The worst seems to be over for DLF

With new properties in its leasing business, analysts estimate rental income to nearly double to Rs 2,600 cr in two years

For DLF, highest valued real estate company, the scenario seems to be improving.

After the company was listed in mid-2007, its stock rose to an all-time high of Rs 1,225 in January 2008. However, since January 2010, it has traded in a range of Rs 170-270.

Recent moves should lead to an improvement in performance and financials. Unlike in the recent past, when it was focusing on plotted sales to improve working capital management (which didn’t yield substantial results), in the last three months, the company signed non-core asset sale deals. These included selling land in Mumbai to the Lodha group in 2012 and the sale of Aman Resorts and the windmills business. These steps would help reduce net debt by Rs 5,200 crore.

DLF is among the 30-odd private companies in which promoter holding is more than 75 per cent (it stands at 78.5 per cent). According to a Securities and Exchange Board of India mandate, promoters of private companies have to reduce their holding to 75 per cent by June. To ensure it complies, DLF plans to issue fresh shares, possibly next month.

At the current stock price of Rs 270, this would help raise Rs 1,650 crore. Analysts say the company also plans to raise additional funds (Rs 3,000-4,000 crore) through a second equity sale, probably after valuations improve. Through the three deals and first tranche of equity issuance, net debt would fall from Rs 26,000 crore in September-end 2012 to Rs 19,000 crore by June-end.

To optimise land value, rather than volumes, the company is also focusing on improving sales/execution, especially of high-value properties. So, even as sales volumes could remain muted (revenues, too, due to a change in the revenue recognition method for real estate companies), average realisations and margins are expected to increase from FY14, owing to a change in the strategy. With the commissioning of new properties in its leasing business, analysts estimate rental income (steady at Rs 1,300-1,600 crore) to rise to Rs 2,600 crore in two years, adding to overall revenues and profits.

For four years, net profit had declined, as revenue came under pressure and interest cost mounted. Debt levels have consistently risen since FY08, It stood, as mentioned earlier, at Rs 26,000 crore in September-end 2012. Owing to the change in strategy and fall in debt, analysts expect net profit to rise from FY14 — estimates for FY14 range from Rs 1,300 crore to Rs 1,900 crore, compared with the estimated Rs 900-1,000 crore for FY13.

These factors are expected to help DLF generate free cash flow into equity in FY14, analysts say. Free cash flow into equity is arrived at after considering all expenses, debt repayment and investments to secure growth. Rising free cash flows, along with the second tranche of equity issuance, are likely to lead to net debt falling to Rs 13,000-14,000 crore through the next two years.

Demand, however, remains a key risk. Owing to slowing economic growth, demand has been weak across most cities. For DLF, which aims to focus on value, analysts see annual volumes at eight to nine million sq ft, compared with an average of 12 million during FY09-12.

If demand contracts significantly, it would take more time to reflect the gains. FY14 gross domestic product estimates point to a recovery in business activity.

Hopes  abound that the Reserve Bank of India would cut policy rates by 50-75 basis points this year. Both developments would be crucial to supporting demand and market sentiment. Broadly speaking, for DLF, the worst seems over. This is also being reflected in the company’s stock price, up 20 per cent so far this year. Hence, investors planning to buy the stock could wait for a correction.