DLF's rental biz weak, sell-off plan needs clarity: Elara Cap

DLF Group CEO KP Singh will look to retire a part of the company's debt by infusing Rs 10,000 crore via a preferential issue of shares. Singh and his family plan to sell 40 percent stake in DLF Cyber City Developers for Rs 12000-13000 crore and the promoters will use the money to buy preferential shares worth Rs 10,000 crore. The deal is expected to close by September.Adhidev Chattopadhyay of Elara Capital maintained that Rs 10000 crore valuation still remains a question mark as some had earlier said that the sum would be around Rs 6000-7000 crore. "Whether the money will come in at once or in tranches, is still not known," he added. He also said that residential business still continues to be weak for the company and one needs to watch out how the transaction unfolds.The entire rally of DLF has been based on the company's plans to sell its residential business.The company has a net debt of Rs 22,000 crore and two-thirds of it is attributed to the residential business. Below is the verbatim transcript of Adhidev Chattopadhyay's interview with Anuj Singhal and Sonia Shenoy on CNBC-TV18. Sonia: What did you make of it and how would you approach the stock now? A: I guess the company's intent, overall plan to first sell the stake is already known to the market for quite some time. That has also been reflected in the run up to the stock price in the last three months. However, again valuation is still a question mark because earlier the figure was that the promoters would get to around Rs 6,000-7,000 crore, now the number is being touted as Rs 10,000 crore. So it again all boils down basically to the valuation at which the deal is happening. Obviously there is a lot of newsflow on potential bidders being interested to take up stake but when this transaction conclude and bigger thing is whether all the money will come at once or whether it will come in tranches it is still not known. So only when actual formal announcement, the transaction happens and one takes a call on when promoters would get the money and when they would be able to infuse it into the company. Anuj: This news had of course first came when the stock was somewhere around Rs 80-90 and from that point we have seen a remarkable run in DLF up to Rs 145. As you said, the key would be the actual amount but do you see enough triggers for DLF to rally on from here? A: Right now entire rally is on this news on the possible stake sale. If you look at the core operations of the business ex-commercial on the residential business, that still continues to weak with no clarity on whether company is going to go in two-three years on that side of the business. So already the stock price reflects quite a lot of possibility of a transaction going through, now only thing is to wait and watch as to when the transaction happens. Sonia: I don’t understand how the news report suggests that the company could be debt-free because we are looking at preferential issue of about Rs 10,000 crore if the promoters do that. The debt of the company is more than Rs 22,000 crore, so what is the sense you are getting about how much debt could they eventually reduce once this preferential issue goes through? A: This becomes technical. As you are aware that Rs 20,000-22,000 crore of net debt around roughly two-third is attributable to the rental business which is Rs 15,000 crore of debt. So, I do not see it becoming debt-free but it totally boils down to what valuation the deal happens at. So the range could be anywhere between Rs 30,000-40,000 crore for the rental business. Anuj: What about rest of the real estate sector? We have seen a big rally in some of the other names as well. Bangalore based stocks have done well, even HDIL and couple of Mumbai based real estate stocks have done well. A: Yes, in Bombay market our only stock pick is Oberoi Realty and we continue to like the stock because of its relatively low debt. So we like Oberoi Realty and we like Kolte Patil, another Pune based developer. We continue to like Prestige and Brigade in that pack. So that is broadly what we are sticking with, selective stocks. Sonia: Is there anything that has changed fundamentally in the last one-two months, have prices picked up, has demand picked up or is this perhaps just a traders move that we are seeing? A: On the residential side of the business, we have not seen any major pick up. Obviously in quarter-on-quarter (Q-o-Q), there is an improvement in Q4 of FY16 but there is nothing to suggest that there has been a broad based recovery on the sector as per our checks.