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DLF: Interest cost pressure continues - Views on News from Equitymaster
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DLF: Interest cost pressure continues
Aug 13, 2012

DLF has announced its results for the quarter ended June 2012. While revenues declined by 10% YoY, profits dropped by 18% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Revenues decline by 10% YoY during 1QFY13. The company booked 1.34 million square feet (msf) of area in its developmental (residential and commercial complexes) business while it leased out 0.29 msf during the quarter.
  • Operating margins expand by 3.2% YoY during the quarter. Margin expansion was mainly on account of lower construction expenses (as a percentage of sales).
  • Net profits declined 18% YoY during the quarter led by lower operating profits coupled with higher interest costs.
  • At the end of the quarter, the company had a development potential of approximately 345 msf.

Consolidated financial snapshot
(Rs m) 1QFY12  1QFY13  Change
Sales 24,458 21,977 -10.1%
Expenditure 13,349 11,307 -15.3%
Operating profit (EBDITA) 11,110 10,670 -4.0%
Operating profit margin (%) 45.4% 48.6%  
Other income 574 1,311 128.4%
Interest 4,964 6,226 25.4%
Depreciation 1,702 1,786 4.9%
Exceptional items - -  
Profit before tax 5,018 3,970 -20.9%
Tax 1,278 1,137 -11.1%
Minority interest (166) 74 -144.9%
Share in profit/(loss) of associates 42 36 -14.2%
Prior period items (32) (15) -53.3%
Profit after tax/(loss) 3,584 2,928 -18.3%
Net profit margin (%) 14.7% 13.3%  
No. of shares (m) 1,697.6 1,698.4  
Basic & diluted earnings per share (Rs)   6.8  
P/E ratio (x) *   31.4  
* On a trailing 12-months basis

What has driven performance in 1QFY13?
  • DLF reported a revenue decline of 10% YoY during the quarter ended June 2012. The company booked sales of 1.34 million square feet of area during 1QFY13. During the corresponding quarter last year and preceding quarter i.e. 4QFY12, the company booked area worth 2.3 msf and 6.75 msf respectively. Under the annuity business, DLF booked 0.29 msf (net) during the quarter as compared to 0.73 msf (net) during 1QFY12 and 0.25 msf during preceding quarter. Currently, the company has approximately 40 msf of area under construction in its developmental business and 7 msf in the annuity business.

  • DLF’s operating profits declined at a slower pace as compared to the decline in sales as operating margins expanded by 3.2% YoY. The key reason for the same was lower cost of construction (which includes cost of land, plots, development rights, constructed properties and others) as a percentage of sales.

  • DLF’s profit before tax and net profits declined by about 21% YoY and 18% YoY respectively. The key reason for the same was higher interest expenses.

What to expect?
At the current price of Rs 213, the stock is trading at a multiple of 31.4 times its trailing 12-month consolidated earnings per share. It is clear from the above results that the key factor for improving the condition lies in the company’s ability to reduce it interest costs (by reducing debt levels). During the quarter ended June 2012, DLF reduced its debt by Rs 450 m (net debt). However, when compared to a debt position of Rs 227 bn, the debt reduction figure seems miniscule. The company is also looking focusing on higher deliveries to protect itself from the inflationary pressures as well as strengthen its cash position. DLF has lined up certain large sized projects for launch during the third quarter of this year.

As for the debt reduction target, the same is Rs 50 bn by the end of this year. While this was mentioned by the management at the time of announcing results, a leading business daily recently has announced that the company sold off a property in Mumbai for a sum of Rs 27.5 bn. However, the news has not been officially confirmed by the company’s management. As mentioned earlier monetization of other noncore assets mainly – Aman Resorts and the wind power business – is planned for this year.

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