Meeting execution, debt reduction targets key for DLF

Given its track record, cautious analysts are monitoring progress on these fronts

DLF's March quarter performance and near-term negatives added to the woes of the stock, which on an intra-day basis on Wednesday dipped to its lowest level since September last year.

While high debt and the delay in sale of Aman Resorts continues to be the key issue in the minds of its investors, muted cash flows and recent setbacks such as the High Court stay on its Crest project in Gurgaon has not helped matters.

The poor March quarter performance was due to the change in revenue recognition policy, higher contribution from lower margin projects and an exceptional loss. Increase in DLF's debt in the March quarter by Rs 390 crore to Rs 21,731 crore and inability to sell its quota of non-core assets meant the company failed to meet its debt forecast of Rs 18,500 crore by March 2013. Further, operating cash flow was a negative Rs 440 crore for the quarter and Rs 2,020 crore for FY13, according to reseacrh firm Jefferies India.

However, the DLF management has set out three-year goals for its operations and these include a steady state Ebidta of Rs 8,200 crore in three years (FY13 core Ebitda at Rs 2,625 crore), reduction of net debt levels to under Rs 10,000 crore, turning free cash flow positive by FY15 and a significant improvement in return on equity.

On the debt front in the short-term, the management has forecast a reduction to Rs 17,000 crore by March 2014. This is being sought to be achieved by wind/energy equipment divestments, Aman/other divestments and equity issue.

The management expects to close the Aman Resorts deal by the end of June. On the sales front, it has guided for an over eight million sq ft (msf) (worth about Rs 6,000 crore) pre-sales for FY14 (7.23 msf in FY13), a significant chunk coming from its Gurgaon Phase-V projects.

The Street will take notice if the company is able to achieve its guidance on the debt as well as completion of projects. Not all analysts are convinced though.

Jefferies India analyst, Anand Agarwal, says that while management maintained its very bullish medium-term goals, he remains cautious given its poor track record of meeting guidance.

Citi Research, which has a neutral view on the stock, has cut its FY14/FY15 estimates by 19-23 per cent on lower revenue and margin assumptions and dilution post fund raising. While FY13 margins were lower at 33 per cent, the management is targeting a figure of 40 per cent by the end of FY14.