'We will continue to support DLF'

'We will continue to support DLF'
Business Standard, April 17, 2009, Page 8

Q&A: Anil Chawla

Surajeet Das Gupta / New Delhi

It has invested heavily in the real estate sector which has been hit badly by the slowdown. DE Shaw, which has over $29 billion invested across the globe, has invested around $2bn in India. DE Shaw India Advisory Services has invested $400 million in property fund DLF Assets Limited (DAL) — DAL, which is mostly-owned by DLF promoter KP Singh, is likely to be taken over by DLF as part of a restructuring of the cash-strapped group. Another $250 mn has been invested in Mac Star Marketing, a subsidiary of realty giant HDIL. DE Shaw India’s CEO Anil Chawla speaks to Surajeet Das Gupta about the future of his firm’s investments in India, the crisis in the real estate sector as well as what he thinks are promising investment areas. Chawla is clear his company is not exiting DLF. Excerpts:

DE Shaw has large investments in the real estate sector which has seen a huge drop in valuations. How has that affected you, and will you invest in the sector again?

The current global downturn has had an impact on players in all sectors, but real estate has arguably been hit the hardest. We’ve partnered with whom we believe are some of the best companies in the real estate sector, and we’ve invested in specific projects which are currently doing well. We’re comfortable both with the initial valuations of these companies and with the quality of the projects in which we have invested. It’s important to note that we are long-term investors — we generally invest with a time-horizon of four to five years. The current economic situation requires us to work closely with investee companies to see how we can best support them, and that is exactly what we are doing.

What went wrong in the real estate sector and the companies in which you invested? How did they get in the cash crunch they’re in — was the land bank they declared accurate? How long will it take for the sector to get back on the rails?

Many companies in the real estate sector were valued based on inflated expectations of earnings, which were, in turn, based on the assumption that the economic boom would continue for the foreseeable future. As a result, the management of these companies over-extended their balance sheets to take advantage of the expected growth. When the downturn came, it was so rapid and unexpected, that most companies were caught off-guard and did not have time to de-leverage their balance sheets, leaving them with massive commitments on debt-servicing as well as on unfinished projects.

At the same time, because of the erosion of confidence in the markets, real estate sales declined, income from new projects decreased severely, and developers found themselves in a cash crunch. The drop in valuations was an inevitable outcome of this situation.

There are signs that the industry is trying to get back on its feet with innovative efforts to refinance or raise fresh capital, as well as to get the cash flow cycle going by launching new projects at significantly discounted prices. If the very recent surge in confidence persists for a few more months, it is quite possible that the industry will start seeing better days in the near future.

You have also invested in SEZ projects through some companies. However many of these companies in which you have invested have asked for permission to denotify their SEZs. Is the great SEZ story over?

I think that the benefits of world-class infrastructure coupled with attractive fiscal benefits and incentives should allow well-planned SEZs to continue to do well.

Companies, including some in which you have invested, are now talking of low-cost housing as a way out — is this sustainable as all they are doing is selling smaller-sized houses. Many of them are also returning the money that they had taken from those who had booked flats. Will this damage the market further?

Without getting into company-specific decisions, which should be studied on a case-by-case basis, I think the theme you’re describing is likely to be the result of tactical steps being taken by developers to get through the current situation. Whether this will develop into a sustainable trend will depend on how the market plays out over the next year or two.

You have a substantial exposure to DLF Assets Limited (DAL). There has been news that DLF is planning to merge the company with itself — reportedly, DE Shaw will sell its DAL stake and the cash from the deal will be invested in other group companies. What is the progress on this?

We generally don’t comment in detail on specific investments. As a firm, though, we believe that DLF is a strong player and we expect to continue our support to the company.

Has there been any change in the overall private equity (PE) space in the last two months. Is there any indication of recovery? Are the valuations more reasonable today? How is the deal-flow?

While the last year has been a relatively quiet one in the PE space, the last month or two have shown some signs of an increase in the levels of activity. There could be a couple of reasons for this. First, a feeling amongst investors that they have seen the bottom; and, two, the inability of investee companies to defer the fund-raising process any further. When it comes to valuations, having experienced the highs of just a year ago, several promoters are still unable to come to terms with the low valuations currently on offer. However, where the need for funds is real and pressing, promoters are willing to come to the negotiation table with a more realistic mindset now.

While the deal-flow is still substantially lower than what was seen at the peak, there has been a pick up in activity of late. The good news is that we don’t see too many of the half-baked deals that were quite the norm earlier. All in all, I think most investors are still cautious, and while activity is picking up, we need to see some more evidence of the sustainability of this recovery before the money starts to flow again.

Which are the areas you will avoid in a slowdown, and which are the areas you will invest in?

We are open to any opportunity which we believe is accurately valued and provides us an attractive risk-return reward. Having said that, we keep researching different sectors to identify any fundamentally attractive stories we can go after. As an example, we have been looking closely at the education space for a while now and are looking to make some long-term bets in this sector. We are definitely looking at new opportunities and are presently at advanced stages of the process with respect to a couple of deals. I think sectors like hospitality, education, and power are good long-term investment opportunities.

When do you see a recovery?

The global downturn has proved difficult for nearly all market participants. The DE Shaw group has always placed preservation of capital ahead of outsized gains, especially during stressful scenarios. From an Indian perspective, the one thing the present situation has made amply clear is that the ‘decoupling theory’ does not hold much water, and India is also exposed to global ups and downs.