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DLF Ltd
Not out of the debt trap yet
DLF's 3Q EBITDA growth was offset by higher interest costs. While there has
been some improvement in its operational performance, we believe it's not
enough, as weak cash flows (due to low asset churn) and high debt persist and
remain our key concerns. We cut our forecasts and TP and maintain a Sell rating.
3Q EBITDA growth offset by interest costs; improvement in operations not enough
While 3QFY11 revenues grew 22% yoy to Rs24.8bn and EBITDA grew 40% to Rs11.8bn, an
increase in depreciation (101% yoy) and interest expense (up 67%) resulted in flat yoy PAT
of Rs 4.6bn (19% below our expectations). At 47.5%, the EBITDA margin ñ 587bp higher yoy
ñ was a positive (see Table 1). DLFís operational performance was better sequentially:
2.5msf of sales booked (6.5msf in 9MFY11) and 1.7msf of leasing (4.2msf in 9MFY11) in 3Q
(see Table 2). Despite DLFís disclosure of 8.4msf of project pipeline under various stages of
approval/launch for 4Q (see Table 7), we believe it is likely to miss its sales guidance of 12-
15msf for FY11, due to sector headwinds (weakening affordability due to a spike in property
prices and mortgage rates, and tightening liquidity) coupled with weak equity markets
(restricting the flow of gains from investments in equity markets to real estate).
Weak cash flows (due to low asset churn) and high debt remain key concerns
DLFís cash flows remain weak due to 1) lower/inadequate asset churn (net cash flow from
operations at Rs6.4bn vs interest repayment of Rs6.7bn in 3Q; see Table 4); 2) significant
outflows (land purchase, capex and dividend payment in 3Q); and 3) slow non-core asset
monetisation ñ Rs29.1bn (Rs4bn in 3Q) realised since 1QFY10 vs a target of Rs45bn. We
reiterate that high debt remains the biggest overhang on the stock, and it increased 6% to
Rs220bn in 3Q11 with net gearing at 83% (see Table 3) largely on account of repayment of
preference shares (including premium) of Rs4.5bn.
We cut our earnings forecasts 9-20% and target price c30%; maintain Sell
We cut our FY11-13F earnings 9-20% on account of lower launch and sale assumptions.
This, coupled with an increase in our discount to gross asset value (GAV) from 10% to 15%
(on account of increasing headwinds ñ tightening liquidity and increasing interest rates) and
lower-than-expected debt reduction, resulted in a 30% reduction in our SOTP-based target
price to Rs195/share (see Table 9), based on an end-FY12F DCF value of Rs149/share for
its land bank and Rs46/share for completed leased assets (60% share). We maintain a Sell.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
DLF Ltd
Not out of the debt trap yet
DLF's 3Q EBITDA growth was offset by higher interest costs. While there has
been some improvement in its operational performance, we believe it's not
enough, as weak cash flows (due to low asset churn) and high debt persist and
remain our key concerns. We cut our forecasts and TP and maintain a Sell rating.
3Q EBITDA growth offset by interest costs; improvement in operations not enough
While 3QFY11 revenues grew 22% yoy to Rs24.8bn and EBITDA grew 40% to Rs11.8bn, an
increase in depreciation (101% yoy) and interest expense (up 67%) resulted in flat yoy PAT
of Rs 4.6bn (19% below our expectations). At 47.5%, the EBITDA margin ñ 587bp higher yoy
ñ was a positive (see Table 1). DLFís operational performance was better sequentially:
2.5msf of sales booked (6.5msf in 9MFY11) and 1.7msf of leasing (4.2msf in 9MFY11) in 3Q
(see Table 2). Despite DLFís disclosure of 8.4msf of project pipeline under various stages of
approval/launch for 4Q (see Table 7), we believe it is likely to miss its sales guidance of 12-
15msf for FY11, due to sector headwinds (weakening affordability due to a spike in property
prices and mortgage rates, and tightening liquidity) coupled with weak equity markets
(restricting the flow of gains from investments in equity markets to real estate).
Weak cash flows (due to low asset churn) and high debt remain key concerns
DLFís cash flows remain weak due to 1) lower/inadequate asset churn (net cash flow from
operations at Rs6.4bn vs interest repayment of Rs6.7bn in 3Q; see Table 4); 2) significant
outflows (land purchase, capex and dividend payment in 3Q); and 3) slow non-core asset
monetisation ñ Rs29.1bn (Rs4bn in 3Q) realised since 1QFY10 vs a target of Rs45bn. We
reiterate that high debt remains the biggest overhang on the stock, and it increased 6% to
Rs220bn in 3Q11 with net gearing at 83% (see Table 3) largely on account of repayment of
preference shares (including premium) of Rs4.5bn.
We cut our earnings forecasts 9-20% and target price c30%; maintain Sell
We cut our FY11-13F earnings 9-20% on account of lower launch and sale assumptions.
This, coupled with an increase in our discount to gross asset value (GAV) from 10% to 15%
(on account of increasing headwinds ñ tightening liquidity and increasing interest rates) and
lower-than-expected debt reduction, resulted in a 30% reduction in our SOTP-based target
price to Rs195/share (see Table 9), based on an end-FY12F DCF value of Rs149/share for
its land bank and Rs46/share for completed leased assets (60% share). We maintain a Sell.
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