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DLF – 2QFY2011 Result Update
Angel Broking maintains a Neutral on DLF.
DLF’s 2QFY2011 results were marginally above our expectations on account of
higher revenue growth, which was however to an extent was offset by lower
margins. Residential volumes (2.08mn sq ft, down 24.1% yoy) remained low on
account of subdued new launches. Commercial leasing continues to show uptick,
which emphasises sustainable recovery in the segment. Net debt-to-equity was
broadly flat sequentially at 0.75x (`19,913cr).Operating cash flow was muted
adjusted for asset sales. We maintain our Neutral view on the stock.
Higher interest cost, low margins on asset sales drag profitability: DLF reported
strong revenue growth of 35.3% yoy (up 16.8% qoq) to `2,369cr, which
surpassed our expectations. The strong growth in revenue was however, to an
extent, offset by weak OPM, which declined by 1,298bp yoy and 909bp qoq to
39.2%. Margins came in much below our estimate on the back of low margins
accruing from asset sales of `400cr and change in product mix. Consequently,
operating profit grew 1.7% yoy (down 5.2% qoq) to `929cr. Interest costs
increased 74.5% yoy and 11.8% qoq to `434cr with leverage increasing due to
the DLF-DAL integration. Depreciation cost also increased 101.1% yoy and 2.6%
qoq to `154cr with the increase in fixed assets. Tax rate stood at 14.9% (29.3% in
1QFY2011 and 29.6% in 2QFY2010). Consequently, reported PAT came in at
`418cr, down 4.8% yoy, but marginally above our estimate of `380cr.
Outlook and Valuation: DLF intends to launch plotted development of 4-5mn sq ft
in 2HFY2011 in Gurgaon and Chandigarh to meet its planned sales target of
more than 12mn sq ft in FY2011. We believe there is a risk to the company’s
guidance in view of the delays in approvals coupled with the steep price rise in
recent months. Further, the company lacks near-term triggers given muted
visibility on debt reduction and new launches (NTC mill). The stock is trading at
4% premium to our one-year forward NAV of `332. Hence, we maintain our
Neutral view on the stock
Investment Arguments
Higher leverage remains a concern
The DAL/Caraf merger and purchase of compulsorily convertible preference
shares (CCPS), which were earlier issued by DAL to SC Asia (to the tune of
`3,085cr), has increased the net debt level to 0.75x from 0.68x in FY2010. As a
result, at the end of 2QFY2011 net debt stood at `19,913cr. Further, promoters
have `1,600cr of CCPS in the merged entity, which carries a dividend rate of 9%
resulting in annual cash outflow of `140cr. These CCPS are convertible post April
2011. Consequently, interest payments as a percentage of EBITDA remain on the
higher side (60%). Debt repayments due in 2HFY2011 is to the tune of `17bn. DLF
proposes to reduce its net debt/equity to 0.4-0.5x by the end of FY2011. However,
reduction in gearing will depend on hiving off of the non-core assets and
successful new launches.
Improvement in leasing; new launches hold key for stock
performance
DLF’s non-residential segment constitutes 55% of our GNAV. In FY2010, the
company leased only 0.93mn sq ft of commercial and retail space. However, it
witnessed improvement in leasing in 1HFY2011 leasing out 2.7mn sq ft. DLF
expects the leasing activity to continue its uptick in FY2011. Further, some time in
CY2012 it expects to list DAL as a business trust/ REIT, which could be value
accretive for DLF shareholders at the lower cap rate. However, much will depend
on the sustainable recovery in the commercial leasing segment.
Post merger of DLF and DAL/Caraf, the company has 20mn sq ft of rent-yielding
assets, which will generate `1,500-1,600cr of rental income in FY2011. However,
the new launches have been delayed owing to the delays in getting new approvals.
Therefore, in 1HFY2011 the company was able to launch only 1mn sq ft, much
below peers. In light of this, we believe management’s guidance of achieving
>12mn sq ft of development volumes in FY2011 will prove to be a challenging
task.
Fairly valued
Among some of the challenging tasks that face DLF in FY2011 include reducing its
gearing, getting faster approvals for successful new launches and monetising its
non-core assets at reasonable values. We estimate DLF to sell 12mn sq ft of
residential volumes in FY2011. In our view, there is limited upside to our launch
estimates, considering the steep rise in price in recent months. For FY2011, we
have assumed 5% reduction in the commercial and retail prices, but a 5% increase
in the residential prices from current levels.
On the bourses, the DLF stock has underperformed the Sensex over the last six
months on concerns of weak operating cash flow and increasing gearing. At
current levels, the stock is trading at 4% premium to our one-year forward NAV of
`332. Hence, we maintain our Neutral view on the stock.
Investment Arguments
Higher leverage remains a concern
The DAL/Caraf merger and purchase of compulsorily convertible preference
shares (CCPS), which were earlier issued by DAL to SC Asia (to the tune of
`3,085cr), has increased the net debt level to 0.75x from 0.68x in FY2010. As a
result, at the end of 2QFY2011 net debt stood at `19,913cr. Further, promoters
have `1,600cr of CCPS in the merged entity, which carries a dividend rate of 9%
resulting in annual cash outflow of `140cr. These CCPS are convertible post April
2011. Consequently, interest payments as a percentage of EBITDA remain on the
higher side (60%). Debt repayments due in 2HFY2011 is to the tune of `17bn. DLF
proposes to reduce its net debt/equity to 0.4-0.5x by the end of FY2011. However,
reduction in gearing will depend on hiving off of the non-core assets and
successful new launches.
Improvement in leasing; new launches hold key for stock
performance
DLF’s non-residential segment constitutes 55% of our GNAV. In FY2010, the
company leased only 0.93mn sq ft of commercial and retail space. However, it
witnessed improvement in leasing in 1HFY2011 leasing out 2.7mn sq ft. DLF
expects the leasing activity to continue its uptick in FY2011. Further, some time in
CY2012 it expects to list DAL as a business trust/ REIT, which could be value
accretive for DLF shareholders at the lower cap rate. However, much will depend
on the sustainable recovery in the commercial leasing segment.
Post merger of DLF and DAL/Caraf, the company has 20mn sq ft of rent-yielding
assets, which will generate `1,500-1,600cr of rental income in FY2011. However,
the new launches have been delayed owing to the delays in getting new approvals.
Therefore, in 1HFY2011 the company was able to launch only 1mn sq ft, much
below peers. In light of this, we believe management’s guidance of achieving
>12mn sq ft of development volumes in FY2011 will prove to be a challenging
task.
Fairly valued
Among some of the challenging tasks that face DLF in FY2011 include reducing its
gearing, getting faster approvals for successful new launches and monetising its
non-core assets at reasonable values. We estimate DLF to sell 12mn sq ft of
residential volumes in FY2011. In our view, there is limited upside to our launch
estimates, considering the steep rise in price in recent months. For FY2011, we
have assumed 5% reduction in the commercial and retail prices, but a 5% increase
in the residential prices from current levels.
On the bourses, the DLF stock has underperformed the Sensex over the last six
months on concerns of weak operating cash flow and increasing gearing. At
current levels, the stock is trading at 4% premium to our one-year forward NAV of
`332. Hence, we maintain our Neutral view on the stock.
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