Timely debt reduction by DLF but equity dilution to weigh on stock
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At long last, DLF Ltd’s persistent efforts to knock off a huge chunk of debt from its highly leveraged balance sheet will see fruition in fiscal year 2018 (FY18). However, home sales of the realty giant need to ramp-up to put its operating cash flows back on track.
In one stroke, the company’s net consolidated debt will halve from about Rs26,000 crore to Rs13,000 crore. Singapore’s sovereign wealth fund GIC, which is the white knight, will acquire 33.3% of DLF’s promoter stake in its subsidiary DLF Cyber City Developers Ltd (DCCDL) for about Rs10,000 crore (post-tax).
Importantly, the promoters will infuse the funds into the debt-laden listed company, whose operating cash flows have steadily been gobbled up by high interest costs for many quarters. The June quarter’s interest outflow of Rs783 crore was nearly three-fourths the operating profit of Rs1,067 crore. Obviously, this pulls down the net profit significantly in spite of decent growth in its income from rental assets.
Also, given that the promoters will infuse funds through a rights issue, the offer would be open for subscription to minority shareholders too. The final outcome therefore will be a huge Rs13,000 crore infusion into DLF (Rs10,000 through promoters and the balance through minority shareholders). But the rights issue will also lead to equity dilution, which may be an overhang on the stock.
According to Edelweiss Securities Ltd, “Depending on the share price (Rs170-210 per share) for promoter issuance/institutional placement, equity dilution could vary from 36-44%. While we expect our FY2018 total net asset value (NAV) to increase by about 28% through the debt reduction, given significant dilution our NAV per share is likely to fall by 5-11%.”
No wonder then that the masterstroke deal that would save crores of rupees in interest costs hardly made a difference to the DLF stock. It closed merely 1.3% higher at Rs182 on Tuesday. Also, the stock had already rallied by about 60% since January in anticipation of the deal.
Further, while the company has striven to put its house in order, home sales which are its forte, are languishing. Key markets like the National Capital Region and Mumbai are still faced with oversupply. To add to this, the goods and services tax regime and the Real Estate (Regulation and Development) Act, 2016, have led to subdued sales and collections in the June quarter, which is likely to continue for some time. The June quarter’s operating cash deficit was a hefty Rs750 crore as construction expenses continue.
To sum up, the much-awaited debt reduction is a welcome step. It also gives DLF a slightly higher share of the rental business that is doing well, as its equity stake in DCCDL rises from 60% to 67% post the deal. The next trigger for DLF’s stock price would be recovery in home sales, fall in inventory and new project launches.