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DLF Limited 2Q – Delivering on Low Expectations
Quick comment – 2Q results were broadly in line
with our expectation. Sales were Rs 23.7 bln, up 35%
yoy and 17% qoq (Rs 19.6 bln excluding asset
monetization). OPM compressed 13ppt yoy / 9ppt qoq to
39% due to adverse revenue mix (low contribution from
luxury housing and commercial complex). These,
together with higher interest expensing and lower tax
rate, led to Rs4.12 bln net profits – down 7% yoy, flat
qoq (Rs4.85 bln excl hotel/insurance losses), versus our
estimate of Rs 4.3 bln. Importantly, DLF expects to
sustain 45-50% OPM, though quarterly volatility may be
expected depending on the revenue mix.
Balance sheet has likely bottomed in F2Q11, we
believe. With the repayment of preference shares
(Rs11.7 bln) in the quarter, net gearing has moved up
sequentially from 68% to 73%. The company is aiming
to lower this to 60%-65% by Mar’11 (Rs 30 bln
reduction) using net cash flows from operations and
recoveries. Specifically, DLF is aiming to achieve good
cash flows from 4-5 msf plot sales, and, potentially,
recover sizable amounts from the government (such as
Dwarka, Tidel project returns). Operating surplus
appears to be stuck at Rs1 bln/qtr, which should rise in
2H, we believe.
Operationally slow, especially in the residential
segment. The company has pre-sold roughly 4 msf in
F1H11 (2.1 msf in F2Q11), versus its F11 guidance of
roughly 15msf. Now the F11 target is >12 msf, which
also includes 4-5msf of plotted sales. Commercial
segment (annualized) is ahead of full year target – 2.54
msf leased versus 3-4 msf F11 targets.
What now: DLF targets new launches to be bunched in
2H – 4-5 msf plots (Gurgaon, Mullanpur), 1-2 GHS in
Gurgaon, 2 premium launches in south India, Indore,
Delhi etc. Mumbai launch is subject to regulatory
approvals. Morgan Stanley’s view – Slow launches
and slow b/s improvement will disappoint markets. We
believe that these value drivers are delayed not denied,
hence stock correction is opportunity to buy. Stay OW.
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