Rental asset transaction key trigger for DLF

Muted demand, worsened by demonetisation, could take a few quarters to revive

The DLF stock, after falling seven per cent in the two previous trading sessions, recovered slightly on Thursday. The stock was down as the trend of weak sales and rising debt continued into the December quarter. The company reported a 30 per cent fall in revenues over the year-ago quarter to Rs 2,058 crore. While margins remained flat, the net profit, given the poor operational performance, higher interest costs and lower other income, fell 44 per cent to Rs 97.6 crore as against estimates, which pegged it at Rs 110 crore.
 
Though gross sales saw an uptick on a sequential basis to Rs 660 crore due to higher volumes at its Gurgaon Phase V project, given the cancellations and upgrade of Rs 390 crore, net sales came in at Rs 270 crore, down 33 per cent over the year-ago period and 11 per cent sequentially. The company, however, is focused on completing the ongoing residential projects of 18.5 million square feet. This would entail spending Rs 3,500 crore to Rs 4,000 crore over the next few quarters. Given the fact that there are no new launches, muted demand and focus on completing projects, the company expects a cash shortfall of Rs 700 crore to Rs 900 crore per quarter.
 
Further, debt has increased by Rs 1,260 crore in the December quarter and this is high as the figure for the nine months of the financial year stands at Rs 2,860 crore. Given the cash shortfall at the operating level guided by the management, expect the net debt to go up from the current levels of Rs 24,400 crore.
 

The key moving part for DLF is the closure of the DLF Cyber City deal. The management indicated that discussions are at an advanced stage and a final decision is expected to be taken shortly. The transaction could lead to lower debt and save interest costs. For the nine months ended December 2016, on sales of Rs 6,000 crore, interest costs at Rs 2,241 crore were nearly 83 per cent of operating profits. (Operating profit, also known as operating income, is a measure of a company’s efficiency. It is the profit generated from the core business of a company before accounting for interest and taxes. Remember, earnings not directly related to the core business operations are not included when calculating operating profit.) While debt will come down as a result of the rent asset deal it will be at the cost of equity with dilution pegged at 25-45 per cent.
 
In addition to the valuation of promoter stake sale in rental assets, the key triggers, according to Harshal Pandya of Edelweiss Securities, is improvement in the Gurgaon market, a pick-up in overall residential demand and DLF’s new launches. Given the muted demand due to higher prices and demonetisation, chances of a near-term recovery do not look too bright.