DLF-Weak 2Q; pressure builds on 2H:: RBS

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DLF Ltd
Weak 2Q; pressure builds on 2H
DLF reported weak 2QFY11 interims on a product-mix change and rising costs.
The operational performance was also weak (except in leasing), but management
remains optimistic on meeting its full-year guidance on debt reduction and sales,
which we view as challenging. We maintain our Hold rating and target price.




Weak 2QFY11 interims led by change in product mix…
DLF’s 2QFY11 revenues of Rs23.7bn (+35% yoy, +17% qoq) beat our estimate of Rs21.1bn.
However, EBITDA was subdued at Rs9.3bn (+2% yoy, -5% qoq), with margins declining
around 1,300bp yoy and 900bp qoq to 39.2%. This was led by rising materials and labour
costs and a product-mix change on a declining contribution from higher-margin residential
projects and a rising contribution from mid-income projects. PBT of Rs4.9bn (-24% yoy, -14%
qoq) missed our Rs6.3bn estimate but, thanks to a tax rate decline to 14.9% (vs around 29%
in recent quarters), PAT of Rs4.1bn (-7% yoy, +1% qoq) beat our Rs4.5bn estimate.

…and weak operational performance (except in leasing)
With DLF’s 2Q sales booked remaining muted at 2m sq ft (msf) (1.9msf in 1Q), its FY11
guidance of 12m-15msf (vs 15m-18msf previously) seems aggressive. However, its leasing
picked up to 1.56msf (vs 1msf in 1Q) and seems well placed to beat the company’s guidance
of 3m-4msf. Net debt at 30 September 2010 remained high at Rs208bn (net gearing at 78%)
due to: 1) weak operating cash flows of Rs1.9bn in 2Q (post taxes and high interest outflow);
and 2) divestment of non-core assets slowing to Rs4bn in 2Q (Rs7bn in 1H and Rs25bn in
the past six quarters; DLF expects another Rs20bn over the next 4-6 quarters).

Management remains optimistic, but slow debt reduction and sales are key concerns
We view the 1H sales performance as clearly adding pressure on 2H. However, DLF has
indicated a more visible momentum in 2H with several launches planned in Gurgaon,
Mumbai, etc that had been postponed over approval delays. It guided for a stable EBITDA
margin (45-50%) but cautioned that any further increase in commodity and labour prices
could weigh on margins again. DLF expects cash flows to strengthen on execution and new
launches to Rs7.5-10bn per quarter, which would help reduce net gearing to 50-60% by
year-end. We believe reducing debt and improving sales momentum remains the key priority.

Maintaining Hold and target price of Rs330/share
We maintain our Hold rating and SOTP-based Rs330 TP, which remains based on a Rs290
end-FY11F DCF value for the land bank, and Rs40 (60% share) for completed lease assets.