DLF plans to reduce net debt by Rs 5000cr in FY13

Five years ago DLF hit the markets with the countries largest initial public offering (IPO) of around Rs 10,000 crore. But those were different times. The bulls ruled the markets, property prices had hit the sky, DLF’s debt was a shade under Rs 10,000 crore, a massive land bank of 574 million square feet spread across 32 cities and a 74-26% joint venture with Hilton to become the countries largest hospitality chain. But then the 2008 financial tsunami changed the world and DLF was left staring at an over stretched balance sheet.

Its debt has now surged to around Rs 25,000 crore, forcing the management to downsize its ambitions. India's largest real-estate company is now getting rid of large non-core business and getting back on the path of fiscal consolidation. DLF sold an 18 acre prime land parcel in Mumbai’s Lower Parel area to Lodha Developers for Rs 2,700 crore. All of that will be used to shave off the company’s debt sometime in October. In an interview to CNBC-TV18’s Nayantara Rai, Ashok Tyagi, chief financial officer of DLF speaks about the company’s furture. Below is the edited transcript of his interview on CNBC-TV18. Q: The Lower Parel land has been sold to Lodha Developers. So, by October, Rs 2,700 crore of your debt will disappear from the books. The next big item will be the sale of Aman Resorts. When is that going to happen? A: We are happy that of the three big ticket deals, which we were talking about, the first one, we have signed an agreement with the Lodha. We have also got the first tranche of payment of Rs 500 crore on Monday. We expect the deal to consummate by end of October. On the balanced transactions, we are clearly in very close and serious discussions with the buyers, but it will be very difficult for me to pinpoint an exact date or a specific time frame. In this financial year, we should be able to close all of these transactions and reduce our debt by an anticipated level of about Rs 5,000 crore. Q: Aman Resorts sale and the wind sale will happen this financial year, in FY13. Is it going to be in this quarter or the next quarter? Can you give a little indication of that? A: Honestly, these are pretty complex transactions. You are dealing with a very sophisticated financial investors. So, it is very difficult to time these to a specific quarter. So, whether they happen in this quarter or next or whether tail of some transaction overflows into the quarter beyond as well, I unfortunately can't control and micro manage that process with that degree. But we do believe that in this financial year we should have done all of this and reduce our net debt by Rs 5,000 crore. Q: How much are you going to raise from the sale of Aman Resorts and the wind power business? A: Our target for net debt reduction this year is Rs 5,000 crore, predominantly being driven by the strength of the non-core and some other minor non-core and some operational surpluses. I would not be able to apportion exact estimates of how much we expect from each deal. We would be able to disclose, once we sign the agreement and we are in a position to disclose this to stock exchanges and to the media. Q: Sources suggest that Aman Resorts sale is likely to happen around Rs 1,700 crore. The expectation was that it would be around USD 400 million or may be a little above that. Are you selling it now a lower valuation? A: We are not selling anything at a lower or higher valuation than what the market can give. Not only now, right from the start of this financial year, we had maintained that we will raise approximately Rs 5,000 crore for a net debt reduction from the sale of these three assets. We overall still stick to that guidance. _PAGEBREAK_ Q: What is going to be the next trigger for DLF to reduce its debt? Even if you look at these three marquee transactions, the Lower Parel Land deal, the Aman Resorts sale and the Wind Power business sale, you are going to shave off about Rs 5,000-6,000 crore from the debt. You are still going to be left with Rs 19,000-20,000 crore as debt. How are you going to deleverage? A: There are two points. One, I know the street loves triggers, but unfortunately it is more of a process than a trigger. Second, we had a net debt of approximately Rs 22,500 crore, when we began this financial year. With the reduction of Rs 5,000, we expect the year to end at a number somewhere around Rs 17,000-17,500 crore range. Our year-end rental flow should be about Rs 2,000 crore a year. So, we expect that about Rs 11,000-12,000 crore of our debt can be funded in a self servicing way through our rental flow, through the classical lease rental discounting mechanism. So, honestly that Rs 11,000-12,000 crore of debt, which can be supported by my rental flow, does not worry us because it is a self liquidating debt. In the balance side, we are having a debt of about Rs 10,500 crore to be serviced out of our development income. With these divestures, that should be down to about Rs 5,000-5,500 crore; Rs 17,500 minus Rs 12,000 crore. Honestly, Rs 5,500 crore also will keep on coming