Rating Rationale

Key Rating Drivers & Detailed Description

Strengths

Strong market position, aided by large, low-cost land bank, and economies of scale

DLF has an established track record in the domestic real estate sector across segments and regions. It is a well-recognised brand, with the most extensive track record among private developers. The large, low-cost, land bank, with a development potential of 187 msf (out of which about 35 msf is identified for development) in prime locations, underpins the strong market position, supports profitability and lends a significant competitive advantage over other real estate developers.

Healthy financial risk profile and financial flexibility

In the development business of DLF, post the transaction with GIC and consequent fund infusion by the promoters, settlement of payables with DCCDL and liquidation of finished inventory, external gross debt has reduced to about Rs 6,000 crore as on June 30, 2021, from Rs 15,500 crore as on December 27, 2017. Majority of the outstanding debt is in the form of working capital/short term or lease rental discounting (LRD). Further, gradual sales of the finished inventory will continue to support cash flow over the medium term. Rental portfolio of 2.1 msf would continue to contribute approx. Rs 250 crore income annually. DLF also has certain projects under development in JV companies, debt for which is not consolidated. While these projects are expected to be incrementally funded out of their collections and sanctioned debt limits, no incremental support from DLF is expected in the near term. Further, management has plans to launch some of the projects in JVs in fiscal 2022.

Financial flexibility is also driven by annual dividend expected from DCCDL. It is supported by a track record of raising funds from national and international investors, banks, and financial institutions, and from the portfolio of leased assets and large land bank. Rental income of DLF, including DCCDL, was Rs 3,258 crore in fiscal 2021 against Rs 3,346 crore in fiscal 2020 and Rs 2,855 crore in fiscal 2018 and Rs 1,550 crore in fiscal 2012. With occupancy of about 89%, the company will continue to generate stable cash flow from these rental assets. Besides, it has annuity income in the form of facilities management and utilities. Outstanding net debt of about Rs 19,072 crore in DCCDL as on June 30, 2021, is primarily LRD in nature, backed by stable rentals, leading to strong debt service coverage ratios. Sustenance of reduced debt and pickup in sales over the medium term will be key rating sensitivity factors.

Weaknesses

Exposure to inherent risks and cyclicality in the real estate industry

Cyclicality in the real estate segment causes fluctuation in cash inflow. As against this, cash outflow towards projects and debt obligation are relatively fixed, resulting in substantial cash flow mismatch. The residential segment has been constrained by weak demand, and bearish consumer sentiment over the past few years. Additionally, the liquidity crisis faced by non-banking financial companies/housing finance companies, led to higher leverage and refinancing needs. The pandemic may cause further disruption and adversely impact cash flows of real estate developers. Pick-up in business environment will be key to increased sales booking of the finished inventory over the medium term. Any decline in pace of sales in the inventory of about Rs 5,200 crore could lower collections and expose DLF to refinancing risk. Further, occupancy levels and rental rates remain susceptible to economic downturns, which could constrain the tenant's business risk profile and rental collections.

Large contingent liabilities and pending litigations

The group has significant contingent liabilities because of matters related to income tax and service tax along with indemnities provided to DCCDL and penalty imposed by the Competition Commission of India in 2011 (for which DLF has already deposited Rs. 630 Cr with Supreme Court towards CCI penalty). As on March 31, 2021, there were income tax demands of ~Rs 6,500 crore, other statutory dues of Rs 650 crore and legal cases of Rs 1,286 crore along with guarantees issues by the company aggregating to Rs 1,020 crore. Most of the matters are longstanding and have shown limited progress and some amounts have been deposited pending resolution. While there has been no crystallisation of liabilities, the matters will be resolved in due course and nonetheless would remain closely monitored.