DLF: Good quarter, debt reduction key trigger ahead

A large part of DLF's sales have come from development of Phase-V in Gurgaon

The DLF stock is up about eight per cent after the company’s June quarter results beat expectations. Consequently, analysts upgraded the stock on strong sales in new launches, as well as attractive valuations. The company surprised the Street with revenues (up five per cent year-on-year to Rs 2,314 crore) and Ebitda (Rs 915 crore down 14 per cent) coming ahead of expectations as compared to the year-ago quarter, given higher revenue recognition from existing projects.

While expenditure was higher, especially construction costs, denting profits, strong sales from higher margin projects helped boost operating profit margins. Though net profit was down 38 per cent year-on-year to Rs 181 crore given higher interest costs and lower other income they were still higher than estimates of Rs 125 crore.

While the June quarter was a good one and the company has gained traction in sales, the key trigger continues to be debt reduction efforts especially sale of Aman Resorts which is expected to fetch Rs 1,700 crore. At the current price, the stock is trading around 14 times FY14 estimated Enterprise Value/ Ebitda. Analysts believe at this price it is trading at a discount upwards of 30 per cent to its FY14 net asset value, which they pegged between Rs 210 to Rs 300.   

Analysts at Motilal Oswal Securities have upgraded their FY14/15 EPS by 7-11 per cent to factor better operating profits from non-core business (hotels) and potential cost savings after divestment of insurance business by the second half of FY14, which currently contributes to an annual loss of Rs 130 crore.

New launches gather steam
Across its various projects, the company achieved gross sales bookings to the tune of Rs 2,430 crore in the June quarter (1.81 million square feet), as against Rs 3,800 crore (7.2 million square feet) in FY13. A large part of the sales have come from development of Phase-V in Gurgaon, comprising of high value luxury projects which include golf course residential project Camellias (Rs 25,000 per square feet) and Crest (Rs 15,000 per square feet).

Though the company has booked strong pre-sales from some of its new projects in Gurgaon, it will take 12-18 months to reflect in its profit and loss statement, given the accounting treatment which recognises such sales after project completion reaches a 25 per cent threshold. “Cash will precede earnings as accounting recognition gets pushed out by four-six quarters,” it says.

Can it meet debt reduction target?
The Street, of course, will keep a keen eye on the progress of DLF’s non-core asset sales programme, with the current year’s target of debt reduction at Rs 4,000 crore. Net debt has declined 6.1 per cent sequentially to Rs 20,369 crore. In addition to the cash flow from projects, the company got Rs 215 crore from the sale of its windmill business during the quarter and Rs 525 crore in July. The company also raised Rs 1,863 crore from its institutional placement programme (IPP) in May. While the company gained momentum in sales in the June quarter, cash flows remain weak. The company generated only Rs 293 crore in operating cash flow in the June quarter and paid out Rs 700 crore in interest payments.

Says Adhidev Chattopadhyay of HDFC Securities, “The company’s net debt reduced by Rs 1,330 crore sequentially, primarily due to IPP proceeds. Ex-IPP (Rs 1,860 crore) the company generated negative cash flow of Rs 500 crore.” In this backdrop, the company’s ability to improve cash flows from operations and speed up the pace of debt reduction (from sale of non-core assets) will be keenly watched by the market.