down. But I don’t think that we are looking at one big bang event to do that. That will be done by a process that will be driven by operating surpluses and residual non-core divestiture that will keep on happening. At an EBITDA of about Rs 2,500 crore from the development business, a Rs 5,500 crore debt is barely a multiple of about 2-2.25. That by itself is very healthy. But we are still committed to keep on reducing that number downwards as well. Q: By when do you think you will actually have a situation where on your books you will have a Rs 5,000-6,000 crore debt? A: I see no reason why we should set ourselves a target like that. We are a company that is into building extremely high capital intensive offices and malls. Those by the very nature of the animal are high capex products. Hence, we believe that the Rs 11,000-12,000 crore debt level that can be serviced by the rental business is something which will stay there, atleast for the next two-three years. On the development side of the business, we should be down to Rs 5,500 crore. We will keep on making ways to chip it down further. But honestly I am not committing myself to a number as ambitious as the one you are talking about. Q: But isn’t this also all assuming that the business is going to stay stagnant and you are not going to grow? A: Are these conservative assumptions? Yes. But, in all fairness, we should plan conservatively and overachieve versus vise-versa. Besides DLF's debt, the other overhang is its legal troubles. DLF has been snapped with Rs 630 crore penalty by the Competition watchdog Competition Commission of India (CCI) for misusing its dominating position in Gurgaon. The company has appealed at the Competition Tribunal. But the CCI sees and resist order nevertheless is impossible. Will it impact DLF plans of future launches, especially its super luxury residential project Magnolia II at the Gurgaon Golf course? There are also appeals against two Punjab and Haryana High Court orders to demolish two projects of DLF in Gurgaon, the 20 acre cyber city technology part and a 30 acre IT SEZ. The fate of a 350-acre land parcel meant for a recreation and leisure project in Gurgoan, which DLF purchased for Rs 1,750 crore, is at the hands of the Supreme Court. The tax man is also trying to recover nearly Rs 3,000 crore as additional tax. Tyagi: We have our next hearing of Competition Appellate Tribunal (COMPAT) in early October. Because the entire issue is sub-judice, I would not venture into making a specific comment on that. But we do believe that within the boundaries of the law we should be able to continue getting our products to the customers. In the second half of the year, we do expect to get more of our products to the customers across the country including in Gurgaon area. Q: So, you are saying that whatever transpired the CCI, whatever order came, whatever is happening right now in the COMPAT is not going to impact the time line of your plan launches, right? A: All I am saying is that it is sub-judice. Let us wait for the COMPAT, how it evolves. Anyway we have right now planned for some of these launches in Gurgaon only in the second half of the year. So, it is not that there is a conflict between my launch plan and this uncertainty as of today. We have anyway planned for these in the second half of the year. By that time, hopefully we will have some great clarity on this. Q: Are you also factoring in launches for reducing debt? A: Obviously, no. The Rs 5,000 crore number, in all fairness, is predominately driven by the non-core divestitures. We do believe that the launches should get more operating cash flows. That should hopefully make us better, but right now our commitment is Rs 5,000 crore number. As you look at the situation, beyond March 2013, operating flows riding on the strength of the new launches would obviously be a very significant chuck of the total operating cash flow. _PAGEBREAK_ Q: As of now, Sebi is very-very clear that all listed companies will have to have a mandatory 25% float. This means that the promoters of DLF will probably have to divest to about 4-5%, they are about 79%. You have the window till March 2013. When are we going to see that happening? A: We have window upto June 2013 to divest that. If that is what the law is, every company will need to abide with that, so would we. It is still something which is 10 months into the future. So, honestly I don’t think that we are losing sleep on that issue right now. Let us see how it pans out. Q: What are you looking at? Could it be a FPO, will be a private placement? What are the options? A: As of right now, we have planned on what potential options we would go with currently. Q: You have not even started the process, started thinking what has to be done. A: We have not. Q: You have got eight months left. A: We have nine months. Nine months is a long time. These are relatively small transactions. So, we have nine months. Q: What are you leaning towards? Would it be a private placement? A: Wouldn’t be able to share with you right now. Q: But would that also play a significant