The Indian property market went through a bull run in the last decade, with prices in most major cities sky-rocketing. However, fortunes of the country’s largest property developer DLF have been less than spectacular over this period.

The company’s share price, which crossed ₹1,000 per share in early 2008, trades at around ₹175 now. It is also saddled with a huge debtof ₹19,000 crore.

What could have caused this wide gap in performance between the country’s property market and that of its largest real estate developer?

Tangled all the way Since its blockbuster IPO in 2007 in which over ₹9,000 crore was raised, DLF saw its debt balloon, revenues fall, profits shrink and cash-flows dry up.

While revenue de-growth can be attributed primarily to the economic slowdown, DLF has itself to blame for its troubles.

One reason why the company’s borrowings increased was its forays into capital-intensive expansions. It entered the hospitality segment, acquiring a controlling stake in Singapore-based Aman Resorts in November 2007, for around $400 million.

The company also diversified into non-core activities such as wind and other power business, at an investment of ₹1,000 crore in 2007.

Second, expansions planned in southern cities faced hurdles. For instance, DLF won the bid for a 9,300-acre township project in Bidadi, near Bangalore, in 2007 and invested ₹400 crore.

But it exited the project in 2009, because of poor ‘market sentiments’. The company’s Chennai venture too did not take off as expected and witnessed an exodus of buyers following delays in launching and a drop in market prices.

Developing cracks Meanwhile, cracks were also developing in its core market of Gurgaon.

DLF had to face irate buyers who took the company to court over ‘unfair trade practices’ such as one-sided contracts.

Additionally, long delays in getting clearances, which led to slips in completion deadlines, resulted in cost escalations and dampened buyer sentiments.

The slowdown in the booming Gurgaon market precipitated a steep drop in sales.

The company sold only 0.07 million square feet (msf) in its two Gurgaon projects in the first quarter of 2014-15, against 1.13 msf sold in the same period last year.

DLF’s total debt ballooned from ₹12,000 crore in March 2008 to a peak of ₹24,000 crore in March 2011.

Due to slowing sales, cash collections dropped from ₹8,624 crore in 2009-10 to ₹1,467 crore in 2013-14.

Net profit dropped 87 per cent in this period and interest expenses quadrupled to ₹2,463 crore.

This has led to its interest cover, a measure of the company’s ability to service debt, falling to precarious levels of 1.5 times in 2013-14, from 3.5 times in 2009-10.

Legal overhangs Interest outgo is around 30 per cent of sales, double the levels seen in 2009-10.

Interest expenses increased 6 per cent to ₹2,463 crore in 2013-14 compared to a year ago, even as debt levels fell, due to higher cost of borrowing.

Additionally, there are regulatory and legal overhangs. Especially, the case pending with the Supreme Court relating to a Competition Appellate Tribunal (COMPAT) verdict requiring the company to pay a fine of ₹630 crore in a case filed by flat buyers is a cause for concern.

Also, delays in its ongoing projects, such as the recent notice to stop construction on its Mall of India due to environmental clearance issues is something to watch for.

Notable exits But to the company’s credit, it has been taking these issues in stride and attacking the debt issue from multiple fronts. One, it sold its various non-core assets such as wind projects last year.

Its wind-related assets fetched around ₹400 crore.

The company’s stake in luxury hotel chain Aman Resorts was sold back to its founder for $300 million. DLF also exited many SEZ parks it co-owned. Some notable exits include sale of an IT SEZ in Pune to Blackstone for ₹810 crore (DLF’s share was 67 per cent) and a 71 per cent stake sale in the Noida IT park.

Second, the company has a sizeable land bank with a development potential of 307 million sq ft (msf) and it has been monetising this asset.

For instance, in 2012, DLF sold a prime land parcel to Lodha Developers for ₹2,727 crore and land in Hyderabad in 2013 for ₹650 crore.

Also, DLF has been working on reducing its interest costs by tapping other fund sources. Promoter’s stake was reduced to 75 per cent — to comply with the SEBI guidelines — in 2012, raising ₹1,863 crore through fresh issue of over 8.1 crore fresh shares.

The company recently raised ₹900 crore at 10.9 per cent interest rate by issuing Commercial Mortgage Backed Securities, backed by its Emporio and Promenade mall assets. Shareholders recently approved raising ₹5,000 crore through private placement of non-convertible debentures.

The company has property worth around ₹4,000 crore and construction work in progress is over ₹13,000 crore.

As the economy picks up and home affordability improves, real estate developers such as DLF will likely see a pick-up in their sales and collections, says Sreenivasa Prasanna, Senior Director, Corporate Ratings, India Ratings and Research.

Rent-producing assets Also, DLF’s annuity income from commercial rent-yielding assets such as offices and malls has been improving. In 2013-14, the company leased 1.5 msf and its rental income was ₹1,950 crore.

Still, the company’s recent quarter presentation indicated that net debt will continue to stay at around the current levels in the short term.

The debt attributable to the development arm is expected to reduce, but debt associated with its rent-producing assets will continue to increase due to capital expenditure in ongoing projects.

These can, however, benefit from the launch of Real Estate Investment Trusts (REITs), which can ease the monetisation of these commercial rent-producing assets.

(With inputs from Navadha Pandey)

(This is the last in the series on how companies are managing debt to gear up for better times.)