Note on DLF Ltd
DLF is a Delhi based real estate company which over time has built decent portfolios in both residential and commercial space. It started as a Delhi and NCR focused operator early on and has since expanded in many markets all over the country. In other markets however, they haven’t achieved any major success. Its core competence lies in the NCR region.
We started delving into the company when someone told us that after the QIP in Dec 2018, the company is going to become debt free. We wanted to dig deeper to understand if there’s some value in the stock.
As of this writing, DLF has a Market Cap of about 41,000 cr (Undiluted – More on this later).
The Assets
Let’s start with the assets that the company has. We divide the assets into 5 different categories: Land Bank, Completed Projects with unsold inventories, Planned projects, Rental Portfolio of DLF and the DCCDL group.
Let’s break down each of these:
1. Land Bank
In the QIP document in Dec 2018, the company has stated that it has enough land for 200+ msf potential development within DLF. On top of this, the DCCDL group has land reserves that have development potential of about 19 msf.
Another 65 msf is the TOD potential according to DLF.
The land reserves are as follows:
2. Completed Projects with Unsold Inventory
According to DLF’s valuation, they have 12300 Cr of Unsold Inventory in their completed projects. The below is the breakup for this:
As on Jan 1 2019:
These are the three main locations that DLF divides their operations into.
DLF 5 is the phase 5 development they are doing around the Golf Course Road in Gurugram.
New Gurugram is the area that covers area around sector 86, sector 87, sector 90 of Gurugram.
The remaining projects are classified as National Devco which includes the Delhi Metropolitan region, Chennai, Hyderabad and the Chandigargh Tri-City area.
Within these three categories, the below projects are included:
3. Planned Projects
Next, let’s come to the future plans for the company’s projects. Some sites are under construction and others are only in planning stage. Let’s see both separately here:
a. Under Construction
These are the projects that are under construction for which sales have started
As on Jan 1 2019, DLF values the Ultima inventory at 1135 Cr.
b. Planned for future
There are certain projects that DLF will be developing in the future which it currently values at 15,000 cr. These are as below:
These numbers are DLF’s share in these projects as most of them are being developed as joint ventures.
The commercial project in Gurugram is a JV with an affiliate of Hines which in the past has delivered the 1 Horizon Center on Golf Course Road in Gurugram.
The prices here are management’s estimates as per the QIP document.
4. Lease Portfolio
These are the projects that are owned by DLF and its subsidiaries excluding DCCDL that have been leased out and make a part of the rental portfolio of DLF.
Around 31.5 Cr Rent is generated per month based on this table. (378 Cr per year).
In this, Mall of India Noida has recently been transferred to DCCDL group.
There are some other commercial and portfolio properties as per below:
These together give a rental income of about 268 cr per year
5. DCCDL
DCCDL is a JV with DLF’s stake at 66.66% and the remaining is with GIC of Singapore. Under this, the company has some commercial and retail projects and a decent rental portfolio has been accumulated.
Some of the leased commercial properties are as below:
The additional development potential in DLF Cyber-City is approximately 11.5 msf.
Retail properties that are leased out currently:
Projects under construction:
Of the 4.1 msf of total Leasable Area, 3.2 msf was under construction as of December 31, 2018
Our Analysis
Capital Structure
It’s a bit complicated to understand the capital structure of DLF. Let’s try to do this by dividing the balance sheet into 3 time frames:
Before the QIP, the company had about 178.445 Cr (₹2 Face Value) shares outstanding.
Along with this, 37.97 Cr CCDs were also outstanding.
On Mar 29, 2019 the following transactions happened:
– QIP – 3172 Cr.
– 24.97 Cr of CCD converted into equity
Post these two transactions, the outstanding shares increased to 220.72 Cr
On 28th May 2019, another 13 Cr of CCDs were converted into equity shares making the total outstanding shares about 233.72 Cr.
Thus at the price of about 175 per share the current market cap comes out to about 41000 cr.
On top of this, there are 13.81 Cr Warrants that promoters hold which may or may not be converted into equity.
Assuming all the warrants are converted, the company will have 247.53 Cr shares outstanding post dilution.
Assuming complete dilution, the Market Cap at current price of 175 will become, ₹43000 Cr.
Debt
Understanding the debt structure is another beast in this case.
The important thing to understand here is that DLF doesn’t consolidate the numbers of DCCDL group in its books since 2018. It uses the Equity Method of consolidation where only the PnL is impacted on an YoY basis.
Let’s start with the Dec 2018 Balance Sheet of DLF while remembering that DCCL numbers are not there on it.
According to the balance sheet, the debt is as below:
- Non-Current Borrowings => 6290 Cr
- Current Maturity of Non-Current Borrowings => 2500 Cr Approx (Assuming that it’s similar to Mar 2018 Balance sheet)
- Current Borrowing => 9351 Cr
In total, about 18000 cr from our estimates. This gets further corroborated from the details in prospectus about the capital structure which says the outstanding debt is about 19284 Cr on its books.
