You have personally spearheaded the deal with GIC which is now India’s largest FDI in real estate, yet the DLF stock sold off on Monday. Do you think it is because the market was expecting the promoters to offload 40%5 instead of the 33% which has been announced?
Saurabh Chawla: No, I think the market is waiting for the details on the transaction so initially of course the market reacted to the press release but once we explain the overall contours of the transaction to the investment community, especially through our analysts I think they will realise that this is a much better deal than what was earlier envisaged because in this construct DLF’s share is also going up from 60% to 67%, which is a great validation that DLF also believes in the future growth story of commercial assets as it goes forward. The second aspect is in this whole process based on the recommendations of not only GIC but other private equity players when they gave us a feedback that the capital structure of DCCDL needs to be harmonised because it is generating substantial amount of cash and hence we rationalised that capital structure also. So in the hands of the promoters the same amount of money goes whereas DLF builds up another 6.7% of stake and we sell out actually a lesser amount to GIC. So in broader construct we achieved all our strategic goals of capital raise by selling out actually less equity.
What do you say the deal is better than the original plan of promoters selling out 40% in the rental arm? Why do you say that?
Saurabh Chawla: So very clearly when the stake actually got built up in 2010 itself our guidance to the market was at some point of time this will get assimilated in the DLF top core, the list core, so this is just a one of the milestones that we are achieving before the final monies come in from the promoters after the closing of this transaction. So it is just a promise that has been met in the capital markets we have– whether it is the debt capital markets or equity capital markets or the banking markets, we have demonstrated, I would say, the highest standards in our governance and management. Markets have been soft, those are cyclical issues which I think over a period of time I think you will start seeing a lot of value also emanate over there but purely from our standards we have never shied away from meeting our commitments where we had earlier guided the markets to.
Give us a sense by when will the funds be infused into DLF? You have given a guidance for November, do you stand by that and do you think it would spaced out, the infusion?
Saurabh Chawla: No, there would not be any second stage. It will be a one-time infusion so the whole money will come in. It will in the form, most likely, again I am giving a disclaimer because yet to be agreed with our shareholders, but most likely it will in the form of warrants because we have to comply with the guidelines of SEBI on public float and how much the promoters can get allotted to themselves which is not more than 5% in every fiscal year. So I mean there are many constraints in which the instrument has to play out but yes the whole money will come in from the promoters in a short period of time after the closing which we envisage by end of November.
While I appreciate there are instruments like warrants at play, give us an idea of the quantum of infusion that is likely in DLF?
Saurabh Chawla: Sure. So the infusion will be by the promoters in the rage of Rs 10,000- Rs 10,500 crores depending upon what the net tax they have to pay on the proceeds. So let us assume it is Rs 10,500 cores from the promoters, obviously in order to maintain the 75-25% ratio there will have to be an issuance to the institutional shareholders. In toto I think we should get about Rs 13000 – 13500 crore within this current fiscal year.
This is being described as the game changer deal as it will once and for all solve DLF’s mammoth debt problem, Can you reconfirm if DLF and promoters stand by the commitment to use the GIC deal proceeds to cut down debt and by how much?
Saurabh Chawla: Yes, I mean we have clearly stated that the whole proceeds will be used to pay down the debt which is actually attributable to our development side of the business and the Rs 13,000 – Rs 13,500 crores will be used towards that. The current net debt on a consolidated basis in DLF is about Rs 26,000 crores so that will come to half which is almost Rs 13,000 crores and post– but there is also debt in DCCDL which is about Rs 5,500 crores so the net left after many of these series of transactions in the DLF development company will about Rs 6,000 crores. And out of this Rs 6,000 crores about Rs 4,000 crores is associated with the rental assets which are already there in DLF so the serviceable debt from the development side of the business will come down to almost 2000 crores odd. So still a long way for us to go forward but once this transaction gets completed there will be a substantial reduction, actually our net debt will come down by half so that is the positive side.
So what you are saying is that the net debt will be sub Rs 1000 crores, I just want you to clear the clear the air here?
