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DLF: Higher costs impact margins

Aug 1, 2008

Performance summary
  • Topline grows by 24% YoY during 1QFY09.
  •  Operating margins contract by 10% YoY to 61.5% during 1QFY09. Impact on account of higher cost of land and construction (as percentage of sales).
  •  Bottomline grows by 23% YoY, aided by lower interest and tax expenses.
  •  Total developable area at 755 m square feet (msqft) at the end of 1QFY09, an increase of 4 msqft from 751 msqft at the end of 4QFY08.
  •  Announced of buyback of upto 22 m shares at a price not exceeding Rs 600. Buyback would commence after SEBI approval, which is pending.

(Rs m) 4QFY08 1QFY09 Change
Sales 30,738 38,106 24.0%
Expenditure 8,699 14,662 68.5%
Operating profit (EBDITA) 22,039 23,445 6.4%
Operating profit margin (%) 71.7% 61.5%  
Other income 472 357 -24.3%
Interest 1,077 541 -49.7%
Depreciation 166 546 229.8%
Profit before tax 21,268 22,715 6.8%
Tax 6,037 3,766 -37.6%
Minority interest (76) (107)  
Share in profit/(loss) of associates 0 (201)  
Profit after tax/(loss) 15,155 18,640 23.0%
Net profit margin (%) 49.3% 48.9%  
No. of shares (m)   1,704.8  
Diluted earnings per share (Rs) *   47.9  
P/E ratio (x) *   10.3  
* On a trailing 12-months basis

What has driven performance in 1QFY09?
  • DLF recorded a 24% YoY growth in sales during 1QFY09. However, for the sake of comparison, we have evaluated the company’s latest quarter on a QoQ basis i.e. in comparison with 4QFY08. Due to the rising home loans and interest rate issues, DLF had to resort to reducing its property (sale) prices and lead the company’s growth by increasing volumes. As such, on a QoQ basis, it reduced its average office and retail property prices (per sq ft) by 10% QoQ and 35% QoQ respectively. In the home segment, the company reduced its luxury and its newly launched, mid-income segment, property prices by 16% QoQ and 5% QoQ. However, in its leasing business, DLF increased prices in the office and retail space by 13% QoQ and 31% QoQ respectively. The move seems to have not gone down well as new bookings, atleast in the retail leasing space hasn’t shown any improvement. The company’s subsidiary, DLF Assets Ltd. (DAL), contributed to nearly 40% of the sales while the balance was shared between the home (39%) and commercial properties. During the quarter, the company earned nearly Rs 930 m as lease income. For the current fiscal (FY09), the company’s management expects rental income in excess of Rs 5 bn from the same.

    DLF’s office and residential space (barring mid-income) witnessed contraction in margins during 1QFY08. Under the residential space, the luxury segment witnessed deterioration in margins by 2% QoQ. However, the mid income housing segment, (which started generating revenues during 3QFY08 onwards), witnessed an increase in operating margins by 2.6% QoQ over 4QFY08. The company’s management had mentioned in the previous quarter that because of the healthy demand, they expect the mid-income housing segment to grow faster as compared to the other segments. As such, the company has been able to improve its margins on a QoQ basis.

    In the office segment, the sales margins dropped by 3.9% QoQ from 82.5% in 4QFY08 to 78.6% in 1QFY09. However, in the lease business, the average per square foot rates increased to Rs 69 in 1QFY09 from Rs 61 in 4QFY08 (13% increase).

    In the retail space, which includes sales and leasing of malls and commercial centres, DLF witnessed a 35% drop in the average square foot prices in its sales business (mainly due to a few new launches during the quarter). Thus, taking the net margins to 71% as compared to 74.1% in 4QFY08. However, in the leasing business, the average rates per square foot have increased by almost one-thirds as compared to the 4QFY08 rates.

  • As compared to 1QFY08, all the operating costs have seen an increase in costs (as a percentage of sales) led by cost of land (5.7%), other expenditures (1.9%), cost of revenues (1.6%) and staff costs (1%) as compared to 1QFY08.

  • DLF recorded a bottomline growth of 23% YoY during 1QFY09. The company clocked a net profit margin of 48.9% during the quarter (49.3% in 1QFY08). This performance was largely due its stable operating performance aided by lower tax and interest costs.

    Land reserves as on 31st March 2008
    (msqft) Super metros Metros Tier I Tier II Total
    Office 63 70 23 5 161
    Retail 33 36 13 10 92
    Super luxury 4 - - - 4
    Luxury 33 6 1 - 41
    Mid income/villas/plots 113 231 76 19 438
    Hotel/ convention center/ service apts 4 3 10 2 19
    Grand total 250 346 123 36 755
    % of grand total 33% 46% 16% 5% 100%

What to expect?
At the current price of Rs 520, the stock is trading at a multiple of 8.3 times our estimated FY10 earnings. DLF’s management has indicated that they do not expect any slowdown in the medium to long-term duration. However, due to the current conditions, the company’s management mentioned that they couldn’t expect a similar growth rate, as it had been the past two years.

DLF has a lot of project launches lined up for the next 6 months. These include projects across all their business segments (residential and commercial), including three new super luxury malls. The company’s management expects these properties to bring in high rental revenues going forward. The fact that the company launches projects before the actual initiation of construction (24 months execution period) should help the company improve bookings in the long run. Further, the management expects the fast growing mid-income housing segment to contribute a significant amount in the future, as presently, most of their projects from this segment are under construction. We maintain our positive view on the company from a 2 to 3 year perspective. We will update our research report soon.

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