DLF: Room for disappointment

With demand from corporate and residential sectors still weak, revenues and profits could remain under pressure.

More than the sharp fall in revenues and profits of real estate companies, what seems to be worrying the Street is the rise in their indebtedness. That’s one reason the DLF stock closed down 13.5 per cent at Rs 153.20 — an all-time low— on Monday. Despite attempts to conserve cash, DLF’s debt is estimated by analysts to have risen by about Rs1,500 sequentially to just under Rs 15,000 crore. However, the company says it has already repaid Rs 1,000 crore of the short term outstandings of around Rs 5,000 crore that need to be paid by mid-2009, and has arranged for another Rs 3,000 crore.

That’s comforting but according to Citigroup, mounting receivables from DLF Assets Ltd (DAL) —a company owned by the promoters of DLF—of around Rs 5,400 crore, is a worry and ‘enhances risks’. Analysts estimate the net to equity for the company at around 0.63 and 0.82 if receivables from DAL are included. DLF has been restructuring its borrowings such that most of it can be paid over a longer time period. Besides, the average cost of debt, which is a shade under 12 per cent, is expected to come down to single digits over the next year or so.

Meanwhile, the business itself is losing momentum. To begin with, revenues from DAL will taper off because of the lower offtake from the IT sector. While the contract that DLF has with DAL allows for the sale of around 20 million sq ft of space in IT SEZs, only 11 million sq ft has already been sold so far and the remaining area may take longer to be sold than the anticipated 12 months. The management feels it may not be able to sell more than one million sq ft of space or so over the next year and, therefore, some projects have been deferred.

The weakness in the corporate space apart, there aren’t too many buyers in the residential segment either. That was clearly reflected in the sharp 64 per cent sequential fall in DLF’s revenues for the December 2008 quarter—volumes for sales and leases were lower by just over 60 per cent at about 1.7 million sq ft. Nevertheless, the company managed to post operating profit margins that were reasonably strong at 56 per cent, just 270 basis points lower sequentially.

As the management points out, typically margins on rentals would be 100 per cent so excluding that component, operating margins are in the region of 35 per cent.

With a clear shift towards middle-income housing though, margins could trend downwards in the future, especially, since DLF is pricing its new launches competitively. Its recent launch in Hyderabad –priced at between Rs 1850-2200 per sq ft—is understood to be at a discount to the ruling market price.

With margins under pressure, the company’s revenues and profits are expected to fall by around 55 per cent in 2009-10 to around Rs 5,100 crore and Rs 2,100 crore respectively. DLF was probably the only property firm to have launched a product in the December 2008 quarter. That’s not surprising because prospective buyers remain unsure about their salaries and jobs in the current environment. That’s why despite lower property prices and lower interest rates, demand may take its time coming.