DLF:: Getting its act together - CLSA

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Getting its act together
An improved pace of project launches in 1Q is an early sign that DLF may
be able to deliver on launch/sales expectations for the year. DLF is also
gaining traction on two other parameters – project delivery and debt
reduction – where DLF has often fallen behind its promises. 1Q results,
meanwhile, gain importance as margin is expected to normalize post a
dismal 4Q performance. Expectations of asset sales driving debt reduction
and rising deliveries can be near term triggers.
1Q launch pace sets stage for FY12 guidance beat
Launch of two plotted development projects by DLF in 1Q (Indore and
Gurgaon) has brought total area launched in FY12 (4.5m sf) to 60% of total
launches in FY11 (7.5m sf, back-loaded). Up-fronting of launches, as well as
strong sales, raise the possibility of guidance beat (10-12m sf) as we see
visibility on a further 8-10m sf of launches during the remainder of FY12.
FY12 resi deliveries > cumulative for the last 4 years
Of the 39m sf of development projects that DLF is working on as of Mar’11,
c.70% are pre FY10 projects. Deliveries of the same will commence from
3QFY12 with ~12m sf expected in FY12 (10m sf in Phase V Gurgaon, 3m sf in
Chennai) and a further 10-12m sf in FY13 (Mid-income housing at Gurgaon,
Kolkata, Kochi). This contrasts well against just 8.7m sf of deliveries of
development properties during FY08-11. Delivery of older projects will likely
reduce margin volatility as older projects are prone to cost estimation errors.
Asset sales may trigger chunky debt reduction
While DLF has sold Rs30bn of non-core assets during the last two years, the
same has not corroborated with a reduction in debt. Media reports suggest
that DLF is near sale of its 70% stake in two office buildings (Pune and Noida)
for Rs9-10bn; additionally sale of Aman may also raise upto Rs20bn for DLF.
We have built-in a Rs12bn debt reduction during FY12, but if the above asset
sales materialise, debt reduction could be higher at Rs30-40bn.
Margin normalization awaited in 1Q
A 20% rise in sales volumes YoY is expected to lead DLF to report 13% YoY
growth in 1QFY12 revenues. Focus is on margins though as construction cost
appreciation in FY11 led DLF’s margins contract 8ppt YoY to 39%. 1QFY12 is
likely to see a margin rebound (we expect 45%), partly on rising proportion
of plot sales to revenues, even as material costs stay high. While it is still
early days, DLF’s management efforts to meet its commitments in FY12 are
encouraging. High PE multiple remains a deterrent.