 "DLF")
The Street was not too enthused with property major DLF’s September quarter numbers, with the rise in debt, lack of major uptick in sales and delay in the sale of promoter stake in rental subsidiary DLF Cyber City Developers (DCCDL).
The stock shed 1.6 per cent on Monday, to close at Rs 113.1 on the BSE exchange. The results were announced on Friday evening.
These were, however, better than estimates. Revenue at Rs 2,070 crore was 1.5 per cent higher than the year-ago quarter and about five per cent more than consensus estimates. Operating profit and net profit at Rs 1,020 crore and Rs 200 crore, respectively, were unchanged over the year-ago quarter but, again, better than estimates.
The company has indicated some rise in sales for the period preceding November 8 when the note ban announcement was made. DLF had a net sales booking of Rs 305 crore in the quarter (80,000 sq ft), as compared to Rs 200 crore (90,000 sq ft) in the earlier three months. About 80 per cent of the bookings is from its Gurgaon properties. However, it expects some deferment of sales in the near term, given the demonetisation event, with sales picking up subsequently.
Improvement in sales is critical. The company is incurring negative operating cash flow of Rs 500 crore on a quarterly basis. This, says Edelweiss Securities, is expected to continue even after the stake sale in rental assets. This, the brokerage believes, can only happen if there are new launches, which will boost incremental sales.
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The key trigger for the stock, thus, is the stake sale by promoters to investors in rental asset arm DCCDL. The promoters are to sell 40 per cent in the latter to investors for an estimated Rs 10,000 crore; this would be invested back in DLF, to reduce its debt. Given the increase in promoter stake after the issue of new shares (by DLF) beyond 75 per cent, it will undertake a Qualified Institutional Placement or other equity instrument to again bring down the promoter stake below this mark, in line with the law. Promoter holding was 74.95 per cent at the end of the quarter and the current market cap is Rs 20,177 crore. So, it could mean a significantly large infusion, as well as equity dilution.
Given the expectation of the rental transaction and subsequent reduction in debt, most brokerages have a ‘buy’ rating. Analysts at JP Morgan believe pessimism on the stock might be overdone (the scrip is down 21 per cent since November 8), as the rental operation it itself valued at Rs 135 a share. The Street, according to the brokerage, is giving a negative value to the residential operations (to the tune of Rs 10), while giving better valuations to DLF’s competitors, trading at 0.4-1.5 times the price to book value. This is despite the fact that the company’s land bank, as of September, is pegged at 269 million sq ft, of which 83 per cent is part of the development segment (residential), while the rest is of the lease segment.
Given the attractive valuation, JP Morgan estimates the stock will rise till Rs 175. Analysts at Kotak Institutional Equities have revised their estimate on this downward by Rs 20, to Rs 160, given the delay in finalising the pending rental deal, muted reported numbers and increase in debt.
However, not all analysts are on the same page. Edelweiss Securities has a ‘hold’ rating on DLF, with as estimated rise till only Rs 125. It cites the structural slowdown in new house sales and high dependence on the sluggish Gurgaon market. It also believes that the prospects of balance sheet improvement (rental deal) will be negated by equity dilution.
