DLF: Change in sales strategy

Move to sell more plots boosts revenues and margins; monetisation of non-core assets critical for lowering debt.

Slowing sales of flats and high interest rates are pinching real estate player DLF. The company’s revenues grew 21 per cent year-on-year to Rs 2,450 crore in the first quarter, but fell nine per cent sequentially. The company managed to beat the Street’s revenue estimate primarily due to increased focus on selling plots, say analysts. This has helped the cash conversion, too.

But, there is one interesting trend in last quarter’s numbers. It has done sales booking of 2.2 mn sq ft in Q1FY12, compared to 1.9 mn sq ft in Q4FY11. What’s changed is that 60 per cent of these bookings were of plots. With cost of construction steadily rising over the last one year, the company has opted to protect margins from cost pressures. This is one of the key factors behind the company’s improved revenues and cash generation in FY12. Analysts like the improvement in operating margins, which have returned to earlier levels of 45.4 per cent.

The strategy of selling plots has helped the company improve margins, as it has not had to factor in rising input costs. But the margin improvement has not helped stem the fall in profit after tax, which dropped 13 per cent to Rs 360 crore, due to rise in interest cost by 8.9 per cent sequentially to Rs 496 crore and fall in other income. In Q1, other income collapsed 57 per cent annually to Rs 60 crore.

In the first quarter, debt stayed at the elevated level of Rs 23,900 crore (gross).

Receivables, including unbilled receivables, also remained high. Cash flows are critical as interest outgo has taken away nearly 70 per cent of the operating cash flow generated this quarter. According to JM Financial, “Interest charge now comprises 20 per cent of revenue (vs 15 per cent in FY10 and 18 per cent in FY11) — highest since listing.”

Despite small operational improvements, the Street is not yet re-rating the stock. DLF’s operational cash flow, which improved sequentially to Rs 840 crore, may fall if the company fails to execute non-core asset sale. The company needs to concentrate its efforts on selling more plots and accelerate sale of non-core assets in order to reduce debt and improve cash flows.