DLF:Residential target modified -JM Financial Research

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Residential target modified; leasing witnessing some
pick-up
Revenue slightly ahead of expectation, bottomline impacted by a squeeze in
margin: DLF’s reported 2QFY11 revenue, EBITDA and adjusted net profit of
`23.7bn, `9.3bn and `4.1bn respectively vs 1QFY11’s `20.3bn, `9.8bn and
`4.1bn. Revenue grew 35% YoY and 17% QoQ but EBITDA margin compression
(39% this quarter vs 1Q’s 48%, 52% in 2QFY10) led to a mere 2% YoY EBITDA
growth, down 5% QoQ (10% below our estimate). As per the press release,
margin decline is ‘a temporary drop, owing to variation in the product mix’
and the same is expected to be in the 45-50% range on an annual basis. 2Q
tax rate was much lower at 15% in 2Q vs 29-30% in the comparative periods
(clarification awaited), which helped maintain a sequentially flattish net profit
(PBT down 14% QoQ, 24% YoY).


Operations update: residential volumes lower vs FY10 average, lease volumes
picking up: a) DLF booked 2.1mn sq ft home sales this quarter. Quarterly run
rate at 2mn this year vs FY10’s 3mn. 2Q sales comprise 1.57mn of existing
stock, 0.5mn from new launches (Panchkula, Shimla). Management expects
volume to pick up in 2H and now guiding at >12mn sq ft of homes sales in
FY11 (vs earlier target of 15-18mn) plus 4-5mn of plotted developments, b)
Fresh lease volume (net of cancellations) picked up to c.1.7mn this quarter
(1Q: 1mn) with progressively higher number of conversions getting
witnessed. On-track to achieve FY11 target of 3-4mn sq ft, c) DLF handed over
1.32mn sq ft in 2Q (1Q: 1.37mn): mainly offices, commercial complexes, d)
Total area under construction stood at 57mn (Jun’10: 55mn), comprising
c.41mn relating to development business, c.16mn in the rental business.
Sept’10 gross debt at `232bn (Jun’10: `234bn); non-core asset sale of `4.1bn:
a) DLF’s Sept’10 gross debt remained more or less unchanged sequentially:
`232bn vs `234bn in Jun’10 (`217bn in Mar’10). Average cost of debt
(Sept’10) at 10.5%. Net debt-equity target for FY11 at 0.4-0.5x, b) Non-core
assets sales of `7bn clocked so far in 1H (`4.1bn in 2Q – divestment of retail
brands business, land sales). The tally on non-core asset monetization stands
at `25bn (achieved over past 18 months) vs medium-term target of `55bn.
Rolling over Sept’11 with TP of `330: We are rolling forward to Sept’11, our
TP stands at `330 with assumptions broadly intact. Our concerns on pace of
sales and delivery, debt remain.