DLF to earn Rs 3,000 cr from rental biz in FY18: Elara Cap

Latha: What were your key takeaways from DLF’s board meeting announcements yesterday?

A: Details announced by the company is fairly in line with what was expected by the market and what was communicated earlier also. So, only clarity which has come now is that DLF would not be selling any stake right now but it is only the promoters who will be selling their 40 percent in the company. Considering company’s current position, as you are well aware, in National Capital Region (NCR), the residential market is not doing very well. The company has been going slowly on launches. However, at the same time, the office market across the country, it has been doing well. We are also seeing an uptick in rentals and DLF’s rental business we are expecting around Rs 2,400 crore of rental this year and with the Noida mall also starting operations next year, we expecting the company to reach around Rs 3,000 crore of rental income by FY18. So, that is obviously the most valuable asset in the company’s portfolio and this would be the right time to monetise the asset also.

However, if one looks at what are the positives for the company obviously yes, post, whenever the transaction happens, the promoter structure would be simplified in the subsidiary that is the rental business, because currently promoters effectively hold 85 percent in that special purpose vehicle (SPV) but post stake sale it will come down to 45 percent. And also as well-known, the proceeds of the issue can then be used to infuse money back into DLF.

Latha: I just wanted to know whether for you the top point would be that the company becomes more debt free, or at least the debt load will get reduced.

A: Broadly the company has got around Rs 21,000 crore of net debt, around two thirds is attributed to the rental business. Now, what is yet not clear is the investor who would come in at the rental business, would the debt also be part of the deal or it is just an equity stake sale. So, we still do not know what the value is. But still assuming Rs 3,000 crore as the rental income and giving an enterprise value of Rs 30,000 crore to the rental business, and we subtract the entire debt, that is Rs 14,000 crore on that business, so we are left with an equity value of Rs 16,000 crore and promoter's 40 percent in that would be roughly around Rs 6,500 crore over there. So, that is the sort of money we are looking at possibly the promoters could raise. However, there is still to be clarity on how much taxation they would have to pay because the face value is Rs 1,600 crore for this instrument, so what is the taxation liability also, the company would look at the tax structure.

Sonia: But since there are some sincere efforts by the management to deleverage the balance sheet for the last many weeks and months now, do you expect more upside on the stock because the stock has already gone from Rs 90 to Rs 140 in a very short span of time?

A: I attribute two things to this. One is obviously the recent cut in the interest rates taken by the Reserve Bank of India. That has had a rub-off effect and this being a largecap liquid stock in the sector; it has obviously percolated down and reflected in the stock price. Also, the announcement they have made yesterday, this has been in the news for quite some time, so I think the stock has already reacted to an extent on the expected announcement of this deal.

However, now the stake sale probably would happen over the next six months in the rental business, then the funding would come into the company probably next year, but how and when and what value the company would like to dilute, is still not known. So, obviously over a longer term, if you take 18-24 month view, overall company should be in a better shape going ahead. However, subject to all these, the multiple legs of all these transactions are being completed.