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DLF’s 3QFY12 earnings disappointed all round as the company’s
change in execution strategy mid-stream in favour of third-party
contractors resulted in a lower execution run rate in 3QFY12. The
disappointment was accentuated by a higher-than-anticipated interest
cost and a high tax rate, resulting in earnings missing estimates by 33%.
The balance sheet was a bigger disappointment as net debt remained
flat even while there was an inflow of INR 12bn from the sale of assets.
This was primarily on account of lower operational cash flows resulting in
interest payments being met from the asset sale cash flow, along with
INR 3.7bn of land purchase.
Operationally, however, the quarter was in line with the company selling
3.3mn sq ft of projects while completing construction on 9.5mn sq ft of
projects, which are now ready for delivery. The sales though were
primarily from lower value plotted land, mainly in Lucknow.
Where to from here?
The company’s strategy to reduce debt through asset sales should have
been supported by the operational cash flow taking care of interest
payments and land purchases. Unfortunately, at this point the slowdown
in the property market and the transfer of ongoing projects to third-party
contractors for construction has resulted in slow sales and lower
execution, affecting operational cash flow. Thus the asset sale cash flow
is being diverted to make interest payments and land purchases.
It is imperative for the company to improve its operational cash flow
through more sales and faster execution. Both, in our opinion, may not
happen for the next two quarters as new launches of housing projects
are likely to be slow till interest rates in the economy are cut, while the
contractors will also take time to pick up the pace of execution on
ongoing projects.
In this situation reduction in debt will remain limited and in the absence
of asset sales in the near term, could even increase. However, the
company’s target of INR 60bn of asset sales for FY13F remains with
three key assets, Aman Resorts, the hospitality business and the wind
power business, which are likely to contribute INR 50bn of the same.
The sale of these assets at the required valuation though depends on
the macro environment both globally and locally improving and hence
could take time.
Overall, the company’s performance both in terms of the P&L and
balance sheet could remain muted over the next two quarters. We
maintain a BUY rating as we expect to see a better macro environment
in 2HFY13F and asset sales and debt reduction taking place.
Parameters to monitor
Improvement in operational cash flow to a level at least enough to
meet interest payments.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
DLF’s 3QFY12 earnings disappointed all round as the company’s
change in execution strategy mid-stream in favour of third-party
contractors resulted in a lower execution run rate in 3QFY12. The
disappointment was accentuated by a higher-than-anticipated interest
cost and a high tax rate, resulting in earnings missing estimates by 33%.
The balance sheet was a bigger disappointment as net debt remained
flat even while there was an inflow of INR 12bn from the sale of assets.
This was primarily on account of lower operational cash flows resulting in
interest payments being met from the asset sale cash flow, along with
INR 3.7bn of land purchase.
Operationally, however, the quarter was in line with the company selling
3.3mn sq ft of projects while completing construction on 9.5mn sq ft of
projects, which are now ready for delivery. The sales though were
primarily from lower value plotted land, mainly in Lucknow.
Where to from here?
The company’s strategy to reduce debt through asset sales should have
been supported by the operational cash flow taking care of interest
payments and land purchases. Unfortunately, at this point the slowdown
in the property market and the transfer of ongoing projects to third-party
contractors for construction has resulted in slow sales and lower
execution, affecting operational cash flow. Thus the asset sale cash flow
is being diverted to make interest payments and land purchases.
It is imperative for the company to improve its operational cash flow
through more sales and faster execution. Both, in our opinion, may not
happen for the next two quarters as new launches of housing projects
are likely to be slow till interest rates in the economy are cut, while the
contractors will also take time to pick up the pace of execution on
ongoing projects.
In this situation reduction in debt will remain limited and in the absence
of asset sales in the near term, could even increase. However, the
company’s target of INR 60bn of asset sales for FY13F remains with
three key assets, Aman Resorts, the hospitality business and the wind
power business, which are likely to contribute INR 50bn of the same.
The sale of these assets at the required valuation though depends on
the macro environment both globally and locally improving and hence
could take time.
Overall, the company’s performance both in terms of the P&L and
balance sheet could remain muted over the next two quarters. We
maintain a BUY rating as we expect to see a better macro environment
in 2HFY13F and asset sales and debt reduction taking place.
Parameters to monitor
Improvement in operational cash flow to a level at least enough to
meet interest payments.
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