May
DLF along with Unitech should be given credit to make NCR what it is today. The vast city of Gurgaon has been built by DLF and Unitech by building skyscrapers, malls and everything else that follows. In turn these companies also grew and their promoters started coming in the list of richest people in India and the World.
However today that seems like a distant history. In 2008 Mr K P Singh featured at #8 in the Forbes ‘World’s Billionaire’s List’ with a networth of $30 billion. This year in 2009 Mr Singh is at #98 in the same list with a networth of $5 billion. In one year a networth reduction of 71% is unimaginable but then 2008 was a year full of unimaginable things. During recession perspectives change quickly and those who do not prepare for bad times can particularly have a bad time. DLF is one of the companies which did not really expect things to turn around and did not prepare for it well. Thus when the Indian Real Estate hype went bust DLF was caught in a big mess.
Lets try to catch a glimpse of what happened to DLF and why is it really in trouble. DLF through its cash bought land (properties) in various parts of the country. DLF expected to build some proerties, sell them without much trouble, and through this get the cash to service its debt and further construction. A story in Wall Street Journal also points out the relationship between DLF and DAL (DLF Assets). Quoting from WSJ
DLF Assets, or DAL, buys commercial property from publicly traded DLF and earns its income leasing that out. The company is owned by DLF’s founders and primary shareholders, the Singh family, and hedge fund D.E. Shaw. And it is having trouble paying for properties it bought in the past year thanks to a plunge in rentals from offices and shopping malls. The bill due DLF stood at about $1 billion at the end of December. DLF said Thursday only that $160 million has been repaid in the first three months of the year. This is money the real-estate developer could use to finish projects and service its own $3 billion mountain of debt; that was the sum as of the end of December, at which time DLF had only $139 million in cash.
So the problem comes down to the fact that DLF does not have cash, thus (1) it can’t service its $3 billion debt and (2) cannot even complete more constructions. DLF also faces the problem of having a debtor like DAL who are unable to make their payment. $1 billion from DAL could really help DLF at this moment but instead they are thinking of acquiring DAL under DLF itself. DAL has the problem of not being able to earn enough rent on the properties it owns. This was bound to happen with rents in India touching global standards while earnings didn’t.
DLF is finding the way out of this problem by selling some of the properties which did not fit in its immediate plans (in the next 3-5 years) and raise Rs 5,500 crores (roughly $1 billion which DAL owes to DLF). DLF plans to use this money for “liquidity preservation and deleveraging” (read complete construction and service debt) according to this story in Economic Times. It seems that DLF promoters do not want any outside interference and hence are not going the Unitech way. Unitech also faced similar trouble like DLF but instead of selling properties (which can lead to a loss to the company), they chose to reduce the promoter holdings and get external funding. Unitech’s promoter’s holding reduced from 64% to 51% and they secured $325 million of funding (information from this article). Maybe Mr Singh feels the loss from selling properties is less than the loss at selling stake at current valuations.
The moral of the story comes down to simple principles, save cash for rainy days. Both DLF and Unitech were bullish on their projects, and they should have been because of the past 10 years in the country. But saving a little cash for the rainy day could have helped them go through this recessionary storm in a much better manner.
Update: On 8th May, 2009 DLF announces that founders will raise upto $608 million going the Unitech way. This article was written on 5th May, 2009. Not that any of them would have read this article but just confirming our views.
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3 Responses to “DLF – Trying to survive the real estate bust”
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@maximus – Extremely informative article and interesting insights . But, isn’t “saving cash for rainy days” easier to say in retrospect? In good days, everyone would certainly look for profit maximisation, else the market will look at you as laggards.
Profit maximization is the objective for sure, but predicting cycles is also required by leaders. There are many real estate companies in India which did very well during the boom period and are still doing well. They did not leverage too much probably or kept enough cash to complete projects. The main point is that DLF and Unitech could have better managed their cash, which I think even they would agree given the situation.
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