DLF beset by multiple issues

Amid declining sales, DLF, the country’s largest real estate company, has had mounting problems since the start of this year.

Experts say it would need to urgently take some measures, including a sale of its land parcels in South India. To reduce its debt and generate cash flow, DLF plans to raise Rs 3,000 crore through divestment or joint ventures in certain projects. It is in talks with some private-equity entities for partly cashing out in some projects before their launches in 2015-16.

It is also looking to set up two real estate investment trusts (Reits) in the next financial year.

In a recent note, brokerage Motilal Oswal had said, "Amid improving macro and policy favourability (foreign direct investment relaxation and Reits), DLF should have offered the best play in the Indian real estate sector, with the largest commercial portfolio and widest land bank.’’ But prolonged weakness of the operating market and subdued performance — including rising debt and legal issues, tax liabilities, land ownership cases — remain key overhangs.”

Earlier this month, fair-trade watchdog Competition Commission of India (CCI) had ordered two probes against DLF for allegedly misusing its dominant position in the Gurgaon market. And, on Thursday, the capital markets regulator, Securities and Exchange Board of India, imposed a fine of Rs 52 crore on DLF’s promoters and owning family, for not allegedly disclosing the needed information to investors during the Initial Public Offering.

Reacting to the penalty, DLF on Thursday said, "We are reviewing the orders and, after taking legal advice, we will challenge the orders in an appeal."

The CCI had last year imposed a fine of Rs 630 crore on DLF for alleged unfair practices, which the company has challenged in the Supreme Court. Last year, the Competition Appellate Tribunal had upheld the penalty of Rs 630 crore. Subsequently, SC asked DLF to deposit the penalty amount in tranches, pending the final order. The stock of DLF has come down by over 13 per cent over six months. It closed at Rs 156 on Friday on the BSE. Also, Sebi has restrained DLF and its promoters from accessing the capital markets for the next three years, also challenged in Compat by the company.

Last year, the Punjab and Haryana high court had cancelled an allocation of 350 acres to DLF in Gurgaon, won in an auction.

Experts say the brand has been impacted due to various adverse orders and enquiries. “In a slow market where the sales are low, such enquiries reduce the prospects of end-users coming on to the specific brand. But, over the years, there have been loyal investors of DLF who will continue to buy from the firm,” a Gurgaon-based broker said, on condition of anonymity.

Over the past two years, DLF has sold almost all its non-core assets, aiming to bring down debt, which had once reached Rs 23,000 crore. It is now left mainly with its land parcels and projects. The debt was Rs 20,336 crore as on December 31, an increase of Rs 400 crore from the previous quarter.

The current attributable net debt to DevCo (the development arm) is Rs 6,350 crore and to RentCo (the rental business) is Rs 14,000 crore. While DLF wants to maintain the debt of DevCo, by raising private equity funds, the company plans to cut that of RentCo through launch of REITs.

Its plan of listing its rental assets as a REIT might be hit. It had planned to acquire a 40 per cent economic interest of DLF promoters in the rental business, DLF Asset, through a share swap deal. “Swapping of stake at DLF Asset with shares in the listed company could have given DLF headroom to raise fresh equity and reduce debt,” a report by Macquarie Capital had said.

DLF’s inability to access capital markets could impact its fund raising programme, as a listed company and forpotential listing of its commercial assets as REITs. And, DLF would have to resort to large asset sales to reduce debt in the future, it said.