DLF: Higher sales momentum key

Improved sales in NCR will help improve cash flows, reduce debt

The DLF stock fell 10 per cent over the past week on earnings downgrades by brokerages. The downgrades resulted from worries over weak absorption and possible price correction in the key National Capital Region (NCR) market.

The company’s FY15 earnings have been downgraded by 15 per cent after the June quarter results due to lower cash flows, higher incremental debt and legal worries. However, the recent downgrades are steeper. BNP Paribas cut DLF’s FY15/FY16 earnings by 46 per cent, with a target price of Rs 146. The stock is currently trading at Rs 156.

BNP Paribas cites lack of major catalysts in the near-term, with weak operational data, potential negative news flow from legal cases and limited upside on its return on equity among as reasons for its bearish view.

The Supreme Court ordered the company to deposit Rs 630 crore in an anti-trust case. Later, the Punjab and Haryana High Court ordered the Haryana government to cancel allocation of 350 acres in Gurgaon to the company.

The key issue continues to be the sluggish volumes in its core market of Gurgaon-NCR. DLF has not launched a new project since June quarter of 2013 in Gurgaon and its pre-sales in the recently concluded quarter was its lowest ever. Analysts believe unless the company changes its product mix, the higher proportion of sales in the mid to premium-end category where the inventory is the maximum will translate to a slower absorption rate.

The company is, however, hoping that new launches this festive season will boost residential sales, improve cash flows (which were negative Rs 700 crore at the end of June quarter) and help prune its debt of Rs 19,000 crore. What is encouraging is its rental portfolio which at Rs 525 crore contributed to a third of sales in the June quarter. Analysts expect rental sales to be a sizeable Rs 2,100 crore in FY15, growing at eight per cent year-on-year.

While analysts believe that the upside from possible real estate investment trust is some time away, given lack of regulatory clarity, the company’s reported move to buy out 40 per cent in DLF Assets it does not own is a positive and will enable it to list the rental assets, thereby unlocking value as well as lowering its debt.

While the biggest near-term trigger will continue to be traction in residential sales, any price correction might hurt profitability.