Falling market prompts DLF to sell assets, reorganize debt

Falling market prompts DLF to sell assets, reorganize debt
MINT, February 03, 2009, Page 05

The company expects to raise Rs2,000 cr by selling ‘non-strategic’ assets over the next few quarters

The sharp decline in the Indian property market has led DLF Ltd, the country’s largest real estate developer by market value, to plan selling assets and reorganizing debt in the coming quarters.

DLF expects to raise Rs2,000 crore by selling “non-strategic” assets—such as its power business and the land that was to be used for retail and commercial projects—over the next few quarters.

Ground reality: DLF is also replacing Rs4,000 crore of short-term debt that will mature in the later part of the year with long-term debt. In the third quarter, DLF replaced Rs1,000 crore of short-term debt. Harikrishna Katragadda / MintThe DLF group also plans to raise around Rs2,000-2,500 crore in DLF Assets Ltd (DAL), owned by its promoters, by selling stakes to private equity investors. DAL was established to buy and hold completed commercial assets of the listed developer. DAL owes around Rs5,500 crore to DLF for the assets that it has bought from the parent company. “DAL is hoping to complete a financial transaction by this fiscal to repay DLF,” said Rajiv Singh, vice-chairman of DLF. “The second option will be listing, which could happen in the next financial year.”

Like many other realty companies, DLF wants to restructure its debt. DLF has a net debt of around Rs13,000 crore. The company is replacing Rs4,000 crore of short-term debt that will mature in the later part of the year with long-term debt. In the third quarter, DLF replaced Rs1,000 crore of short-term debt and it plans to replace Rs3,000 crore of debt by this fiscal. DLF needs to repay around Rs2,000 of crore of debt by March.

It became evident over the weekend that the developer, as also its peers in the real estate business, would eventually report sales and earnings less than the previous fiscal.

On Saturday, DLF reported a 68.72% decline in net profit to Rs670.79 crore for the third quarter ended December compared with Rs2,144.98 crore in the corresponding period last year. The company’s revenue was down by 39.42% to Rs673.46 crore during the quarter compared with Rs1,111.85 crore during the year-ago quarter.

DLF’s closest rival, Unitech Ltd, on Saturday reported a 74.12% decline in net profit to Rs136.05 crore compared with Rs525.78 crore during the year-ago quarter. The company’s revenue declined by 56.48% to Rs507 crore against Rs1,165.11 crore during the same period last year.

Analyst said the 2008-09 results of real estate companies are likely to be lower compared to last fiscal.

“Revenues of DLF and other real estate developers will be lesser during the fiscal year ended 2009 because I don’t think they will book more sales or launch new projects this quarter,” an analyst with a domestic brokerage firm who did not wish to be named said. “It will either be lesser than year or at the best the companies will show similar performance compared to last year.”

“Looking at the nine months results, it has become evident that they will post lower revenue and profit this year,” another analyst with an international brokerage firm said.

In the last nine months, prices of residential property have dropped 15-20% in India’s top cities, with research houses such as Goldman Sachs predicting a further 30% correction. Assuming that DLF will post similar sales and profit during the fourth quarter, the company could report revenue of Rs4,445.54 crore for fiscal 2009 compared with Rs4,813.72 crore during fiscal 2008. The company is likely to post a decline of 51.95% in its net profit to Rs5,140.89 crore during fiscal 2009 compared with Rs7,812.03 crore during the previous fiscal.

DLF had a commitment to deliver 19.5-22 million sq. ft to DAL. The company has secured tenants for 11.5 million sq. ft. It plans to deliver 9.5 million sq. ft by March and 2-2.5 million sq. ft over the next six-eight months “We will get tenants for the remaining space that needs to be delivered over the next 24-36 months,” Singh said. “However, we think it is not wise to create something that will take so long... We are being cautious about it. The balance delivery in DAL will be substantially delayed.”

Thus, revenue contribution to DLF from sales to DAL will be significantly less for the next several quarters. In the third quarter ended December, DAL contributed to 35% of DLF’s profit before tax, compared to 58% during the same quarter the previous year.

Revenue from rentals, which contributes one-fifth of the company’s profit, is expected to go up to 30-40%, Singh said. DLF also plans to cut prices of new homes by an additional 15-20% in the next three months. Around 12-15 months ago, DLF started reducing prices of its new products. The company reduced prices by 25-30% of the then-prevalent market price, Singh said. “Out of the potential price correction that could happen of up to 50%, 30% price correction has already taken place.