DLF- Margins disappoint; leasing surprises positively :: Edelweiss

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DLF
Margins disappoint; leasing surprises positively


􀂃 Asset sales boost revenues; operating margins disappoint
DLF reported Q2FY11 sales of INR 23.7 bn (up 35% Y-o-Y and 17% Q-o-Q).
Adjusted for estimated asset sales of ~INR 4.1 bn, revenues, at ~INR 19.6 bn,
are in line with our estimate of INR 19.2 bn. Operating margins disappointed
with reported EBITDA margin of ~39% (our estimate 55%) due to a combination
of lower margins from asset sales and rise in operating and other expenses. As
per management, the dip in margins is temporary and it expects current pricing
trends to help sustain margins in an environment of rising construction costs.
Reported net profit of ~INR 4.2 bn was ahead of our estimate of INR 4.0 bn.


􀂃 Residential sales steady; product mix to skew towards plots
The company sold ~2 msf during the quarter (1.9 msf in Q1FY11) with ~1.57
msf in existing projects and ~0.5 msf from new launches in Panchkula and
Shimla. Overall, DLF has given guidance for new sales booking of ~12 msf in
FY11 with volumes expected to be generated from plotted development launches
of ~4-5 msf at Gurgaon/Chandigarh. With plotted development commanding
higher gross margins of ~60-80%, we expect DLF to post EBITDA margins of
46% and 45% in FY11E and FY12E, respectively.

􀂃 Leasing uptick continues; full year guidance may be surpassed
DLF posted net lease of 1.56 msf in Q2FY11 (versus 0.98 msf in Q1FY11 and
0.69 msf in Q4FY10) and the company is on track to surpass its FY11 guidance
of ~3-4 msf of new leases. In terms of rentals, offices and retail malls segments
contributed INR 2.66 bn and INR 0.48 bn, respectively, in Q2FY11.

􀂃 Liquidity position: No significant reduction in debt
The company’s net debt remained flat Q-o-Q with Q2FY11 net debt at INR 199
bn compared to INR 201 bn in Q1FY11. DLF has mandatory debt repayment of
INR 28.9 bn in FY11 with ~INR 12.24 bn repaid in H1FY11 and balance
repayment obligation of ~INR 16.7 bn in H2FY11. Average cost of debt is 10.5%
with current net debt/equity ratio of 0.73x.

􀂃 Outlook and valuations: Attractive; maintain ‘BUY’
Robust demand in the residential segment and recovery in commercial segment
augurs well for DLF considering its strong rental portfolio of ~20 msf. We have
revised our NAV estimate to INR 417 (INR 426 previously) after factoring in
higher operating expenses and higher debt in FY11-12E. We maintain ‘BUY’
recommendation and rate it ‘Sector Performer’ on relative return basis.