While delayed projects and higher cash outgo were negatives in the December quarter, ability to increase sales and reduce debt are key triggers for its stock
DLF shares were down about 3 per cent after the company announced a marginal drop in net profit year-on-year to Rs 466 crore for the December quarter on the back of higher interest and depreciation. Revenues were up 22 per cent over the year ago quarter (due to better mix and pricing) and 5 per cent sequentially (due to higher volumes). Ebidta margins at 47.5 per cent were higher both year-on-year and sequentially, due to reduction in costs. The key negatives for the company in the quarter according to Religare analysts Suhas Harinarayanan and Arun Aggarwal were lower sales volumes (year-on-year) and a delay in repaying debt.
While stocks across the realty space are trading at significant discounts to their net asset values (including DLF), analysts feel that the demand continues to be a question mark due to rising interest rates and property prices as well as RBI’s hawkish stance on the sector.
The DLF management is also cautious on account of higher inflation which might lead to tighter liquidity management, higher borrowing costs and commodity and labour price inflation. That apart, any adverse outcome over the additional Rs 1,200 crore income tax demand raised by the IT department could impact DLF’s financials. All these are likely to weigh on the stock.
May miss sales target
The company booked sales of 2.48 million square feet in its development (residential units) business with only a single launch in the quarter on account of approval delays. The company has marked out a new sales plan of 8 million square feet spread over 6 projects in the March quarter, (over 60 per cent relates to plot development in Chandigarh/Gurgaon) and this should improve its business volumes.
Given its target of reaching 12 million square feet on new sales for FY11 and the fact that it has achieved 6.5 million square feet in first nine months of the fiscal, the company may miss this target. While DLF has said it would be able to meet its targets as delayed approvals have resulted in lumpiness, analysts are sceptical about how much of it will get captured in the March quarter.
On the other hand, the leasing business has seen steady volume momentum (rentals were flat) in the last two quarter. While the office leasing space has seen a pickup in demand, the company believes that the retail leasing space will take 2-3 quarters to improve on volumes as well as the pricing front.
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| In Rs cr | Q3FY11 | % chg y-o-y | % chg q-o-q | FY11E | FY12E |
| Revenues | 2,480 | 22.0 | 5.0 | 10,516 | 11,746 |
| Ebitda | 1,178 | 40.0 | 27.0 | 5,132 | 5,831 |
| Ebitda margin (%)* | 47.5 | 590 | 830 | 48.8 | 49.6 |
| PAT | 466 | — More From This Section | 11.0 | 2,412 | 2,990 |
| P/E (x) | — | 15.8 | 12.5 | ||
| * margin change in basis points Source: Deutshce Bank, Religare Securities | |||||
Cash outflow, higher debt
The company’s cash flows in the quarter were impacted due to acquisition of land at a cost of Rs 500 crore, dividends and preference capital redemption. The company says that the debt reduction has been delayed due to strategic investments, slower execution and delayed new launches. The company however, believes that cash flows going ahead will improve as the full impact of its Alameda project sales (Gurgaon) are felt in the March quarter. Further it is pinning its hopes on new launches as well as a pickup in project execution (impacted due to monsoons, labour shortage on account of Commonwealth Games) to improve the cash flow situation. Net debt has increased by about Rs 800 crore sequentially to Rs 20,694 crore with net debt - to - equity ratio going up to 0.82 from 0.77 in the September quarter. However, the company has repaid the bulk of its mandatory debt of Rs 2,890 crore for FY11 with about Rs 210 crore to be repaid in the March quarter. The company is targeting a debt - to - equity ratio of about 0.6 times in 2011-12 from sale of non-core assets as well as higher operational cash flows.
Valuations
Going ahead, DLF’s ability to increase sales volume, reduce its debt and improve its cash flows will be the key monitorables. At Rs 220.80, the stock is trading at 12.5 times its 2011-12 earnings per share of Rs 17.5. Analysts attribute a NAV of Rs 340 to the stock which at the current a price translates into discount of over 54 per cent. While the stock is appears to be trading at attractive levels, most analysts have cut their targets (to Rs 260-325 levels) on account of the sluggish residential market. And, given the tough macro environment, the stock is unlikely to move up in the near-term.