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DLF Limited Overweight
DLF.BO, DLFU IN
FY11 balance sheet: the big cleanup job... looks
largely complete now
DLF’s balance sheet, in our view, is incrementally getting cleaner and simpler as:
1) DAL now is fully consolidated and most preference share (PE) buyouts are
largely done; and (2) Land liabilities are now fully recognized. This “clean up”,
however, has come at the cost of increasing debt (for buyouts /consolidation)
despite the company generating an operating surplus. Going forward, a shift in
product mix to plotted sales (high margin, shorter execution cycle), land capex
moderation and non core asset sales (Rs70B target over two to three years)
should aid debt reduction. Recent news flow points to increased traction on all of
these. Progress on debt reduction plans remains the key catalyst for the stock, in
our view. Retain OW.
Key highlights of the annual report:
Operating surplus of Rs18.6B negated by PE buyouts implying incremental
rise in debt but they seem to be largely done for now. On our calculations, DLF
generated Rs18.6B of free cash flows (post interest/tax) in FY11; however,
preference share buyouts (Rs54B for DCCDL/Lehman, etc.) and higher
lease/land capex (Rs17B) led to a net debt increase of Rs62B in FY11. In its
annual report, management is guiding for a moderation in both.
Land cost on books is at Rs195B, implying an average cost of Rs530psf on
367msf of land bank. Our MTM analysis of key parcels shows a 2.5x multiple
on this book (see Table 7 on page 8).
Key red flag - Outstanding tax liabilities of Rs20B largely on account of DAL
sales (tax free) done during 2007-09. This could be a drag on cash flows if an
adverse ruling on the same comes. We note of late DLF received Rs 4.1B relief
on one of the claims.
Debt profile evenly spread between rent/development business -~50% or
Rs105B of the on books debt is secured against rental income. Dev co Debt/
EBITDA of ~3.6x is reasonable, we think. If asset sales happen, then this
number would improve going forward.
Key highlights of management commentary – (a) Cautious on demand given
tight liquidity and a rising rate scenario, (b) Debt reduction has been highlighted
as the main focus area in FY12, (c) Annuity business guidance moderated to 2.5-
3 msf (vs. FY11- 4 msf), this in order to improve rentals in core properties.
FY11 key balance sheet changes
Rs MM FY10 FY11 Ch Y/Y Comments
Net Block 165,580 178,721 13,141 - Increase on account of lease capex on commercial assets.
- Decline in WIP due to transfer of projects to fixed assets as a result of
deliveries on completion
CWIP 111,288 103,120 (8,168)
Total Fixed Assets 276,868 281,841 4,973
Goodwill 12,680 13,840 1,161 Increase on account of DAL/ DCCDL merger
Current Assets
Stocks
124,806 150,388 25,582
- Increase primarily on account of (a) Capitalization of ~Rs15B HSIIDC
land in Gurgaon (350 acre);
(b) New land acquisition of Rs11B; and
(c) Construction progress on on-going projects
Sundry debtors 16,190 17,257 1,068 - Marginal increase
Cash and Bank Balances 52,350 13,461 (38,889) Reduction due to (a) higher land acquisition/lease capex in FY11; (b) pref
share redemption of Rs54B during the year
Other Current Assets
46,847 78,900 32,053
- Primarily due to high unbilled receivables (Rs76B) on plotted sales done
in Q4. Collection from these should accelerate as billings happen over
next 2-3 Qs.
- Further, part of the increase was attributable to area increase in Phase
V ongoing projects. Under POCM, company recognizes these projects as
a whole rather than individual buildings.
Loans and advances 75,933 72,712 (3,221) - On account of asset sales (Rs12.7B in FY10) and movement to stocks.
