DLF Ltd’s shares have outperformed the markets in the past three months. Its shares have gained 4%, while the Nifty index on the National Stock Exchange has fallen by around 5%. Of course, this was after a period of sharp underperformance. In the past one year, the DLF stock continues to be a major underperformer.
The reason its shares have done reasonably well in the past three months is that there is some movement on the much-awaited sale of its non-core assets, which was expected to release cash and repay its burgeoning debt burden. The reason the past underperformance hasn’t been wiped away is that the sale of non-core assets, so far, is just a drop in the ocean. DLF’s debt stood at around Rs 23,000 crore at the end of the September quarter.
According to a news report in The Economic Times, the company is set to sell its hotel subsidiary for around Rs 550 crore. This follows the sale of an information technology park for Rs 512 crore, and the sale of a plot in Gurgaon for Rs 440 crore in September. In the past three months, therefore, the company has raised Rs 1,500 crore.
A lot more needs to be done to reduce the company’s large debt. As an Edelweiss Securities Ltd report puts it, “While receipts from asset sales of about Rs 1,000 crore in the second half of FY12 may prop up cash inflows, we believe that DLF is having a treadmill effect as these sales may only serve to bring back net debt to Q1FY12 levels (Rs 21,500 crore).”
What could make a difference, however, is the proposed sale of Aman Resorts that, according to analysts, should fetch around Rs 2,000 crore. The core business is expected to remain weak, given the cracks in the property market. In fact, DLF was able to monetize only Rs 410 crore worth of assets in the first half of the current fiscal, compared with Rs 707 crore in the year-ago period. Residential sales volume at a mere 1.3 million sq. ft in the September quarter was the lowest clocked by the firm in the last 10 quarters.
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A high gearing for a realty firm, especially during depressed market conditions, negatively affects investor sentiment as high interest costs eat into profits. Worse still, interest rates have been inching up, adding to the company’s woes.
By end-September, DLF’s cost of debt had steadily risen to 12.5% due to rising interest rates and higher working capital needs. Interest cost in the September quarter rose 21.6% to Rs 516.1 crore from the year before and 6% compared with the June quarter.
While the three asset sales in the past three months are a good beginning, clearly, investors will look for bigger asset sales and a revival in the Indian property market
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