role in reducing your debt? A: Honestly, it is the function of how that dilution takes place. If what you say is correct that there is a deadline of June 2013, the good news is that you wouldn’t have to wait very long to understand that. Q: With how the economy is performing at the moment, what is your outlook as far as the property market is concerned? A: We do believe that the economy is passing through a difficult phase. The consecutive interest rate hikes had an adverse sentiment. Also, the slower growth is not as it should be. On the property market specifically, the good news is that one is not seeing a rise in delinquencies or people not paying up. One is seeing a slowdown in fresh leasing, but one is not seeing again a delinquencies on rentals. Also, we have seen, as late as our last launches in March and April when we launched a few high products across the country, that for a product that is priced right and located right, the market still is there and it is a deep market. We are surprised as an example by our response in a city like Lucknow. So, as long as you price something right, you have the reputation to bank on and your product is located right, I do believe there continuous to be a basic market. That is what will sustain the better players in the industry. Would interest rate regime help revise the market further? The answer is qualified yes. Q: Are you seeing property prices coming down? A: I am not an expert at this. There are other people who are experts at this. But we have clearly seen a slowdown in the pace of growth of prices. I think that is clear. Maybe there are some micro markets where you might have seen a complete plateauing as well. But atleast we are not seeing any sharp reduction. So, I don’t think in the immediate short-term prices are going to grow dramatically. But I do not expect a sharp ‘downturn’ as well. Q: Commercial real estate is often seen as a very strong indicator of the economy. How is that business doing? Are you expecting a slowdown, are the vacancies going up? A: Vacancies are not going up. But clearly new off-take is going down. We are seeing a slowing down of that. Our leasing numbers clearly support that. But there continues to be a cautious strengthening in the overall rentals especially in the NCR market. Our lease rentals today are higher than what they were earlier. We are clearly seeing an inching up there. But overall the fresh volume off-take is slowing down. Q: What is DLF’s strategy through this slowdown, be it in commercial real-estate as well as residential markets? A: DLF’s strategy is more or less the same what we have been trying to chart for the last couple of years. We continue to focus on cautiously selected new launches where we do believe that we have a differentiating skill set and differentiating product and continue to do well there. We continue to cautiously spend on capex for either land in the two preferred geographies of Delhi and Chandigarh or in completion of the existing WIP capital projects. But clearly not go hugely into building new capex. We continue to divest non-core to keep on reducing the debt as well as reducing the management bandwidth that it entails and meet every commitment to every banker, stakeholder, every customer. I think across the next year or so as thing pick up, hopefully be in the situation where we can then harvest that up tide and move forward. _PAGEBREAK_ Q: Are you looking at buying land besides making it contiguous etc, is that on hold? A: Not on hold. We believe that we have adequate inventories of land, except for buying select pockets for contiguity in these two geographies. Big ticket land buying atleast right now is not on the radar. Q: When DLF was listing about five-six years ago, it was a pan India player, it wanted to be in 32 cities. But now if I look at your strategy, it seems to be only around Gurgaon and Chandigarh. Have you given up those ambitions of being a pan India player? A: Clearly, the NCR region which is Gurgaon and Delhi continue to be the biggest anchor around which we are. We clearly have no qualms on mentioning that. Chandigarh has emerged as a new and exciting geography where we believe that across the tri-cities we have a lot of depth in the market and in the land banks to be able to make progress. Beyond that, we are not exiting. But I think clearly we are focusing ourselves. Hopefully, over time, we should be 8-10 geographies on a sustainable basis, but not 35-40 geographies. But we believe that there are 8-10 markets in India where we have built up the goodwill, the management bandwidths and the execution capability to be able to stay in those markets for a long time. So, you will see us in Chennai, Kolkata. You will see us in some of those markets across the next few years as well. Q: But this is clear from 35-40 cities, you are going to be only may be in 8-9 geographies. A: We want to be, on a sustainable basis, in 8-10 cities. Q: Does it look like you are going to beat the guidance this time that you have given of shaving off your Rs 5,000 crore? A: Let’s talk on April 01, 2013.