DLF firesale is gathering steam, but is it good enough?

Looks like India’s largest realty player is finally getting its debt under control through asset sales and investing in select high value rental assets.

DLF has already expanded its asset sales programme to Rs 10,000 crore from Rs 6,000 crore earlier, of which it has achieved Rs 4,800 crore in asset sales, thus clawing back around half the equity raised in 2007. The management is now confident of closing transactions worth Rs 3,000-4000 crore in the next six months.

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After having found a buyer for its non-core assets Aman Resorts for Rs 2,500 crore, DLF has sought shareholder approval for selling a stake in its windfarm business for around Rs 900 crore. The company is in talks with IDFC, ReNew (the company floated by Sumant Sinha, former CEO of Suzlon), Bharat Light & Power and Green Orient on this.

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The board approved the sale of its entire wind power unit at its meeting on 30 May and has sought its shareholders’ approval for the purpose through a postal ballot, the result of which will be out on 20 July. It also plans on selling its 17-acre NTC mill land in Central Mumbai by the end of FY13. Bankers estimate the deal would fetch between Rs 3,000 crore-4,000 crore, but the deal is stuck due to valuation issues. The funds would be utilised to bring down the net debt to a comfortable level, which currently stands at over Rs 22,000 crore.

Last week, DLF sold its entire stake in its subsidiary Adone Hotels and Hospitality to a Kolkata-based consortium Avani Projects and Square Four Housing & Infrastructure for Rs 567 crore. DLF has raised about Rs 1,774 crore in last fiscal through divestments of non-core assets, including plots and IT parks. The divestments proceeds have reached Rs 4,844 crore till date.

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However, brokerage Citi on Wednesday downgraded DLF to “neutral” from “buy”, and cut its target price to Rs 218 from Rs 266, arguing that the realty player’s share outperformance versus rivals over the past year is unjustified given the non-core asset sales over next the next five to six months “will likely only help at the margin” and not cut debt “materially” due to continued estimated capex of around Rs 300 crore to Rs 400 crore per quarter.

Third-party construction may increase the execution rate for the company, but that will result in lower margins, it said.

The crux of the problem is that DLF was expecting tonnes of money from these three non-core assets. However, it was not able to sell them within the given timeframe had has now revised it to September 2012, after which it will strategise for the next round of divestment. These non-core asset sales may help in the short run, but the impact will be limited because of its continuing need for capital expansion. An Emkay Global Financial Services Ltd report says that fiscal 2014 debt would increase if the company fails to revive its core business cash flow, which can meet its fixed cost and capital servicing obligations.

JP Morgan, however, is not so bearish on the company. Going forward, the company’s prime focus will be on high-margin luxury launches, while it scales down plans for mid-income projects due to inflationary trends. “A key launch impending is a super premium project in prime Gurgaon (Magnolias, Golf Links) in 2H FY13 and would be the key driver for the bookings in FY13,” said the brokerage in a recent note.