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DLF: Slowdown issues overdone? - Views on News from Equitymaster

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DLF: Slowdown issues overdone?
May 2, 2008

Performance summary
  • FY08 sales grow by 440% YoY, aided by strong volume sales of its high-end residential properties. Actual sales figure 12% higher than our estimates.

  • EBIDTA margins expand by 12.1% YoY for the fiscal, aided by lower staff costs and other expenditure (both as percentage of sales)

  • Net profits surge 306% YoY during FY08, aided by a strong topline performance an expansion in operating margins. But for the decline in other income (FY07 other income included a one time sale of property), the bottomline growth would have been even higher. Excluding this one time income, the net profit growth for FY08 stands at almost 800%. Actual profit figure higher by 28% as compared to our estimates.

Consolidated financial snapshot
(Rs m) 3QFY08 4QFY08 Change FY07 FY08 Change
Sales 35,984 43,065 19.7% 26,344 142,287 440.1%
Expenditure 10,970 15,236 38.9% 11,477 44,768 290.1%
Operating profit (EBDITA) 25,014 27,829 11.3% 14,866 97,518 556.0%
Operating profit margin (%) 69.5% 64.6%   56.4% 68.5%  
Other income 528 658 24.6% 14,190 2,652 -81.3%
Interest 788 1,079 36.9% 3,076 2,980 -3.1%
Depreciation 148 362 143.9% 578 785 35.8%
Profit before tax 24,606 27,047 9.9% 25,402 96,405 279.5%
Tax 3,218 4,978 54.7% 6,042 17,534 190.2%
Minority interest 4 (304)   (11) (367)  
Share in associates 57 3   (13) 54  
Profit after tax/(loss) 21,450 21,768 1.5% 19,337 78,558 306.3%
Net profit margin (%) 59.6% 50.5%   73.4% 55.2%  
No. of shares (m)       1,525.8 1,704.3  
Diluted earnings per share (Rs)       11.3 46.1  
P/E ratio (x)         15.6  

What has driven performance in FY08?

For quarterly analysis, we have compared 4QFY08 to 1QFY08, as data for 4QFY07 is not available.

  • DLF’s office and residential space witnessed expansion in margins during the 4QFY08. Under the residential space, the luxury segment witnessed an improvement in margins of over 8% over 1QFY08. The mid income-housing segment started generating revenues for the company during 3QFY08 onwards. This segment earned 36% operating margins during the quarter and contributed to 15% of the company’s total revenues during the fourth quarter. The company’s management stated that they expect the mid-income housing segment to grow faster as compared to the other segments because of the healthy demand.

    Details of DLF's properties
      Offices Retail Residential*
    1QFY08 4QFY08 1QFY08 4QFY08 1QFY08 4QFY08
            Luxury Super Luxury Super Mid Income
    Lease/Sales booked (msqft)
    Opening balance 8.3 13.4 3.2 5.1 4.8 - 5.3 0.4 1.1
    Add: Booked during the quarter 4.3 3.3 0.7 1.9 0.1 0.4 0.2 - 7.7
    Less: Handed over 1.3 0.7 - 0.6 - - 0.2 - -
    Closing balance 11.3 16.0 3.9 6.4 4.9 0.4 5.3 0.4 8.9
    Under construction (msqft)
    Opening balance 25.8 39.8 11.7 11.6 8.5 - 6.9 - 0.55
    Add: New launched 5.1 (0.9) 1.2 0.3 - - - - 4.87
    Less: Handed over 1.3 0.7 - 0.6 - - 0.2 - -
    Closing balance 29.5 38.2 13.0 11.3 8.5 - 6.7 - 5.4
    Rates - For sale business (Rs per sq ft)
    Weighted average rates (sale price) 6,131 9,830 23,292 13,570 7,636 14,548 10,384 - 3,036
    Weighted average land + cons cost 1,793 1,719 5,463 3,521 1,918 2,936 1,744 - 1,956
    Margin (Rs per sq ft) 4,338 8,111 17,829 10,049 5,718 11,612 8,640 - 1,080
    Margin (%) 70.8% 82.5% 76.5% 74.1% 74.9% 79.8% 83.2% - 35.6%
    Rates - For lease business (Rs per sq ft)
    Average rates (lease rate) 49 61 115 220 - - - - -
    Weighted average land + cons cost 1,923 2,000 4,250 8,642 - - - - -
    *Mid income business started in 3QFY08 / Sale of plots not included

    In the office segment, margins improved by 11.8%, from 70.8% in 1QFY08 to 82.5% in 4QFY08. We can observe from the table that the average per square foot lease rates have increased to Rs 61 in 4QFY08 from Rs 49 in 1QFY08 (24% increase).

    In the retail space, which includes sales and leasing of malls and commercial centres, due to correction in the real estate market, DLF witnessed a negative trend in the average square foot prices in the super metros regions (Mumbai and Delhi Metropolitan region) in its sales business. However, in the leasing business, the average rates per square foot have increased by almost two-thirds in the super metro regions as compared to the 1QFY08 rates. Further, the company began earning sales revenue in regions barring super metros in the fourth quarter.

  • In FY08, the operating costs such as cost of revenue and staff costs have both seen a 200 basis points (2%) contraction and the other expenditure, which primarily includes expenses like brokerage, advertisements and government, have witnessed a 9% YoY reduction (all costs are calculated as a percentage of sales). The cost of land, plots and constructed properties has remained flat during the fiscal.

  • DLF recorded a strong bottomline growth during the fiscal, with net profit margin being in excess of 55%. This performance was largely due the strong operational performance and was also aided by reduction in interest costs, depreciation and the effective tax rate.

Land reserves as on 31st March 2008
(msqft) Super metros Metros Tier I Tier II Total
Office 64 70 26 5 165
Retail 33 36 14 9 92
Super luxury 4 - - - 4
Luxury 33 6 1 - 40
Mid income/villas/plots 113 231 73 16 433
Hotel/Convention Centre/Service Appts. 4 2 10 2 18
Grand total 251 345 124 32 752
% of grand total 33% 46% 16% 4% 100%

What to expect?
At the current price of 720, the stock is trading at a multiple of 11.5 times our estimated FY10 earnings. DLF’s management has indicated that while it expects the growth momentum to be maintained going forward (does not foresees any significant reduction in demand in the long run), the biggest challenge for the company will remain securing requisite approvals from the government for purchase and development of land. It has also cited the company’s thrust towards entering the hospitality business, where it plans to set up 20,000 business hotel rooms across India over the next 5 years (in partnership with the Hilton Group). Further, the company has plans to invest in infrastructure ventures like wind energy, power generation and utilities, where investments in excess of Rs 15 bn have been proposed. We maintain our view on the stock from a 2 to 3 years perspective.

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