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The stock of DLF, the real estate major, has shed 13 per cent over the past month on earnings downgrades and an interim order by the Supreme Court (SC) to deposit Rs 630 crore in an antitrust case. A large part of the decline, 7.3 per cent, came in the two days after the SC order on Wednesday. In case the SC approves the full penalty, the company will have to fork out Rs 820 crore, including interest costs. This is about a fourth more than FY14’s net profit of Rs 646 crore.
Edelweiss Securities analysts estimate an impact of Rs 5 on the net asset value/target price of the stock, which they peg at Rs 246. Given the recent fall, it appears the Street has already factored this in. Nevertheless, as and when the judgment is announced, expect the stock to react. The case relates to a suit filed in 2011 by owners of three luxury residential projects of DLF, accusing the company of abusing its dominant position. While a final decision is awaited from the SC and the company says it is confident about the merits of the case, any adverse outcome will be a negative. The Competition Commission of India is also looking at another case related to DLF’s New Town Heights project.
DLF will be hoping for an encouraging response, as this will not only improve its struggling development portfolio but also help it reduce debt, which increased by Rs 538 crore in the June quarter to Rs 19,000 crore. Given the negative cash flows (about Rs 700 crore in the June quarter), if the final SC order is adverse, the debt situation will worsen. Analysts say it will then be difficult for the company to meet its medium-term debt target of Rs 18,500-19,500 crore. Lower cash flows and higher incremental debt led analysts to revise downwards their FY15 earnings’ estimates for DLF by about 15 per cent.
A clear positive in the June quarter, though, has been the performance of its rental assets. On the back of rental income in the quarter at Rs 525 crore, about a third of sales, the company has projected rental income of Rs 2,100 crore in FY15, a year-on-year growth of eight per cent. Though there has not been significant change on the ground level, about half the analysts tracking the stock have a ‘Buy’ call, given the robust revenues from the rental income portfolio, coupled with the expected recovery in sales during the second half of the financial year. The Bloomberg consensus target price of Rs 224 suggests there is an upside potential of 26 per cent from the current levels of Rs 178. While further correction will make the stock attractive vis-a-vis the target price, the key trigger continues to be some traction in residential sales.
