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DLF: Higher costs suppress margins - Views on News from Equitymaster

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DLF: Higher costs suppress margins
Nov 16, 2007

Performance summary
  • 2QFY08 topline grows 6% QoQ (it being the second quarterly result post listing, the YoY figures are not available).
  • Increased delivery in the office segment (up 67% QoQ) with improvement in margins by 19% in 2QFY08.

  • Bookings grew by 55% QoQ in the retail mall business.

  • Total developable area at 738 msqft at the end of 2QFY08, an increase of 123 msqft from 615 msqft at the end of June 2007.

  • Operating margins contracts by 2% QoQ during the quarter – higher construction costs take toll on the margins.

  • PAT grows by 33% QoQ mainly due to higher other income and lower taxes, interest and depreciation.

Consolidated financial snapshot
(Rs m) 1QFY08 2QFY08 Change
Sales 30,738 32,499 5.7%
Expenditure 8,699 9,863 13.4%
Operating profit (EBDITA) 22,039 22,637 2.7%
Operating profit margin (%) 71.7% 69.7%  
Other income 472 993 110.4%
Interest 1,077 36 -96.6%
Depreciation 166 110 -33.7%
Profit before tax 21,268 23,484 10.4%
Tax 6,037 3,301 -45.3%
Minority interest 76 9  
Share in associates 0 6  
Profit after tax/(loss) 15,155 20,186 33.2%
Net profit margin (%) 49.3% 62.1%  
No. of shares (m)   1,704.8  
Diluted earnings per share (Rs) *   41.5  
P/E ratio (x) *   22.9  
* On 1HFY08 annualised earnings

What is the company’s business?
The company was incorporated in 1963 as American Universal Electric (India) Limited. It was named DLF Limited in 2006. It has developed some of the first residential colonies in Delhi such as Krishna Nagar in East Delhi, which was completed in 1949. Since then, DLF has been responsible for the development of many of Delhi’s other well known urban colonies like South Extension, Greater Kailash, Kailash Colony and Hauz Khas. DLF’s primary business is development of residential, commercial and retail properties. The operations span all aspects of real estate development, from identification and acquisition of land, to planning, execution and marketing of projects, through to the maintenance and management of completed developments.

What has driven performance in 2QFY08?
Growth in offices and retail drives topline: DLF recorded a topline growth of 6% QoQ during 2QFY08. This was driven by increased delivery in the office segment, an increase of 67% QoQ and an increase in bookings of 55% QoQ in the retail mall space. In the offices segment, the company currently has lease volume of 12 lakhs sqft per year (i.e., 1 lakh sqft per month). The lease rentals also recorded a growth of 16% QoQ during the quarter. In 2QFY08, the company also won the ‘Tidal Park II’ IT park project from TIDCO (Tamil Nadu) and another IT park project from AP Industrial Infrastructure Corporation Ltd. Both these wins will give an additional 10 msqft of developable area to the company.

Details of DLF's properties
  Offices Retail Residential
  1QFY08 2QFY08 1QFY08 2QFY08 1QFY08 2QFY08
          Luxury Super Luxury Super
Lease/Sales booked (msqft)
Opening balance 8.3 11.3 3.2 3.9 4.8 - 4.9 0.4
Add: booked during the quarter 4.3 2.5 0.7 1.1 0.1 0.4 0.1 -
Less: handed over 1.3 2.2 - - - - - -
Closing balance 11.3 11.5 3.9 5.0 4.9 0.4 5.0 0.4
Under construction (msqft)
Opening balance 25.8 29.5 11.7 13.0 6.7 - 6.7 -
Add: New launched 5.1 7.1 1.2 0.5 - - - -
Less: handed over 1.3 2.2 - - - - - -
Closing balance 29.5 34.4 13.0 13.4 6.7 - 6.7 -
Rates - For sale business (Rs per sq ft)
Weighted average rates (sale price) 6,131 6,865 23,292 15,237 7,636 14,548 8,683 -
Weighted average land + cons cost 1,793 1,708 5,463 5,375 1,918 2,936 1,671 -
Margin (Rs per sq ft) 4,338 5,157 17,829 9,862 5,718 11,612 7,012 -
Margin (%) 70.8% 75.1% 76.5% 64.7% 74.9% 79.8% 80.8%  
Rates - For lease business (Rs per sq ft)
Average rates (lease rate) 49 57 115 313 - - - -
Weighted average land + cons cost 1,923 1,832 4,250 7,437 - - - -
* On 1HFY08 annualised earnings

Higher construction costs dents margin: DLF’s operating margins contracted by 2% QoQ during 2QFY08. This was mainly due to rise in construction and employee costs. The construction costs have risen by 11% QoQ and employee costs have risen by 15% QoQ.

Land reserves
(msqft) Super metros Metros Tier I Tier II Total
Office 58 42 30 11 141
Retail 35 41 14 15 105
Super luxury 4 - - - 4
Luxury 38 7 2 - 47
Mid income/villas/plots 121 243 59 15 438
Grand total * 256 333 105 41 735
% of grand total 35% 45% 14% 6% 100%
*39 hotel project size not included in above land reserves

Higher other income and lower interest costs aids bottomline: DLF recorded a strong 33% QoQ growth in bottomline during 2QFY08. This was mainly due to higher other income, which grew by 110% QoQ. The 97% decline in finance charges also aided the bottomline growth. The rise in other income and fall in interest costs was attributed to IPO inflows while the taxes also normalised to 20% in 1HFY08, which has had a positive impact in 2QFY08.

What to expect?
At the current price of 950, the stock is trading at a multiple of 23 times its annualised 1HFY08 earnings. Going forward, the key thrust for the company will be on DLF Hotel Holding Ltd. with hotel project coming up in 8 cities across India. The company expects 4,000 hotel rooms to be operational under the luxury and business segment in the future.

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