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DLF recovered smartly at the bourses on Friday after a knee-jerk reaction to its June quarter results announced a day earlier. India's largest realty firm posted a profit of Rs 127.77 crore for June 2014 quarter, as compared to Rs 181.19 crore in the same quarter last year, translating into a fall of 29%.
Its income from operations fell from 25% from Rs 2,314 crore to Rs 1,725 crore on year-on-year (y-o-y) basis. The company expects market situation to remain challenging in the short-term.
Though DLF opened nearly 4% lower, the stock recovered as the markets read into the fine print of the numbers. Despite lower sales and profits, DLF saw an improvement in operating margins, which improved to 43% during the recently concluded quarter as compared to 35% earlier.
Though reported profits at nearly Rs 128 crore are 29% lower than last year, they are ahead of analyst expectation of Rs 102 crore. Another positive surprise in the numbers is the sharp reduction in its interest outgo. Interest payment outgo came down down to around Rs 591 crore from nearly Rs 558 crore during the June quarter. The reduction in interest payment looks even better if one looks at the outgo of the previous quarter which stood at Rs 629.67 crore.
Sandipan Pal of Motilal Oswal believes that the commercial mortgage backed security (CMBS) issuance of Rs 900 crore at a rate of 10.9% played a part in reducing the interest outgo. DLF, during the quarter privately placed the CRISIL AA (SO) rated CMBS of DLF Emporio and DLF Promenade with institutional debt investors, mutual funds and insurance companies.
Subdued Sales
Despite success on the finance front, DLF has not been able to improve real estate sales in absolute terms. In fact according to Sandipan Pal first quarter presales was the lowest ever at a level of 0.38 million square feet (msf) valued at Rs 310 crore as compared to 0.44 msf in the sequential quarter which was also valued at Rs 310.
Higher margins and realisation during the quarter was on account of sale of luxury projects like Kings Court and Camellias in the NCR region which accounted for 45% of presales. Among the other contributors to presales were projects from Hyderabad, Indore and Bhubaneswar.
There was, however, some good news on the leasing front. The company managed to lease out 0.71 msf (million square feet) as compared to 0.6 msf in the previous quarter. Most of the leasing took place in malls in Gurgaon, Chennai and Delhi.
Non-core assets
DLF continued with its sale of non-core assets. Realisation from divestment of non-core assets stood at Rs 240 crore during the quarter ended June. Over the last three years, the company has sold luxury hospitality chain Aman Resorts, insurance and wind energy ventures.
Sandipan Pal in his report on the DLF’s quarterly performance feels that while concerns over leverage have moderated, weakness in operations remains overhang. Management too is presenting a cautious picture and expects market to be challenging and demanding in the short term.
Pal however, feels that improving macro outlook and various positive developments in policy front should offer big benefits to the stock on leverage play.
Analysts at Kavy maintain a BUY recommendation on the stock and a SOTP (some of the parts)-based target price of Rs 240/share.
“Our valuation is based on 0.77x our end-FY15E NAV forecast. We believe that the near-term catalysts are: (i) Success of new launch; (ii) Balance sheet deleveraging; and (iii) Margins improvements. Key risks include: (i) Unaffordability may lead to 8-10% real estate price correction; (ii) CAPEX persistence (iii) adverse ruling on tax demands,” they said in a result review report.
