Edelweiss: Annual Report Analysis - DLF

CARAF/DAL consolidation impact

n  DLF promoters were issued 9% compulsory convertible preference shares (CCPS) of INR 16.0 bn in DLF Cyber City Developers (DCCDL), convertible into equity shares of DCCDL at any time within five years from the date of issue at holder(s) option. Conversion will lead to promoters’ equity stake in DCCDL to 40%.

n  DCCDL will be under obligation to pay dividends @ INR 1.4 bn/annum on preference shares till the date of conversion. In FY10, the company posted PAT of INR 3.0 bn and paid no dividend on equity shares.

n  Till the date of conversion, there will not be any charge in P&L for minority stake and, hence, consolidated profits will be higher to that extent. Post conversion, 40% of accumulated undistributed profits will get subsumed in minority interest.

n  The increase in shareholders’ funds includes INR 29.3 bn on account of consolidation of preference shares in DLF Assets (DAL) held by DSIPL. Post balance sheet date, Caraf (DAL’s holdco/DLF subsidiary) has acquired 90% of the preference shares for INR 30.9 bn, which will have corresponding adjustment to equity and net debt.

n  DLF’s capital reserve jumped from INR 16.8 bn in FY09 to INR 28.3 bn in FY10 (up INR 11.5 bn) on account of consolidation of DAL.

n  DAL earns rental income from leasing of properties purchased from DLF at a value arrived at by assuming a rental and capitalising the same at a rate of 9%. Post consolidation, the aforesaid properties are stated at sales price of DLF which includes profit of INR 66.4 bn on transactions till FY09.

Redemption of preference shares may impact future cash flows/debt

n  DLF has redeemable non-convertible preference shares (NCPS) of INR 19.7 bn, which were due for redemption as on balance sheet date including redemption premium of INR 5.9 bn. The said NCPS will be redeemed in the next FY at a reduced premium of INR 3.8 bn.

n  If one were to consider redeemable preference shares and preference shares in DAL held by DSIPL as debt instead of equity, as prudence would suggest, the revised D/E would be 1.07x vis-à-vis the reported 0.71x. 

n  The redemption premium on preference shares has not been amortised through the P&L (INR 2.1 bn YTM; 12.3% of FY10 PAT) as would have been a prudent accounting policy, in our view. The Companies Act, 1956, allows the same to be charged as a one-time charge against the securities premium account.

DAL consolidation leads to reduction in debtors; debtors > 6 months has gone up

n  Debtors exceeding six months increased from INR 9.8 bn in FY09 to INR 13.0 bn in FY10, though overall debtors declined due to consolidation of DAL.

n  During FY10, DLF forfeited INR 320.3 mn (FY09 INR 73.8 mn) on account of non-payment of dues from customers included in revenues. 

n  Interest charged to customers increased from INR 0.9 bn in FY09 to INR 1.1 bn in FY10. Interest accrued from customers increased to INR 1.4 bn (FY09: INR 0.7 bn).