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DLF: Finance costs spoil show

Jun 1, 2012

DLF has announced its results for the quarter and year ended March 2012. While revenues declined by 3% YoY, profits dropped by 39% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Revenues decline by 3% YoY during quarter. The company booked 6.75 million square feet (msf) of area in its developmental (residential and commercial complexes) business while it leased out 0.25 msf during the quarter.
  • Operating margins expand by 5.7% YoY during the quarter. Margins expansion mainly on account of lower cost of land (as a percentage of sales).
  • Net profits declined 39% YoY during the quarter led by a poor operating performance, higher interest costs as well as a higher effective tax rate.
  • At the end of the quarter, the company had a development potential of approximately 348 msf.

Consolidated financial snapshot
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Sales 26,831 26,168 -2.5% 95,606 96,294 0.7%
Expenditure 20,169 18,192 -9.8% 58,079 57,251 -1.4%
Operating profit (EBDITA) 6,662 7,976 19.7% 37,527 39,043 4.0%
Operating profit margin (%) 24.8% 30.5%   39.3% 40.5%  
Other income 1,866 1,307 -30.0% 5,839 5,945 1.8%
Interest 4,557 6,039 32.5% 17,056 22,465 31.7%
Depreciation 1,657 1,636 -1.3% 6,307 6,888 9.2%
Exceptional items   (160)   - (160)  
Profit before tax 2,314 1,448 -37.4% 20,002 15,475 -22.6%
Tax 156 -413   4,594 3,694 -19.6%
Minority interest 312 42 -86.7% (72) (15) -79.3%
Share in profit/(loss) of associates 37 316 754.1% 88 336 281.0%
Prior period items 937 (101)   972 (95) -109.7%
Profit after tax/(loss) 3,445 2,117 -38.6% 16,396 12,008 -26.8%
Net profit margin (%) 12.8% 8.1%   17.1% 12.5%  
No. of shares (m)       1,697.6 1,698.4  
Basic & diluted earnings per share (Rs)         7.2  
P/E ratio (x) *         25.8  
(*On a trailing 12-month basis)

What has driven performance in 4QFY12?
  • DLF's consolidated revenues declined by 3% YoY. During the quarter, the company sold 6.75 msf as part of its developmental business. The corresponding figure last year stood at 3.8 msf. Similar to before, there were a higher proportion of lower value sales during the quarter. Under the annuity business, DLF booked 0.25 msf (net) during the quarter. Currently, the company has approximately 40 msf of area under construction in its developmental business and 9 msf in the annuity business.

  • DLF was able to expand margins by 5.7% YoY on the back of lower land costs. Operating profits increased by 20% YoY.

  • DLF's profit before tax and net profits declined by approximately 38% YoY each. Despite higher operating income, profits declined at a sharper pace on account of higher interest costs and other post tax adjustments

  • For the full year FY12, DLF's revenues remained flat while its profits declined by 27% YoY. The company's operating performance for the full year. During the year, the company sold 13.5 msf as compared to 10 msf in its development business. As part of its annuity business, leasing (net figure) stood at 1.4 msf (office space only) as against 4.38 msf in FY11. In the retail mall segment, DLF leased a total area of 1.38 msf. The leasing business (in total) reported revenues of Rs 16 bn for the full year. Total value of the developmental business stood at about Rs 53 bn.

What to expect?
At the current price of Rs 185, the stock is trading at a multiple of 25.8 times its trailing 12-month earnings. DLF continues to go through tough times given the poor macro conditions. Factors such as delayed launches, cost inflation on budgets and overall uncertain times in regions - global as well as domestic - impacted the performance for the full year. In addition, the high interest rate scenario, funding difficulties as well as investor sentiments all played their part for the full year FY12's performance. While things have improved in certain parts, the uncertainty for the future still remains. DLF will continue with its strategy of focusing on the luxury housing segment (including plotted houses in micro markets after assessing the same) coupled with bringing down the debt on its balance sheet through monetization of its non-core assets - namely land in Mumbai, Aman Resorts and its wind mills business. As per the company's management, the potential value of divestment in these assets is about Rs 30 to 40 bn. These deals are expected to go through in the next 6 months.

At the end of the year, the net debt on the company's balance sheet stood at about Rs 227 bn. As mentioned earlier, progress on the divestment strategy and future debt position remain the key areas to monitor in the near future. This is considering that interest costs form nearly one fourth of the company's full year revenues.

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