DLF deal delay has Street worried as debt clock ticks

The DLF stock fell 8.11 per cent on the BSE on Thursday, a day after the realty major announced its promoters would sign with Singapore’s GIC Pte the much-awaited deal to sell their entire 40 per cent stake in DLF Cyber City Developers (DCCDL).

DLF holds about 60 per cent in DCCDL, the company’s rental arm, while the promoters have the rest.

The company says it has got audit committee approval to negotiate and enter definitive shareholding agreements.

The deal, estimated to fetch the promoters ~12,00014,000 crore, is expected to help DLF significantly cut its over ~24,000-crore net debt. Against this backdrop, it is surprising to see the stock tank following the deal’s announcement.

While profit-booking can be partly attributed to the fall in the stock, which had gained almost 38 per cent in 2017 (till Wednesday), market experts say lack of clarity on the deal valuations, as well as the deal closure getting postponed to the September 2017 quarter (from earlier expectations of March 2017 quarter) are other reasons.

Deven Choksey, managing director, KR Choksey Shares & Securities, says, “Ideally, the stock should not have gone down. It seems the market is not very confident about the deal going through. There is also no clarity on the deal’s valuation.”

Deal valuations are crucial, as it will have a strong correlation to the reduction in DLF’s debt levels. The promoters are expected to infuse a large portion of the ~12,00014,000 crore they receive from stake sale into DLF through fresh equity.

Since the deal closure has been pushed to the second quarter of 2017-18, it will also offset some of the gains arising from fresh fund infusion.

DLF had recently indicated that given muted sales, the company would require ~7501,000 crore of incremental debt every quarter. So, a delay of two quarters would mean an increase in debt by ~1,5002,000 crore, unless the deal valuations are way ahead of Street estimates.

DLF’s debt has increased by ~2,200 crore in the past two quarters to about ~24,400 crore at the end of December 2016.

Not surprisingly then, analysts appear worried over the delay in deal closure.

Kotak Institutional Equities’ analyst Samar Sarda in a report on the company says, “The management has not announced the deal value. Also, infusion of funds could take another four-five months, which will impact debt reduction against the initial plans. We maintain our target price but downgrade the stock a notch to ADD,” while he awaits finer details on the deal on valuation among other things. The report was published on Thursday.

The other key worry stems from the likely surge in equity capital due to fund infusion — both by promoters and other investors.

G Chokkalingam, founder of Equinomics Research & Advisory, says, “The market is worried due to the huge equity dilution that will happen due to the fund infusion into DLF by promoters and additional funding even assuming it is done at ~150 a share. Consequently, the benefits from the reduction in debt and interest costs may get offset to a large extent.”

The current equity capital of DLF is 178.39 crore (1.78 billion) shares.

At ~150 apiece and assuming fund raising of ~13,000 crore, the equity capital will rise by 48.6 per cent. DLF’s market cap stood at ~25,172 crore on Thursday.