Debt reduction holds key for DLF

SC decision is a positive and should enable DLF to raise funds but sluggish housing market weighs on cash flows

The DLF scrip was up about two per cent after the Supreme Court rejected market regulator Sebi's plea to restrain promoters from selling their stake in its rental subsidiary. This will enable the promoters, who have a 40 per cent stake in the rental subsidiary, DLF Cyber City Developers, to sell their stake to third parties.

Analysts estimate the stake to be valued at about Rs 6,500 crore, expected to ploughed back into DLF. With 63.5 per cent of the Rs 22,520 crore of net debt attributable to the rental company, any fund raising which will help reduce debt will be a positive.

DLF added another Rs 940 crore of debt in the September quarter, due to higher expenditure on projects and dividend payouts. Finance costs in the quarter were Rs 706 crore, about 17 per cent higher on both a year-on-year and sequential basis. Interest costs ate away 35 per cent of revenue and were the largest cost item on DLF’s income statement in the quarter. They were 26-28 per cent of sales in the preceding and year-ago  quarters.

Asset sales (DT Cinemas) and investment by the Singapore government’s investment arm, GIC, in DLF’s two projects in Delhi and now the go-ahead for stake sale in the rental subsidiary should help cut the rising debt. However, the company continues to have negative cash flow. Analysts say this will continue for at least another couple of quarters, as demand in its core markets in the National Capital Region is sluggish.

This is borne out by the results over the past few quarters. In the September one, seasonally weak, revenue was below expectation at Rs 1,870 crore, down seven per cent over e year, due to lower sales at the Camelias Phase-V Gurgaon project. However, operating profit at Rs 940 crore was better than expected, with strong rental income and muted sales of lower margin projects. Despite the good operating performance, net profit at Rs 130 crore was held back by higher interest and depreciation costs. The bottom line, thus, was in line with Street expectations.

The company will be focussing on execution and completion, as 65 per cent of its under-construction residential projects will be ready for delivery over the next four quarters. On the commercial side, DLF completed the nearly two-million-square-feet The Mall of India project in Noida. While the mall is 75 per cent leased, analysts at Kotak Institutional Equities expect it to generate about Rs 200 crore annually at 90 per cent occupancy.

While the go-ahead on the rental stake sale is a positive, investors should await meaningful traction in the company's housing sales before taking exposure to the stock.