| DLF Limited | ||||||
| Ratings reaffirmed at 'CRISIL AA- / Stable / CRISIL A1+ ' | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings on the bank facilities of DLF Ltd (DLF).
DLF recorded sales of Rs 3,084 crore in fiscal 2021, the highest in the past five fiscals, despite the first quarter being severely impacted by the Covid-19 pandemic. For the first nine months of fiscal 2022, sales have improved further to Rs 4,544 crore, driven by launches, liquidation of inventory and realisation of past receivables. This, along with an evolving business model wherein DLF would continue to pursue short-cycle residential and commercial projects, should help sustain the sales momentum.
Liquidation of finished inventory of Rs 4,100 crore along with receipt of pending receivables of around Rs 3,800 crore from sales that have already been made will provide further stability to the cash flow and maintain debt at reduced levels. The cash flow of DLF would also continue to be supported by the dividend income received from DLF Cyber City Developers Ltd (DCCDL; rated ‘CRISIL AA/Stable’; joint venture [JV] of DLF with GIC; DLF has two-third stake in DCCDL), the rental arm of the group.
The ratings continue to reflect the strong business risk profile, improving financial risk profile and healthy financial flexibility of DFL. These strengths are partially offset by susceptibility to risks and cyclicality inherent in the real estate sector along with large contingent liabilities and pending litigation. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of DLF and its subsidiaries and associates because of their strong operational and financial linkages. Furthermore, CRISIL Ratings continues to moderately consolidate DCCDL to the extent of economic incentive it draws. With the settlement of assets and inter-party payables between the two entities in fiscal 2020, the debt and cash flow of DCCDL remain ring-fenced. Both the entities have an independent management, with no cross-guarantees/securities provided by either (except for a few specific assets, where the underlying land is with DLF); GIC has some affirmative rights for decisions taken at DCCDL. CRISIL Ratings continues to factor in the dividend that DLF would receive from DCCDL on account of its shareholding in DCCDL.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
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 million square feet (msf; out of which about 35 msf is identified for development) in prime locations, underpins the company’s 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 reduced to Rs 4,755 crore as on December 31, 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). Furthermore, gradual sales of the finished inventory will continue to support the cash flow over the medium term. Rental portfolio of 2.1 msf would continue to contribute approximately Rs 250 crore 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 own collections and sanctioned debt limits, no incremental support from DLF is expected in the near term. Furthermore, the management has plans to launch some more projects in JVs over the medium term – some have already been launched in fiscal 2022.
Financial flexibility is driven by annual dividend expected from DCCDL. This 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, stood at Rs 3,258 crore in fiscal 2021 against Rs 3,346 crore in fiscal 2020, 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 Rs 19,259 crore in DCCDL as on December 31, 2021, is primarily LRD, 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 fluctuations 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 is 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 Covid-19 pandemic may cause further disruption and adversely impact the cash flow of real estate developers. Pick-up in the business environment will be key to increased sales of the finished inventory over the medium term. Any decline in the pace of sales in the completed inventory of Rs 4,000 crore could lower collections and expose DLF to refinancing risk. Furthermore, 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 (CCI) in 2011 (for which DLF has already deposited Rs 630 crore with the Supreme Court towards the 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 issued 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. |
Liquidity: Strong In the development business under DLF, liquidity is supported by cash and bank balance of Rs 1,535 crore as on December 31, 2021. Utilisation of bank lines (available sanctioned limit of Rs 2,373 crore) averaged 92% over the 12 months ended June 30, 2021. Financial flexibility is supported by a track record of raising funds from national and international investors, banks and financial institutions and from a portfolio of leased assets and a large land bank. Cash accrual, cash and equivalents and unutilised bank lines should be sufficient to meet the debt obligation as well as incremental capital expenditure (capex) and working capital requirement. For the rental business under DCCDL, cash accrual is healthy, backed by a steady rental portfolio and amortised repayment structure of the debt. CRISIL Ratings continues to factor in the annual dividend that DLF will receive from DCCDL to further cushion liquidity.
ESG profile The environment, social and governance (ESG) profile of DLF supports its strong credit risk profile.
The real estate sector has a significant impact on the environment as a result of high emissions, waste generation and impact on land and biodiversity. The impact on social factors is indicated by labour-intensive operations and safety issues on account of construction-related activities.
DLF has an ongoing focus on strengthening various aspects of its ESG profile.
Key ESG highlights:
There is growing importance of ESG among investors and lenders. The company’s commitment to ESG principles will play a key role in enhancing stakeholder confidence given its high foreign portfolio investor shareholding and access to capital markets. |
Outlook Stable DLF will continue to benefit from its strong market position and is likely to generate healthy cash flow through liquidation of inventory in the absence of any large, debt-funded capex and pursuit of short-cycle projects. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company DLF is one of the oldest and largest real estate companies in India. It has a diverse asset portfolio across the real estate segment and is further expanding its presence across the country. The company has experience in developing real estate projects across business and customer segments.
DLF, on a standalone basis, will continue to focus on value and premium housing (independent floors) and commercial projects in the near term, which are short gestation projects. The company has launched multiple such projects in the Gurugram market; these projects have been well received. An aggregate of 15-20 msf is planned across Gurugram, Chennai and the tricity area (Chandigarh, Panchkula and Mohali). A few commercial projects in a similar build-and-sell model would also be pursued.
For the nine months ended December 31, 2021, DLF reported profit after tax (PAT) of Rs 1,100 crore on operating income of Rs 4,170 crore against Rs 616 crore and Rs 3,702 crore, respectively, for the corresponding period of the previous fiscal. |
Key Financial Indicators- DLF (consolidated*)
*The financials are as per company reported consolidated financials for DLF and include gains from DCCDL as per JV accounting. ^ DLF has recognised a deferred tax asset reversal of Rs 1,916 crore during the fiscal on account of opting a change in tax regime. |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
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Annexure – List of entities consolidated
*as on March 31, 2021 |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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