Adoption of Ind-As norms affected the margin: Ashok Tyagi, DLF

In a chat with ET Now, Ashok Tyagi, Group CFO of DLF Ltd, said that the company expects earnings to come back to previous levels after it posted a lower Q1. He said that the adoption of Ind-As norms affected the margin. He also said that DLF rental stake sale is in the advanced stage of due diligence, and they expect to announce the deal in Q3.

ET Now: If one strips off the DT Cinema impact for the quarter gone by, your numbers do not inspire too much of confidence, is that right?
Ashok Tyagi: The numbers are lower than the previous quarters. There are two or three reasons. a) This is the first quarter post the Ind-As adoption. Most of the onetime issues have been taken in the opening net worth issue, and there could be some residues of that, especially in the finance charges which was weighed higher than what normally it was in the previous quarters. Hopefully, by the next quarter, it should stabilise. b) A large quantum of construction is being handed over, so the last minute costs were there, and there were some pending onetime government charges. But again none of these is a like a Rs 200 crore entity, they got us to an EBITDA before the DT Cinema deal to a number lower than what we would have wanted. I do hope that in coming couple of quarters, we should be able to bounce back. If you see the EBITDA percentage, it continues to be in the 40% range which is where we have guided the market for the last many quarters now.

ET Now: It is good to see that that rental income has seen an uptick, but the scope is limited though for future growth because inventory has been exhausted by you. Can you tell us about your plans for an office space in Chennai?
Ashok Tyagi: Even before Chennai, we have kicked off a two million odd square feet development in Gurgaon, just opposite to Cyber City called Cyber Park. Cyber Park should be up and running for the rent in the fiscal of 2018-2019, yielding 10 points. We had about one and a half million square feet area to be built up in Chennai IT SEZ and that we have commenced as well. Again, some pre-leasing has already commenced there and by the end of fiscal 2018, we should have that also in a rent-yielding mode. Until that time, you are right that we may not have a too much fresh capacity. The million square feet leasing metric may not be what you would normally want to see, but clearly, there are rental escalations that keep on kicking in. In fact, in Cyber City the new rent deals that we are doing are now crossing the three-figure mark, which is a record. So clearly while the square feet leasing numbers may not be very high for the next year, year and a half, you would continue to see an uptick in the rental income.

ET Now: When do you plan to announce the details regarding the stake sale in your rental arm?
Ashok Tyagi: We are in the advanced state of due diligence with the shortlisted partners. The virtual data room has been now open for the last six weeks odd. My assessment is that most of them are at the fag end of their due diligence exercise on land, legal and financial and tax. We hope to announce the deal in Q3, which is October-December quarter and fund the deal post regulatory approvals before the end of this financial year.

ET Now: Will you be looking at selling out to a clutch of investors or will you be zeroing down to only one entity?
Ashok Tyagi: That maybe premature and speculative for me to comment on that right now.

ET Now: You have a very strong relationship with GIC, so is it right to say GIC’s chance of getting the deal is very strong?
Ashok Tyagi: All I can say is that the shortlisted investors, who are currently engaged in the due diligence process, have a strong international reputation and each of them has the capacity to conclude the transaction. I would not comment on any specific name.

ET Now: What could be the DLF’s total equity base going forward?
Ashok Tyagi: Equity base will go up, by how much is a function of the quantum that comes in, the share price that exists at that time when the reinvestments are done, and other factors. If the debt comes down, interest burden on the company will also go down. Overall, it should be net accretive not only for DLF Ltd, where it will be hugely accretive but even from an overall consolidated standpoint.

ET Now: Five years from now, when the debt raising exercise is completely done with and the REITs are out, what kind of a DLF are we looking going forward?
Ashok Tyagi: Five years honestly is a way too long a timeline but once this transaction concludes, the development business primarily housed in DLF Ltd will be significantly relieved of its debt burden. We would be owning 60% in the rental company and the remaining 40% by the foreign investors. That entity would have its debt, both for self-liquidating debt as well as potentially for any future growth. Going forward, hopefully in a five-year cycle, if there is a course correction in the residential market, sales can make a comeback. We should have about Rs 15000 crores finished or semi-finished inventory in projects already launched, and hopefully, as the market picks up, we should be in the best place to liquidate that stock. So that is the direction we should set on post this deal and hopefully in five years, things should only strengthen further.

ET Now: What is your assessment of sales for the next one year?
Ashok Tyagi: Last couple of years we have been doing about Rs 3500 crores of gross pre-sales, and this year we expect it to be around Rs 3,000 crores.
The first quarter has been below our own expectation but we do hope that in the second half of the year things would pick up. The residential market has to grow; there are a lot of distressed projects out there; some of them may not necessarily see completion. Given our location and the fact that most of our stocks will be finished stocks, we should eventually be able to get in an advantageous position once the market turns. In a 9-12 residential cycle that should happen, and it can further ease the situation of the development side of the business apart from the stake sale where the debt reduction will happen.