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DLF: Low base effect paints a rosy picture - Views on News from Equitymaster

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DLF: Low base effect paints a rosy picture

May 17, 2010

DLF announced FY10 results. The top-line and bottom-line registered a strong y-o-y growth while on a sequential basis the results were disappointing. Here is our analysis of results.

Performance summary
  • Topline registered 78% YoY growth during 4QFY10 on the back of strong sales booking and low base effect. On a sequential basis revenues declined by 2%.
  • Operating margins stood at 50% during 4QFY10 on account of decline in expenditure as a percentage of sales. On a sequential basis operating profits expanded by 19% YoY in 4QFY10.
  • Net profits registered 168% YoY growth in 4QFY10 due to lower base effect. However, on a sequential basis net profits declined by 9% due to higher interest and tax expenses
  • Total developable area stands at 416 msqft at the end of the quarter as compared to 430 msqft at the end of the preceding quarter.

Consolidated financial snapshot
(Rs m)  4QFY09    4QFY10   Change  FY09    FY10   Change
Sales 11,223 19,944 77.7%   100,354 74,209 -26.1%
Expenditure 9,677 9,944 2.8% 44,310 39,197 -11.5%
Operating profit (EBDITA) 1,546 10,000 546.9% 56,044 35,012 -37.5%
Operating profit margin (%) 13.8% 50.1%   55.8% 47.2%  
Other income 2,291 1,518 -33.8%        3,960            4,333 9.4%
Interest 1,625 3,147 93.6%        5,548 11,075 99.6%
Depreciation            516 947 83.4%        2,386            3,246 36.1%
Profit before tax 1,695 7,424 337.9% 52,070 25,024 -51.9%
Tax -2 2,362   6,873 6,957 1.2%
Minority interest           (100) 28   (275)      98  
Share in profit/(loss) of associates   (7) 47   (211)        5  
Prior period items    - (873)              (14) (870)  
Profit after tax/(loss) 1,591 4,264 168.1% 44,696 17,300 -61.3%
Net profit margin (%) 14.2% 21.4%   44.5% 23.3%  
No. of shares (m)                    1,698
Basic earnings per share (Rs) *         10.2  
P/E ratio (x) *         29.3  
* On a trailing 12-months basis

What has driven performance in 4QFY10?
  • DLF registered a 78% YoY growth in revenues during 4QFY10, however during FY10, revenues dropped by about 26% YoY. The company booked nearly 3.6 m sqft of property in its developmental business (residential and commercial complexes), as compared to 3.1 m sqft recorded in the preceding quarter. Under the annuity business, DLF booked 0.69 m sqft as compared to 0.42 m sq ft in 3QFY10. DLF currently has 39 m sqft of area under construction in its development business and 17 m sq ft in the annuity business.

  • On a YoY basis, DLF witnessed a good jump in realizations for its developmental business, particularly in the residential segment. However, on a sequential basis, the realizations in the residential segment declined by 28%. The company did not sell any commercial space in its developmental business during the quarter. Margins in its residential business stood at 54% during the quarter. As for the annuity business, the average lease rates in the office segment dropped by 42% on a year on year basis.

  • During 4QFY10, DLF’s operating profits increased 5 fold on a YoY basis. Operating margins stood at 50% as compared to 14% in 4QFY09. Despite the strong growth in operating profits, net profits increased by 168% YoY mainly due to burgeoning interest cost and rise in tax rates. Interest cost rose 94% YoY while tax rate stood at 32% in the quarter as compared to tax benefit/recovery in 4QFY09.

What to expect?
At the current price of Rs 299, the stock is trading at a multiple of 29.3 times its trailing 12-month earnings. Going forward, management expects volumes in the home segment to remain buoyant across categories depending upon price and location while the commercial leasing environment will take a while before it reaches the levels of anticipated growth.

DLF has been working consistently on reducing its debt burden by ‘unlocking’ its non-core assets. The company divested and realized approximately Rs 18 bn during the year through sale of non-core assets (planned divestment was Rs 55 bn for the full year) and has plans to divest Rs 27 bn over the next 12-18 months. Cash flow arising from sale of noncore assets will be used to repay debt. The company, also paid off debt to the tune of Rs 56 bn as compared to a debt repayment target of Rs 35 bn thereby reducing the overall interest cost. The net debt position at the end of the quarter stood at about Rs 164 bn (including preference shares), translating into net debt/equity ratio of 0.53. The company plans to maintain the net debt/ equity ratio in the range of 0.4-0.5x versus peak range of 0.65-0.75x.

Thus the overall strategy of the company is to reduce the debt burden on its books and foray into affordable and value housing category which has seen significant ramp up in demand.

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