
What do you value the DLF property going to DLF Assets now? At what value will DLF’s transactions with DAL happen?
No, there is no valuation... I, as a promoter will just advance the money into DAL, which will in turn advance the money to DLF. The valuation exercise is entrusted to the board of directors.
What is your assessment of DAL’s market value today?
There are two ways to look at it; one is value when you sell something and one is the value of the income you receive. DLF Assets is receiving high quality income from high quality tenants on a 9% tax free basis and in today’s falling interest environment, a 9% tax free return is a handsome return. Normally, if this was any kind of a bond, it would have actually appreciated in value. I would expect over time the value of this asset would be possibly below the 9% number at which we have transacted for it. In the Singapore markets—international REIT markets—on a normal steady state basis such kind of assets would be valued at about 6% to 7%.
So what would be the total rental income?
As of right now the rental income is growing but the total rental income will be about Rs1,000 crore.
But estimates of the value of this Rs1,000 crore have ranged from Rs6,000 crore to Rs11,000 crore.
I dont know the number exactly. Very frankly, in a steady state, normal market valuation (of this) could be in excess of Rs10,000 crore and maybe short of Rs15,000 crore.
What is the future of DLF Assets?
That is left to the independent directors. If they feel the need that it should be integrated with DLF, we respect it; our intention is to remove this discomfort of relationship. I would prefer if this discomfort is removed by the integration exercise with DLF.
What do you think is the most elegant way of resolving this discomfort?
I think the most elegant way is to integrate the two and merge the entities—it may not be under DLF; could be a merger at a subsidiary company level.
Do you think you will be able to raise Rs3,500 crore by September as you have indicated?
I would expect to.
How much cash will you generate this year? The estimates are between Rs1,200 and Rs1,500 crore.
I think we will significantly beat that estimate.
What are you predicting your cash flows on?
We have projects operational...large amounts of rental income. More than half of this number is rental income alone. Biggest challenge now is government approval—not money. A large backlog of sale is waiting for approvals... We had a successful launch in Delhi and at full contribution can give cashflows of Rs3,000 crore to Rs4,000 crore.