Out of this debt, 8700 Cr is owed to the DCCDL group.
Thus, we can divide the debt into two main components as:
‘Debt owed to DCCDL’ = 8700 Cr
‘Debt owed to Others’ = 10584 Cr
The company has proposed to use the funds received from QIP to reduce its debt.
Assuming the company does utilise the entire amount of QIP money for debt reduction, the ‘Debt owed to Others’ will come down to about
10584 – 3000 = 7584 cr.
furthermore, the company has proposed to transfer assets to DCCDL to pay off their dues as below:
- Rent yielding assets 4000 crores
- Commercial land parcels 1350 crores
- Transfer of stake in JV’s 850 crores
- Transfer of other assets 500 – 1000 crores
- Existing arrangements in relation to DLF Assets Private Limited in Hyderabad and Chennai 1000 crores
Some of these have already happened in last few months.
Once these dues are paid off, the 7584 Cr of Debt will remain on the books of DLF.
We can assume that the debt will come down to 8000 cr approx.
There is one more line item i.e. Other Current Liabilities, which stood at around 3000 crore on 31st March, 2018 but subsequently has increased to more than 10000 crores in the QIP prospectus.
In the Annual Report of 2017-18 this head mainly contains items like Income received in Advance, Realisation under agreement to sell, statutory dues, other liabilities etc. This item requires careful study in Annual Report of 2018-19 considering in future DLF will be selling most of its projects post completion only, to avoid RERA and might change the debt number accordingly.
Furthermore, if all the warrants are converted, another 2200 Cr. will come to DLF and these funds might be used to reduce the debt further down to about 5500 Cr.
3. Impact on Profits
But let’s assume that warrant money will not be coming / utilised. Even then, the debt will definitely reduce by at least 50% from the current 19000 Cr.
Currently, the company bears an interest cost of around 2000 Cr per year or about 10% of the total debt.
With the debt reducing by more than half, we can say that the interest expense will come down to about 1000 Cr.
Which will have a decent impact on the PnL.
Estimating the exact impact on the PnL is very difficult in this case because we cannot compare the numbers currently available due to the change in accounting that recently happened (IND AS 115). Additionally, with transfer of assets happening to DCCDL, it will again change the PnL numbers.
Still, we can say that the interest expense should come down by at least 50% going forward.
4. Valuation
There are 5 main asset categories that we have looked at
- Land Bank
- Completed and Unsold Inventory
- Planned Projects
- Lease portfolio
- DCCDL Stake
1. The land bank is pretty huge. So it definitely has some value to it. We don’t know how much but anything greater than 0.
2. The completed unsold inventory is valued at 12300 Cr by DLF
3. Planned projects are valued at 15000 Cr by DLF
4. DLF’s own lease portfolio generates around 500-600 Cr per year from Rentals. Assuming a conservative 8% yield, we can value this at 7000 Cr approx.
DLF has planned to transfer 4000 cr worth rent yielding assets to DCCDL. If we take this at face value and subtract it from 7000, we get 3000 cr.
With this transfer, some more value should be added back due to the increase in DLF’s share of income from DCCDL. Those numbers will become clear in 1-2 years only. For now, we can choose to be conservative and just assume a value of 3000 cr for the lease portfolio.
5. DCCDL stake – DLF in 2018 valued the 100% equity of DCCDL at about 26000 Cr while making the transaction in their books for stake sale. At this valuation, DLF’s stake is worth about 17000 cr.
With this data, one can carry on a sum of the parts valuation and conclude whether the company is cheaply available or not. We believe it is somewhat cheap.
Some more aspects
- A major area of concern is the non-clarity on how the land reserves will be monetised.
- The company has a very strong brand in Delhi and NCR where they are able to sell their apartments at a premium compared to similar properties adjacent to them. Even the sales staff says we don’t even discuss / compare the other nearby properties when making sales.
- They have a very good ability to get large corporates with reputed names as tenants.
- We don’t know how the future leadership in the company might look like.
Disclaimer: This article has been written for the purpose of academic discussion only. This is not a recommendation to buy or sell any investment product of any kind either for the security discussed or any other investment, in any form. We urge every reader to verify the facts presented on their own and talk to their investment advisors before making any investments, in any form. We are not responsible for any losses / gains achieved as a result of reading the content on this blog. We, or our clients, may or may not hold positions in the discussed securities, presently or in the future.
We have not received any compensation for merchant banking, investment banking, brokerage services or any compensation for products or services from the subject company. We have not received any compensation from the subject company or any third party in connection with the note. We have never served as an officer, director or employee of the company.
