DLF: Demand recovery a few quarters away

Fall in revenues in the June quarter was due to lack of new launches, weak demand and lower realisations

DLF had a weak June quarter, with revenues coming below estimates of Rs 2,000 crore at Rs 1,724 crore, down 25 per cent year-on-year (y-o-y). The company has not launched a new project since the June 2013 quarter and its pre-sales of 0.38 million sq ft worth Rs 308 crore is its lowest ever. Average selling price at Rs 7,995 a sq ft, though up 13 per cent sequentially, was also down 40 per cent y-o-y and were marginally lower than estimates. Muted demand across the country and the management's focus on luxury projects in a slowing Gurgaon market (accounts for half of its sales) has led to the cap on launches. The management believes that the market continues to be challenging and it will take a couple of quarters for the situation to improve. For now, it has guided for flat growth in sales bookings of Rs 3,000-3,500 crore for FY15.

On the flip side, while luxury projects and lower material and employee expenses helped margins, these also got a boost from higher annuity income. Thus, margins improved by 310 basis points y-o-y to 42.7 per cent, pushing operating profit to Rs 737 crore against estimates of Rs 600 crore.

Net profit, too, came higher at Rs 127.6 crore (estimate of Rs 100 crore) due to lower interest costs and lower tax rate, even as DLF booked exceptional expense (net impact Rs 35 crore). While sale of Aman Resorts helped lower interest costs, the tax rate was down 10 percentage points to 21 per cent.

However, given weak sales, DLF's debt has increased by Rs 540 crore to Rs 20,700 crore. Analysts at Kotak Securities believe unless the company raises equity or makes a large asset sale, debt is likely to increase by Rs 600-900 crore in FY15. The company's free cash flow was negative at Rs 770 crore in the quarter. However, factoring in upcoming launches, analysts expect an improvement in its cash flows, as the second half is typically better than the first. The company has indicated that debt will be range-bound (at these levels) as things stand now but the situation will improve if sales go up.

While residential sales are sluggish, DLF's rental assets are in better shape. The company leased 0.71 million sq ft of space in the June quarter, much higher than 0.59 million sq ft in the March quarter and 0.4 million sq ft in the year-ago period. With rental income in the quarter at Rs 525 crore (30 per cent of sales), the firm has projected rental income of Rs 2,100 crore in FY15, a y-o-y growth of eight per cent.