DLF Ltd’s shares have been steadily regaining lost ground, surging 53% since end-October. The rally is since the September quarter results brought happy tidings of positive cash flows after several quarters of pain.
Tailwinds of debt reduction and annuity sales drive DLF’s shares
Even the delay in its proposed qualified institutional placement of shares worth ₹4,500-5000 crore or the sudden resignation of the group chief financial officer Saurabh Chawla last week, did not dampen investor sentiment.
The core issue is what’s driving DLF’s valuations at a time when the real estate sector continues to languish. It seems investors are appeased by DLF’s debt cuts and robust traction in the commercial lease rental segment.
DLF’s burgeoning debt was the biggest impediment to profit growth. That’s now reined in through restructuring. The holding company’s net debt is a healthier ₹7,143 crore, down from ₹25,000 crore as of end FY2017. Promoter infusion of ₹9,000 crore following a deal to hive off rental company DLF Cyber City Developers Ltd (DCCDL) helped ease the burden. On completion of QIP and another tranche of promoter funds infusion, the company will become debt-free.
For the first time after restructuring, DLF generated positive cash flows. Simultaneously, rental assets under DCCDL are churning out decent cash flows as well. The annuity income pool (rental) is pegged by the firm and analysts at around ₹3,000 crore for FY19. According to Adhidev Chattopadhyay, an analyst at ICICI Securities Ltd, “the strong operational rental assets and some under construction should enable DCCDL to grow its annuity income pool by a compounded annual growth rate of at least 10% over the next 4-5 years.”
That said, it’s an uphill ride still on residential sales. The liquidity crisis thanks to the NBFC mess, is likely to weigh on the property market.
The national capital region where most of DLF’s inventory is housed, is also weak. Even on a pan-India basis, high inventory of unsold residential units has capped increase in asset prices in the luxury market.
However, DLF’s ₹12,900 crore inventory will also generate cash as it gets sold and there won’t be any additional costs on these completed units. This can be ploughed back into other assets. The dark side is clearing inventory could take at least four to five years, unless there is a sea change in the property market.
The turnaround story has caught investor attention. That said, the key to further upsides would come from an uptrend in home sales, something that has been languishing for nearly five to six years.