Aman ki aasha: For DLF, asset sales are a struggle

There's something about DLF that does not seem to work for the markets. Otherwise, a Rs 1,650 crore deal to sell Aman Resorts should have created some flutter in the stock when the rest of the market is largely bullish. Why are the markets not celebrating the company's steady reduction of debts?

The answer may lie is the price. When you sell something you bought for Rs 100 at Rs 75, it sends a clear signal - that you are in a buyers' market, and can't command your price.

Is this the case with DLF's recent sale of Aman Resorts for Rs 1,650 crore? Is this a distress sale in which value has not been realised adequately?

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[caption id="attachment_565915" align="alignleft" width="380"] The markets know that these sales are still not enough to undo the damage of excess debt accumulated in the salad years[/caption]

Apparently, yes. DLF had bought Aman from founder Adrian Zecha for $400 million (including debt) five years ago in November 2007. Even without taking inflation into account, the money now coming in is around $300 million (including debt). That's a straight 25 percent drop in value.

While it is true that one Delhi property (Lodhi Hotel) is being kept out of the deal, the fact is after adjusting for the inflation in property values overall between 2007 and now, DLF has still sold well below realisable market value - and what it had itself hoped for.

BusinessLine, quoting unnamed analysts, says that "the company was expecting around Rs 2,000 crore but had to settle for Rs 1,650 crore owing to sluggish demand in the real estate and hospitality sectors."

But this is not the first distress sale made by DLF. In August this year, DLF sold its prime Worli property in Mumbai at Rs 2,727 crore, which included debt of Rs 1,500 crore. It thus got only Rs 1,227 crore net, against a purchase price of Rs 702 crore seven years ago. That's a 75 percent appreciation - which yields a compound interest rate of around 10 percent per annum, when real estate has been rising even faster till recently.

The short point may be that DLF is selling its property below its real market potential in order to meet its commitments to pare down debt to certain levels by the end of 2012-13.

Last year's balance-sheet indicated that the company was paying an interest of 12.38 percent on its 31 March 2012 debt of Rs 25,066 crore. As Firstpost noted a few months ago, this "translates into a yearly interest of Rs 3,103.8 crore. This works out to 30.4 percent of the yearly income of Rs 10,207.88 crore and is much more than the company's last quarterly income. The interest burden of the company this year is 2.7 times its last year's net profit of Rs 1,168.68 crore."

Now you can understand why the company is in such a hurry to sell what it can at any price. The markets know that these sales are still not enough to undo the damage of excess debt accumulated in the salad years. Even after the Aman Resorts sale, which will close by February 2013, DLF may still have Rs 18,500 crore debt on its books by March 2013.