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DLF: Down and out - Views on News from Equitymaster
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DLF: Down and out
Feb 2, 2009

Performance summary
  • Revenues drop by 62% YoY during 3QFY09, 10% YoY during 9mFY09. Business impacted by a sharp drop in incremental sales and new leasing volumes.
  • Operating margins contract by 13% YoY to 56.5% during 3QFY09. Erosion on account of higher staff and other expenditure (as percentage of sales).
  • Net profits decline by 69% YoY during quarter, lower by 21% YoY for 9mFY09.
  • Total developable area stands at 751 m square feet (msqft) at the end of 3QFY09, as compared to 753 msqft at the end of 2QFY09.


Consolidated financial snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Sales 35,984 13,667 -62.0% 99,221 89,217 -10.1%
Expenditure 10,970 5,947 -45.8% 29,532 35,882 21.5%
Operating profit (EBDITA) 25,014 7,720 -69.1% 69,689 53,335 -23.5%
Operating profit margin (%) 69.5% 56.5%   70.2% 59.8%  
Other income 528 1,361 157.7% 1,994 2,676 34.2%
Interest 788 938 19.1% 1,901 1,948 2.5%
Depreciation 148 788 431.6% 424 1,839 334.2%
Profit before tax 24,606 7,356 -70.1% 69,358 52,224 -24.7%
Tax 3,218 537 -83.3% 12,556 7,116 -43.3%
Minority interest 4 (20)   (63) (202)  
Share in profit/(loss) of associates 57 (90)   51 (204)  
Profit after tax/(loss) 21,450 6,708 -68.7% 56,790 44,701 -21.3%
Net profit margin (%) 59.6% 49.1%   57.2% 50.1%  
No. of shares (m)         1,702.7  
Diluted earnings per share (Rs) *         39.0  
P/E ratio (x) *         4.1  
* On a trailing 12-months basis

What has driven performance in 3QFY09?
  • DLF’s revenues declined by 62% YoY during the quarter. As per the management, it attributes this drop on account of lower incremental sales and leasing volumes. It may be noted that during the quarter there were cancellations of pre-leases as well. As for its 9mFY09 performance, the company’s revenues and profits declined by 10% YoY and 21% YoY respectively.

  • Revenues from DLF’s biggest client, DAL (DLF Assets) also slowed down on account of reduction in demand for office space. During the quarter, DAL contributed to nearly 44% of total income (sales plus other income) as compared to 56% in 3QFY08. Going forward, the management believes revenues from DAL will remain insignificant in the next few quarters.

  • DLF’s operating margins contracted by 13% YoY during 3QFY09. While the cost of land reduced (as a percentage of sales), all the other expenditure heads witnessed an increase over the corresponding quarter in the previous year.

  • On account of lower demand, the company has resorted to lowering prices and rental rates. In its residential space, the average rates of apartments dropped by 41% YoY. As such, margins in the same space decreased by 30% YoY to 33.7%. Data for other divisions i.e. plots and town house for 3QFY08 is not available. It may be noted that the margins in the residential segment have been lower on account of higher mid-income housing sales.

  • In the retail segment, the average price (sales) dropped by 33% YoY, while lease rates dropped by 34% YoY. However, margins of retail division (sales) dropped by a mere 1% YoY. In the office segment, average prices (sales) dropped by 13.3% YoY, while margins dropped by 2.3% YoY. However, DLF still enjoys high margins of 78.5% in this segment. Lease rates in the office space increased by 18.6% YoY, which is a positive sign for the company.

  • During 3QFY09, DLF recorded a 69% YoY decline in profits, mainly impacted by its poor operating performance. The company clocked a net profit margin of 49.1% during the quarter (59.6% in 3QFY08).

What to expect?
At the current price of Rs 161, the stock is trading at a multiple of 4.1 times its trailing 12-month earnings. In the conference call, the management mentioned that it has suspended work on more than a quarter of its commercial projects in a bid to save costs as demand for homes and offices have slowed down. It further added that projects will remain suspended until its finances and demand improves. DLF’s management also mentioned that it is looking to restructure its debt by substituting Rs 40 bn short-term debt with long-term loans. This restructuring is scheduled to be complete by mid 2009. The company plans to take these secured loaned against assets.

As per the company, receivables from DAL are still in excess of Rs 22.5 bn. The company has a debt on book worth Rs 150 bn. DLF’s management stated that DAL is currently looking to raise funds to the tune of Rs 25 bn from various sources, which is likely to happen soon. In addition, the company has also suspended future sales to DAL.

Due to the rough times, DLF is currently working on various cost cutting measures. These measures also include sale of assets, which can include selling off its non-core segments such as the windmill and utility business. It will also look to sell excess land as well. As per the management, the company’s focus will now shift towards asset profile.

Going forward, the company remains hopeful that is mid-income housing and affordable housing segment will contribute significantly to the revenues. In fact, its new launches will most consist of residential projects. As per the management, DLF is looking to launch houses in the range of Rs 20 lakhs to 25 lakhs (Rs 2 m to Rs 2.5 m) in select cities and suburbs to test the markets. However, it may be noted that this could further bring down the company’s margins.

We have held back a view on DLF given the increased complexities in its balance sheet. We accept the fact that we made a mistake in recommending a ‘Hold’ on the stock in December 2007 at Rs 1,021. The stock has crashed almost 87% since then. While we have a ‘no view’ on the stock at this point in time, we shall continue to provide you updates on the company.

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