Focus for the next two-three years would be to pare down the completed inventory and grow commercial business and JV with GIC, Saurabh Chawla, Senior ED-Finance, DLF.
DLF is a stock in focus because the company has approved a qualified institutional placement (QIP) worth Rs 3500 crore recently. Moreover, the promoters would look to infuse Rs 11,250 crore via warrants.
Saurabh Chawla, Senior ED-Finance, DLF said they would take the approval of shareholders for the QIP on December 27. The target is to complete the infusion from promoters by December-end and start preparing for QIP in fourth quarter, said Chawla.
However, it is not possible to give the exact date of QIP and the amount to be raised because that depends on number of shares that can be issued in a QIP to maintain the 72:25 ratio between promotes and public shareholders, he said, adding that the price of the QIP will determined by the market as per Sebi formula.
Effort will be to complete QIP in Q4 but for that market also need to be in good shape, he said.
When asked what would be the debt picture by end of FY18 post all these developments, he said there are two timelines for this. One, is after the QIP and promoter infusion, the debt is expected to come off by Rs 14000-15000 crore. Currently, the net debt on a consolidated basis is Rs 28000 crore, said Chawla.
The only debt that will remain in DLF will be in the joint venture that is being created with GIC, so will be ring-fenced to DLF Cyber City Developers Ltd (DCCDL), and the balance debt over the period of 6-12 months will get pared down as different transactions happen.
Therefore, by end of FY19, DLF would be net debt zero and any debt that remains in DLF would be in the JV, which will be ring-fenced and will not be to recourse of DLF, said Chawla.
This is a game changer strategy for us because in a holistic way they will be sitting on 15000 crore of completed inventory in DLF and all the construction spend to create the inventory would over – most by March 2018 and some by Jun-July 2018, said Chawla.
Therefore, any sale that happens from DLF of this completed inventory would be a straight cash to bottomline net of taxes, he said. “It is a compelling story to not only create fresh cash but earnings as well, as we go forward,” said Chawla.
Focus for the next two-three years would be to pare down the completed inventory and grow commercial business and JV with GIC, he said.
He said, they are changing their business model from doing pre-sale launches and funding construction through payments or installments from customers to a model where they would be constructing and starting sales when the construction is at an advanced stage of completion. This will require a different kind of balance sheet, said Chawla, adding that it is a model followed by most of the developed countries.
Below is the verbatim transcript of the interview.
Sonia: Lot of things are happening in DLF there was a GIC investment, promoters’ infusing money and now this qualified institutional placement (QIP) approval. First let us talk about the QIP, how much money are you intending to raise and over what period of time and more importantly how will DLF as a company change in terms of its debt profiling now?
A: We are taking the approval for QIP to the shareholders on December 27th. We are targeting that we should be able to complete the infusion from the promoters by end of December and in the fourth quarter we should start preparing for the QIP. I really cannot give you a fixed point of time when the QIP will be done or the amount because what we are taking is the number of shares that can be issued in QIP to maintain the 75:25 percent ratio between the promoters and public shareholders.
The price of the QIP will be market determined as per the SEBI formula. So, our efforts would be is to complete the QIP in Q4 FY18, but you require markets also to be in a good shape to do the QIP. So, we are just targeting quarter four, let see whether it happens in Q4 or Q1.
Anuj: With all these steps and this QIP as well how will the debt profile change? Say at the end of FY18 what could be the overall debt picture?
A: I will give you two timelines for this. One is after the QIP and the promoter infusion we expect the debt to come off by about Rs 14,000-15,000 crore. Currently, my net debt in DLF on a consolidated basis it is about Rs 28,000 crore. So, basically, we half the debt on a consolidated balance sheet basis. The only debt that will remain in DLF is in this joint venture (JV) that is getting created with GIC. So, it will be ring-fenced to Cyber City Developers Ltd (DCCDL) and the balance debt over the period of 6-12 months will get pared-down as different transactions really happen.
So, by end of FY19 which is March 2019, we expect DLF to be net debt zero and any debt which remains on DLF’s book would be actually in the joint venture which will be ring-fenced and will not be to recourse of DLF. So, it is a game changer strategy for us because if you look at in a holistic way, we will sitting around Rs 15,000 crore of completed inventory in DLF and all the construction spend to create the inventory would be all over, most of it by March 2018 and some of it by June to July 2018. So, any sale that happens from DLF of this completed inventory will be straight cash to the bottom line net of taxes. So, it is actually a very compelling story where we are able to create not only free cash, but earnings as we go forward.
As things pan out, as growth comes back obviously, we will continue to re-look at our growth strategies from thereon. At this stage our focus over next 2-3 years would be to pare down this completed inventory and grow our commercial business in joint venture with GIC.
Latha: Did I hear you right, it is net debt zero by March 2019 and you will have an inventory of Rs 15,000 crore in that JV if that happens what will be the impact on your bottom-line? Because as you say all the sales now will accrue net of taxes as profit?
A: I can’t give a guidance as to what is the quantum of sales we would be doing, but if I have about Rs 15,000-18,000 crore of completed inventory on my books even if I were to assume a three to four year timeframe in which that inventory is sold you are talking about almost Rs 4,000-5,000 crore of sales every year. So, that is the compelling story that we are bringing to the market.
Sonia: So, once the debt goes down the interest cost of course will almost halve and might go to zero after two years, so does that means margins will also improve for the company from the current levels?
A: This is a creation of a joint venture, so the balance sheet of DCCDL will be totally carved out of the DLF balances sheet as you currently see yet. So, all the debt and all the profit & loss (P&L) will be fully carved out. Only thing that you will see in DLF’s balance sheet or DLF P&L is below the line where my 67 percent share in the earnings of DCCDL shall appear. So, all the debt in DCCDL will be out of my balance sheet and only the earnings will be there. Hence there will be actually practically zero interest cost, not half interest cost but actually zero interest cost. So, that is the outlook that we are working towards or the objective that we are working towards that in next 12 odd months we should achieve that objective where what you see in our balance sheet will be only completed inventory and the sales emanating out of the completed inventory and 67 percent of our share in the earnings of this joint venture with GIC.
Anuj: Now we have three near term disruptors behind us - demonetisation, goods and service tax (GST) and Real Estate (Regulation and Development) Act, 2016 (RERA) as well do you think now on a macro position things are looking better?
A: Well these were disruptive events although they will be very beneficial for the sector and for the economy in medium to long term. But they did cause disruption in our operations and of course our financial results in Q2 reflect that. But these are of course now behind us and as I said over the last few years we have prepared for a different business model. We are changing our business model from doing pre-sales through launches and basically funding our construction through the payments from or instalments from customers.We are moving away from that business model and we are moving to a model where we would be constructing and then starting the sale when the construction is at very advance stage of completion. You require a different kind of balance sheet for that and this transaction allows us to go to that kind of a balance sheet. This is a model which is usually followed by most of the developed countries where the pre-sales element or pre-booking element is very small element of it. They complete the project and then they start doing the sales so we are moving towards that. It gives a lot of certainty to cash flows, it gives much better certainty to earnings, you are not at the mercy of any local regulator or events and hence the certainty would surely mean much better discount rates for a stock price.