Buy DLF
Published on Friday, November 13th, 2009 at 12:25 PMAuthor: insightt95in (170 Articles)
DLF
Sell
Price: Rs384 Target Price (Mar 10): Rs305
DLF Flash: Media reports DLF promoters to
buy out DE Shaw’s stake in DLF Assets Ltd
* As per media report, DLF’s promoters have entered into a deal to pay
c.USD500mn to buy out PE investor DE Shaw’s stake in DLF Assets Limited
(DAL), a promoter-owned entity and prepare the ground for subsequent
listing of DAL abroad.
http://economictimes.indiatimes.com/markets/real-estate/news-/DLFowners-
to-buy-out-DE-Shaw-in-arm/articleshow/5221389.cms
* We note that promoters buying out DE Shaw’s stake in DAL and
subsequent merger / subsidiarisation of DAL with DLF would lead to DLF’s
receivables of c.Rs28bn being replaced by DAL’s SEZ assets, cashflow
stream from which could be quite back-ended considering:
• (a) DAL has already obtained an amount of c.Rs5-6bn towards lease
rental discounting in respect of its leased assets, as a result of which
though P&L impact could be positive for DLF (annual rental income),
cash-flow will be negligible in the near-term,
• (b) Demand environment for SEZs is currently weak; we note that
DLF itself has recently applied for denotification of some of its SEZ
properties. The locations of the DAL SEZs are Chennai (in close
proximity to OMR), Hyderabad (near Gachibowli), Gurgaon (Cybercity
& Silokhera).
* We argue against the theory of value-accretion to DLF from such deal,
except to the extent of cap rate differentials that may be enjoyed between
(a) the rate at which DLF buys the assets of DAL vs rate at which they
were originally sold, i.e. 9%, (b) rate of listing, as and when it happens.
Refer Exhibit 2. As per our estimates, every 1%-point difference in cap
rate leads to c.8-10% change in assets’ valuation.
* To recollect the DLF-DAL relationship in brief:
• DAL had received total PE funding of close to c.USD1-bn from DE Shaw
(mid-2007), Symphony Capital (1H CY08). Rough estimates based on
lease rental pegs the enterprise value of DAL at c.Rs90bn.
• DLF had booked cumulative revenue of c.Rs97-bn between Apr-07 to
Sep-09 towards property sales made to DAL. This relates to c.13 msf
of property (revenue booked based on percentage of completion
method), of which DLF has delivered c.6mn sq ft. We understand that
rental income therefrom is in the range of c.Rs3bn p.a.
• Revenue booking by DLF towards DAL sale has slowed significantly
since 3QF09 as the IT SEZ market got severely impacted by the
property market downturn. Refer Exhibit 5 for a trend analysis.
• As at end-Sep09, DLF still has a receivable balance of c.Rs28bn due
from DAL towards revenue booked by it on account of sale of property.
The receivables balance was substantially reduced from c.Rs49bn as at
Mar-09; DAL paid c.Rs25bn to DLF in 1QF10 – sources of fund for DAL
included amount obtained through lease rental discounting and funds
infused by promoters selling part of its stake in DLF.
* While we are currently still unclear about the structure which will be finally
followed to see this transaction through, we examine below the possible
issues / questions that may need to be examined:
• Assuming valuation of DAL to be at c.Rs90bn, based on DLF’s current
market price of Rs384, this will necessitate issue of 234mn fresh
shares in DLF which will result in increase in promoter’s shareholding
from 79% at present to 81%. This may, however, be subject to
restrictions, if any, contained in the takeover code.
• The transaction would necessitate a revaluation of the properties that
DAL had purchased from DLF at the current cap rates; note that the
properties were earlier sold by DLF to DAL at 9% cap rate. DLF’s
shareholders would prima facie benefit from the re-purchase of DAL
assets if the transaction is carried out at a cap rate higher than 9% at
which it was sold.
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