Investors are evidently not impressed with DLF Ltd’s attempts at reducing debt. The company had said earlier in the year that it plans to reduce debt by Rs.5,000 crore in this fiscal year by selling non-core assets.
With the sale of its hotels venture, Amanresorts Group, coming through on Wednesday, it has now raised Rs.4,917 crore from sales of non-core assets this year. Still, DLF’s shares inched up by only 0.83% on Wednesday, compared with a 0.59% increase in the BSE Realty index.
The hotels deal with Adrian Zecha, founder and chairman of the Amanresorts Group, was at a valuation of around $300 million (around Rs.1,640 crore today). In August this year, DLF had sold a piece of land in central Mumbai to Lodha Developers for Rs.2,700 crore. In June, it sold its entire stake in Adone Hotels and Hospitality Ltd for Rs.567 crore. The company’s wind energy business, which is also on the block, is expected to sell for around Rs.500 crore.
Since the time the Lodha deal was announced in mid-August, DLF shares have risen by less than 4%, while the BSE Realty index has risen over 27%. Why aren’t investors enthused? For starters, the overhang of the company’s political linkages has hurt investor sentiment. Besides, while the sale of non-core assets will trim debt to some extent, analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd point out in a research report that this will be partly offset by the company’s negative operating cash flow (which runs at an annual run-rate of Rs.500-600 crore), expected payments of Rs.600-800 crore on land purchases, and outflows on account of preference and equity dividend worth Rs.600 crore. Totally, this amounts to outflows of Rs.1,700-2,000 crore, which will wipe out 35-41% of the amount raised through the two above-mentioned deals.
Needless to say, DLF needs to find other sources of raising funds. The company needs to sell some equity by mid-2014 to comply with public shareholding norms. It needs to sell a minimum of 81.2 million shares to bring down promoters’ holding to 75%—this will lead to an equity infusion of only around Rs.1,800 crore based on DLF’s current share price. It seems unlikely that the company will garner investor interest in a much larger issue at this point.
It must also be noted that the Amanresorts sale hasn’t been profitable for the firm. On the contrary, the company had purchased it for a much higher price of $400 million in 2007. The only consolation is that it has retained a hotel in Delhi. Recent quarterly results show DLF has been struggling to improve sales in the current sluggish environment. While there is some hope for improvement in the next year with interest rates expected to come down, the large debt overhang can continue to play spoilsport, unless DLF finds more assets to sell.