DLF: Banking on land

Analysts believe that the time may not be ripe for the property developer to start buying land

Even before DLF had won the bid for 350 acres of land in Gurgaon, near New Delhi, Merrill Lynch has said it would be a negative development for the real estate player. The brokerage pointed out that DLF already had a fairly high exposure to Gurgaon and the  project was targetted at the luxury-end, a space in which demand was yet to revive.

Moreover, the accretion to the net asset value would be just Rs 4-8 per share for a project that would be developed over seven years, with a minimum financial outlay of Rs 1,700 crore, which is the price that DLF paid for the land. Since DLF already has a large land bank, the brokerage believes that it’s not really necessary to buy land at expensive valuations.

While Merrill Lynch does have a point, the market  hasn’t taken the development too badly —the DLF stock closed higher in the last two trading sessions. Since April, the stock has gained 129 per cent compared with a rise of 50 per cent for the Sensex. One reason for that is the improving financial health of the company.

Having sold a stake of 10 per cent to a clutch of investors, the promoters are sitting on Rs 3,800 crore of cash, which could be used to buy out private equity investors DE Shaw. At the end of the June 2009 quarter, receivables from DLF Assets were down to Rs 2,600 crore from nearly Rs 5,000 crore at the end of the March 2009 quarter. That has brought down the company’s  net  to around Rs 11,700 crore and consequently, the debt-equity ratio is now  lower at 0.5 times, compared with 0.6 times at the end of March 2009.

DLF’s operating profit margins, in the June 2009 quarter, were reasonably good at 45 per cent. However, net profits, which increased 150 per cent sequentially at Rs 395 crore, came in a tad below expectations. In fact, adjusted for a one-time price reset taken in the March quarter, profits were flat. While there is no doubt some recovery in real estate activity, especially  in the residential segment, it could take a while before demand gets stronger and prices firm up.

DLF posted revenues of Rs 1,650 crore sequentially,  47 per cent quarter-on quarter and reported residential sales volumes of 0.7 million in suburban projects, which was encouraging. Analysts point out, however, that there was little sequential improvement in sales in projects located on the outskirts of cities.

Residential property should start finding more takers once business at IT companies improves and they start hiring in bigger numbers. DLF managed to sell around  2.7 million sq ft of space in the June 2009 quarter and plans to launch around 18 million sq ft this year. Analysts have a price target of between 260-275 for the stock, which currently trades at Rs 382.