India's largest property developers DLF Ltd.'s plan to sell 40 percent stake in its rental arm to Singapore sovereign wealth fund GIC Private Ltd. has left the equity market unenthused. The stock ended eight percent lower after the company informed the exchanges about the pact late evening on Wednesday.
While the announcement brings some sort of closure to the uncertainty surrounding the proposed stake sale, some concerns linger. The deal size, for example, and the timeline for the deal are yet to be sealed. Kotak Institutional Equities expects the capital infusion to take at least 4-5 months. In a recent report, the broking house questioned the lack of clarity on the company's debt reduction plans.
The real estate developer takes on an additional debt of around Rs 700-1,000 crore per quarter, according to data cited by Kotak. Since GIC is expected to transfer the amount only by September 2017, and not within this financial year, it would have taken on an additional debt of Rs 1,500-2,000 crore by then. This will marginally offset the benefit of the amount raised through this deal, Kotak said.
DLF's chief financial officer Ashok Tyagi, however, told BloombergQuint over the phone that there would not be no such adverse impact even if the money comes in late.
DLF has a Rs 27,812 crore gross debt pile as of the December-ended quarter. Part of this debt is on the books of the rental arm – DLF Cyber City Developers Ltd. (DCCDL) – Rs 6,670 crore as of the September-ended quarter. This figure could go up to as high as Rs 7,070 crore by the end of this financial year, according to Kotak Institutional Equities.
Tyagi expects a substantial chunk of the debt on the residential side to be taken care of through this deal but stopped short of putting a number on it, saying it will depend on the amount received at the time of the closure of the deal. He also did not want to comment on the deal value.
There are various numbers floating in the public space, but we do not wish to comment on that honestly. The valuation (of the deal) will come in the public domain only once the definitive agreement is done.Ashok Tyagi, Group CFO, DLF Ltd.
The company expects complete and conclude the definitive agreement with GIC in the next 2-3 months and then seek regulatory approvals, he added.
Market Conditions
The real estate sector has been one of the worst affected by the government's demonetisation drive. The residential space was the worst affected, Tyagi said, while commercial leases for both offices and malls remained robust.
The Real Estate Regulatory Act (RERA) and demonetisation will go a long way in cleaning up the “murk” in the sector, he added.
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