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DLF: Exercising caution - Views on News from Equitymaster

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DLF: Exercising caution

Aug 5, 2009

Performance summary
  • Revenues drop by 57% YoY during 1QFY10. However, on a sequential basis, revenues are higher by 47% QoQ.
  • Operating margins contract by 16.4% YoY to 45.1% during 1QFY10. Margin erosion is on account of higher overall expenditure. Operating profits decline by 68% YoY.
  • Net profits decline by 79% YoY during the quarter. Apart from poor operating performance, bottomline performance hampered by higher interest costs.
  • Total developable area stands at 423 m square feet (msqft) at the end of 1QFY10, as compared to 425 msqft at the end of 4QFY09.

Consolidated financial snapshot
(Rs m) 1QFY09 1QFY10 Change
Sales 38,106 16,499 -56.7%
Expenditure 14,662 9,057 -38.2%
Operating profit (EBDITA) 23,445 7,441 -68.3%
Operating profit margin (%) 61.5% 45.1%  
Other income 357 961 169.0%
Interest 541 2,874 430.9%
Depreciation 546 734 34.5%
Profit before tax 22,715 4,794 -78.9%
Tax 3,766 993 -73.6%
Minority interest (107) 165  
Share in profit/(loss) of associates (201) (6)  
Profit after tax/(loss) 18,640 3,960 -78.8%
Net profit margin (%) 48.9% 24.0%  
No. of shares (m)   1,697.2  
Diluted earnings per share (Rs) *   17.7  
P/E ratio (x) *   22.5  
* On a trailing 12-months basis

What has driven performance in 1QFY10?
  • DLF’s revenues declined by 57% YoY during 1QFY10. While on a year on year basis, revenues have slumped sharply, on a sequential basis revenues are higher by 47% QoQ. According to the management, the business scenario has improved after the sluggish demand in the past few quarters. Revenue growth during 1QFY10 was largely led by sales within the residential segment. During the quarter, the company launched a project called ‘Capital Greens’. As per the company, phase-I (2 m sqft) of the project was sold out on the first day itself. In addition, it also sold 0.5 m sqft in Bangalore during the quarter. In the commercial segment, DLF handed over approx 1 m sqft of office (Gurgaon) and commercial complex space (Delhi).

  • During the quarter, the company reorganised its business into two segments -development (sales and commercial complexes) and annuity (offices and retail malls). Earlier, all these segments were looked at separately. Within its development business, the company saw a rate increase of nearly 91% YoY in its residential space and a 50% YoY increase in rates of commercial complexes. Margins in its residential business increased to nearly 54% from 40% in the quarter ending June 2008. However margins in its commercial complex business declined to 59% from 71% last year. As for its annuity business, lease rates in the office segment dropped by nearly 57% on a year on year basis.

  • DLF’s operating profits declined by 68% YoY on the back of a strong contraction in operating margins. During 1QFY10, operating margins stood at 45.1% as compared to 61.5% in the corresponding quarter last year. As for the performance at the bottomline level, DLF’s profits declined by 79% YoY during the quarter. The fall in profits is higher than the decline in operating profits largely on account of higher interest costs, which shot up by 431% YoY. As a percentage of sales, interest costs increased to 17% of sales as compared to about 1% in 1QFY09.

What to expect?
At the current price of Rs 400, the stock is trading at a multiple of 22.5 times its trailing 12-month earnings. As DLF’s management had mentioned in the previous quarter, the company needed to clean up its balance sheet. With the business environment still being muted, the company had decided to sell its non-core businesses and use the money to lower its debt burden. As a result, the company’s debt to equity ratio has reduced to around 0.5, down from 0.6 at the end of FY09. The company plans to further reduce it to 0.3 by the end of the fiscal.

The company also received nearly Rs 25 bn from DAL during the quarter, as against the target of Rs 20 bn that was set earlier. As for strategies for the external environment, the company plans to continue testing markets for mid-income housing across new locations. On an overall basis, the company plans to launch 16 m sqft during the current fiscal with 8 m sqft each in the mid-income and luxury housing segments. As for the commercial segment, the company plans to be selective in launching new complexes.

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