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DLF: Mid-income relief - Views on News from Equitymaster

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DLF: Mid-income relief
Nov 1, 2008

Performance summary
  • Topline grows by 15% YoY during 2QFY09, 20% YoY during 1HFY09.
  • Operating margins contract by 10.4% YoY to 59.2% during 2QFY09. Erosion on account of construction and other costs (as percentage of sales).
  • Bottomline declines by 4% YoY, higher by 8% YoY for 1HFY09.
  • Total developable area stands at 753 m square feet (msqft) at the end of 2QFY09, as compared to 755 msqft at the end of 1QFY09.


Consolidated financial snapshot
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Sales 32,499 37,444 15.2% 63,237 75,550 19.5%
Expenditure 9,863 15,274 54.9% 18,562 29,935 61.3%
Operating profit (EBDITA) 22,636 22,170 -2.1% 44,675 45,615 2.1%
Operating profit margin (%) 69.7% 59.2%   70.6% 60.4%  
Other income 993 958 -3.5% 1,465 1,315 -10.3%
Interest 36 469 1202.8% 1,113 1,011 -9.2%
Depreciation 110 505 359.1% 275 1,051 281.9%
Profit before tax 23,483 22,154 -5.7% 44,752 44,868 0.3%
Tax 3,301 2,813 -14.8% 9,339 6,579 -29.6%
Minority interest 9 (75)   (67) (182)  
Share in profit/(loss) of associates (6) 87   (6) (114)  
Profit after tax/(loss) 20,185 19,353 -4.1% 35,340 37,993 7.5%
Net profit margin (%) 62.1% 51.7%   55.9% 50.3%  
No. of shares (m)         1,704.8  
Diluted earnings per share (Rs) *         47.6  
P/E ratio (x) *         4.6  
* On a trailing 12-months basis

What has driven performance in 2QFY09?
  • DLF recorded a 15% YoY growth in sales during 2QFY09, while its sales for the 1HFY09 period have grown by 20% YoY as compared to the corresponding period in the previous year. On a YoY basis, the company has received a boost in sales mainly due to the initiation of its mid-income housing segment (introduced during 3QFY08). While the company is seeing a slowdown in its retail and residential (barring mid-income) space, it continues to see traction in the office segment. On a YoY basis, the company has increased its sale and lease rates in this segment. While the sale prices have increased by 16% YoY, the lease rates have increased by 33% YoY. This was mainly on account of strong demand, especially in the leasing space. During the quarter, the company booked nearly 1.8 msqft of property for lease as compared to 1.6 msqft during 2QFY08.

  • DLF has seen its residential space grow mainly due to in inclusion of the mid-income housing category. The company’s management believes that this segment will drive its growth in the short to medium term. During the quarter, the company booked sales of 2.7 msqft in its mid-income segment and nearly 0.1 msqft in its luxury segment. As mentioned before, property prices for its mid-income segment are not available for last year’s quarter, as such on a QoQ basis (i.e. 1QFY09), the average sale prices have reduced by 2%. Prices of its luxury segment have remained flat.

  • In its retail segment, the company has witnessed mixed results. During the quarter, the company booked sales of 0.3 msqft of property as compared to 1.1 msqft during 2QFY08. However, it witnessed some traction in this segment’s leasing business, where in it booked 0.2 msqft of property during the quarter. On the flipside, the average lease rates have dropped by 67% YoY, while property prices have been reduced by 54% YoY. This as such proves that the company had to resort to cutting rates to drive this segment’s growth. It should be noted that this decline in average lease rates is overstated as 69% of total area booked consists of foodcourts & multiplexes, which command significantly lower rates.

  • Margins (sale of properties only) in the office and retail segment have improved by 3.1% YoY and 1.8% YoY respectively. In the residential space (apartments only), the luxury segment’s margins have marginally contracted. For the mid-income housing segment, the margins dropped by 4% QoQ, as compared to 1QFY09.

  • DLF saw its operating margins erode by 10.4% during the quarter on the back of an increase in construction costs (as percentage of sales), which includes cost of land, plots and constructed properties and cost of revenue. Margins were also impacted due to higher other expenditure as compared to 2QFY08. The management has attributed this overall decline in margins due to its mid-income housing. According to the management, all the segments (barring mid-income housing) garner margins above 70%, while the mid-income housing segment garners margins of about 35%.

  • During the quarter, DLF recorded a 4% YoY decline in profits, mainly impacted by its poor operating performance. The company clocked a net profit margin of 51.7% during the quarter (62.1% in 2QFY08). It was also impacted by higher interest and depreciation costs during the quarter.

    Land reserves as on 30th September 2008
    (msqft) Super metros Metros Tier I Tier II Total
    Office 63 69 23 5 160
    Retail 33 36 13 10 92
    Super luxury 4 - - - 4
    Luxury 32 6 1 - 39
    Mid income/villas/plots 113 231 76 19 439
    Hotel/ convention center/ service apts 4 3 10 2 19
    Grand total 249 345 123 36 753
    % of grand total 33% 46% 16% 5% 100%

What to expect?
At the current price of Rs 220, the stock is trading at a multiple of 4.6 times its trailing 12-month earnings. It should be noted that the company earned roughly 40% of its revenues from DAL (DLF Assets Limited). As per the management, the balance of DAL’s projects will be delivered over the next six quarters. At the end of the quarter, the total amount receivable from DAL is estimated to be Rs 48 bn. The current rented portfolio is about 4.7 msqft. The company expects to increase this to roughly 10 msqft by the year-end, yielding rentals of Rs 6 bn per annum.

As regards to its hotel businesses, the management mentioned that while AMAN Resorts is on track towards its expansion plans, its JV with the Hilton Group is seeing a delay by 12 to 18 months. While all the sites have been secured, these projects are awaiting financial closure.

In its conference call, the management mentioned that their revenues have been lower by roughly 25% to 30% due to the rise in interest rates of home loans. However, the company is expecting its mid-income housing segment to drive its growth going forward. In the short run, the company is aiming at focusing on its sales program, primarily mid income and commercial complexes. The company has a handful of launches lined up, with most of them in and around New Delhi.

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