What do analysts say on SEBI’s order banning DLF, promoters from securities market

With the securities market regulator Securities and Exchange Board of India (SEBI) barring the country's biggest public listed real estate developer DLF including its chairman KP Singh and other senior executives from accessing the securities market for three years over lapses in making a material disclosure during its IPO filing, the company's share price hit an all-time low on Tuesday.

Analysts tracking the space say that the order in effect means the company will be prohibited from dealing in securities – equities, REITs, debentures and other such instruments. This will have significant impact on the fundraising plans of the company through commercial mortgage backed securities (CMBS), non convertible debentures (NCDs), REIT listing ultimately aimed at bringing down its debt liabilities.

“DLF cannot participate in any listed issuance such as equity, preferential, debt or REITs, whether primary or secondary, for the next three years. This is also likely to extend to instruments such as CMBS (collateralised mortgage-backed securities) and NCDs (non-convertible debentures) that DLF has actively floated over the past six months,” said a note prepared by Ambit Capital.

This is also expected to result in DLF losing its relative bargaining power and having to monetise a larger portion of its land bank (259 million sq ft as of June 2014) at discounted valuations, the note added.

Of late, the company has been aggressive in raising capital through CMBS to bring down its debt liabilities and to also improve the quality of debt. It has so far raised Rs 900 crore through this route against its two retail properties DLF Promenade and DLF Emporio. It also announced in August this year that it is planning to raise as much as Rs 5,000 crore (or $820 million) through private placement of NCDs in one or more tranches to augment its long-term resources.

“All this is out of the window now,” said Krishnan ASV, research analyst, Ambit Capital.

A real estate analyst who did not wish to be named said that it is likely to create cash flow problems for the developer in the short run. “This can turn into a spoiler as real estate funds from across the world had started warming up to the Indian market on the back of a majority government at the centre,” he added.

In order to manage its cash flow problems, the options available with the developer is to either slowdown pace of construction or sell unsold inventory at a discount in completed projects.

“DLF’s total non-bank debt amounts to 45 per cent of its total net debt of Rs 19,800 crore as on FY14, refinancing of which may come under pressure. This is the third negative legal development for DLF in the past two months,” said a note sent by Edelweiss on the issue.

Earlier, the Punjab and Haryana high courts had ordered cancellation of allocation of 350 acres of land in Wazirabad, Gurgaon to DLF. Also, recently, the Supreme Court ordered the firm to pay the Rs 630 crore penalty slapped by the Competition Commission of India (CCI) on the developer.

The order also puts a stop to the prospects of the developer to list its income generating assets under real estate investment trust (REITs). Last month, SEBI had released the much awaited REIT and Infrastructure Investment Trusts (InvIT) regulations, which are expected to create new sources of capital for real estate and infrastructure players.

According to HDFC Securities, DLF’s rental portfolio is about 29 million sq ft in size, of which the office space component is made up of 24.8 million sq ft that is operational and 1 million sq ft under construction. The retail or shopping mall portfolio comprises 1.6 million sq ft of completed space and 1.8 million sq ft under construction.

The developer has been working on listing its assets under REITs and it said in its quarterly report that the company plans to raise around Rs 3,000-3,500 crore in the current fiscal year through REIT.

On the SEBI order, Deutsche Bank said that while the order will not materially alter the company’s operations, it will push back any plans for further equity issuance and also postpone value-unlocking in rent-yielding commercial portfolio through REITs.

“This is big news and it will impact entire realty sector and stock negatively. Big giants like HDIL, Indiabulls Real Estate and Unitech may continue southward journey. Investors should stay away from these sectors as of now. Its bit difficult to say how big the correction would be, but we are expecting at least 7-10 per cent downside in the stocks,” said Vivek Gupta, CMT – director research, CapitalVia Global Research Limited.

(Edited by Joby Puthuparampil Johnson)

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