Saurabh Chawla: Our net debt will be sub Rs 10,000 crores post all the transactions..
The joint press release by GIC and DLF talks about future collaborations the promoter and the DLF Vice Chairman Rajiv Singh talk of GIC and DLF unlocking value together in the future throw some light on what this kind of collaboration and value unlocking is going to be all about?
Saurabh Chawla: Well if you look at our presentation the entity of DCCDL itself is embedded with almost 19 million sq ft of future development that is the magnitude of development that you can do creating more offices and retail spaces across the country. Currently we are developing almost 4 odd million sq ft of offices in Gurgaon. So you are talking about more than doubling with the embedded development potential within this entity itself and that is what I think Mr Singh and Mr Lee Cookson have been referring to that this will enable us to capture the growth story in the office and the retail space across the country. What also which we have actually talked about and if you must have noticed is that we are also talking about inorganic growth so we would be looking at opportunities in places like Mumbai, Bangalore, where we do not have presence in the commercial space and these are very large office and retail markets. So there is no reason with the expertise and the financial backing of GIC we not only enter into those markets but also expand our operations over there. So the sky is the limit for this entity with GIC backing and discipline of investors I think in our development potential and expertise in our operations I think it is a very compelling proposition for GIC as an investor and for DLF investors, DLF shareholders indirectly.
So from what you are saying DLF will have to buy land in the expensive markets of Mumbai and Bangalore. Would not the company then again have to raise more debt? I mean how are you going to manage your capital requirements versus cash flows from current projects?
Saurabh Chawla: So this entity so number one I want to clarify that this is not a residential play this is a commercial play so the DCCDL will not be entering into residential development so that is number one. Number two is this entity at the current run rate throws up almost Rs 1,200 crore of cash and this cash on an annual basis and this cash is only growing so this cash has to be well utilised and hence if we were to lever this cash up there is no reason that we do not actually expand in various jurisdictions. Debt by itself is not bad actually if debt is serviced by stable rental cash flows so there is a substantial amount of equity upside to be made from that and the GIC’s expertise and our operations I think that is what we intent to do.
The sense I am getting that commercial real estate and DLF is a different focus today will that correct more or will it be more aligned with the market reality?
Saurabh Chawla: You are right I mean where the markets are right now with residential markets and many of the micro markets where we have presence being soft our focus has been more on the commercial. I think what you really need to appreciate is that over the last two to three years as residential markets entered into a very soft zone we also had lot of disruptions where it was not clear as to how we should run our business so real estate regulatory bill itself is whilst this is great legislation to bring in transparency and discipline, but it also brings in uncertainty and we have taken a little conservative view as to how we should play it out. But now that everything is enacted and there is clarity on the regulatory aspect of it, on the tracks aspect of it on the GST we believe that we are very well positioned also not to grow our business on the residential side, but I think we will right now still guide the markets that we will have a relook at it in next two to three quarters before the growth starts to emanate from there. So I think we are well positioned the timing of this transaction is also quite good that we will have a very focussed commercial development and asset owning entity and with everything behind us also on the residential play we can start relooking as to how we do that business also.
REITs are the new fad for real estate companies what about REIT listing is that still on the table?
Saurabh Chawla: I think what we have done with GIC is actually create a business trust, so in a business trust there is a higher degree of development potential, in a REIT there is a lower degree of development potential. As you are aware GIC is a sovereign fund they are not like private equity, private equities like to exit in four to five years time. GIC being a sovereign fund, being an NLP to most of the private equity players, it can be actually in your portfolio for decades, I mean some of the longest holding investments they have is almost 50 years so there is no pressure for exit over there as long as the markets are growing and both the partners are happy growing that embedded value also within the portfolio. We were happy, so the way we look at in DLF we have already created a business trust, now this business trust will decide at what point of time they go to the capital markets to give a better visibility on the market value of that investment. So we really do not need to encash on our assets to go into the REIT market. The board of directors of DCCDL will decide or DLF and GIC will decide okay this is a good time to monetise some assets within DCCDL and demonstrate that value there.