Current Assets 316,125 332,717 16,592
Current liabilities 46,370 92,251 45,881 - Increase due to
(a) Capitalization of 350 acre HSIIDC Gurgaon land parcel
(b) Customers collections from sales;
(c) Adjustment for increase in area for Phase V projects an d
(d) Absorption of higher costs due to input inflation
Provisions 41,402 38,763 (2,638)
Current liabilities and
provisions
87,771 131,014 43,243
Liabilities
Secured loans 193,016 222,762 29,746
Increase due to (a) higher land acquisition/lease capex in FY11;
(b) pref share redemption of Rs54B during the year
Unsecured loans 23,751 17,141 (6,610)
Total Loans 216,766 239,903 23,136
Net Worth
304,327 263,321 (41,006)
- Decline in share capital due to buyouts of pref capital. This reflects only
principal redemption.
- While most of the pref shares have been bought back in FY11; promoter
pref shares in lieu of 40% stake in Cyber City is still outstanding (Rs16B).
Net Debt
164,417 226,442 62,026 - Increase of Rs62B mainly on account of (a) pref. share redemptions of
Rs53B; (b) Higher land/lease capex of Rs 17B
Closer look at FY11 working capital changes….
Below, we take a detailed look at the working capital changes over the last year. Key
items resulting in substantial changes in working capital items include:
a) Capitalization of ~Rs15B for 350 are land parcel in Gurgaon (HSIIDC land
parcel bought in FY10), resulting in increase in stock and current liabilities.
b) Increase in unbilled receivables partly on account of plotted sales in Q4.
c) Accounting adjustment for increase in area in Phase V projects which the
company recognizes under POCM as a whole and not as individual
buildings. These adjustments have been made in customer advances and
unbilled receivables resulting in the amount going up.
d) Land acquisition of Rs11B contributing to increase in stocks
e) Adjustments for stake increase in Aman post settlement with minority
investors
Overall net working capital increased by Rs12.2B primarily due to land acquisition
(Rs11B) and pending customer collections on plotted sales. Development revenues at
Rs66B are running in line with the pre bookings run rate (Rs65-70B for last two
years); however, cash collections were lower at Rs53B in FY11 primarily due to high
unbilled receivables on plotted sales. Collection from these should accelerate going
ahead as billings happen.
FY11 cash flows - operating surplus (Rs18B) negated by
preference share (private equity) buyouts and higher capex
Below, we try to work out a restated FY11 cash flow statement. In FY11, DLF
generated Rs18.6B of operational cash flows (post interest outflow); however, FCF
was negative (Rs 62B) primarily on account of two reasons:
(a) Large pref share buyouts of Rs54B – The company bought out most of the
private equity investors in FY11. These include SC Asia (Rs31B), Lehman
Brothers (Rs11B), Aman (Rs 1.5B) and others (Rs 9B). Post these buyouts,
promoter pref shares of Rs16B (on account of DAL merger) is the only large
pref share outstanding.
(b) Higher land lease capex (Rs17B) – DLF spent Rs11B on land replenishment in
FY11 primarily for consolidation/contiguity of existing land parcels in Gurgaon
and Chandigarh. In addition to this, lease capex for rent co. during FY11 was
high at Rs6B. Looking ahead, the company expects moderation in both.
Overall, this led to debt increase of Rs62B in FY11. Going ahead, company is
guiding to debt reduction primarily on the back of: (a) Higher plotted developments
in the sales mix, thereby accelerating cash flows; (b) Widened scope of asset sales
program to Rs70B over the next 2-3 years and (c) Lower land payments and lease
capex for rental assets.
Table 2: DLF: FY11 Cash flows
Inflow Rs B
Sales Inflow 53.1
Annuity Income 12.8
Asset Sales 12.7
Other income 5.8
Rent deposits 1.6
Total Inflow 86.0
Outflow
Development Capex (16.0)
Other exp (15.1)
Tax (7.5)
Interest (25.9)
Other business losses (3.0)
Total (67.4)
Operational cash flows 18.6
Lease capex (6.0)
Dividend (9.1)
Land acquisition (11.0)
Net cash flow (pref pref share buyouts) (7.5)
Pref share buyouts (54.0)
Net debt change (62.0)
Source: Company reports.
Balance sheet is much cleaner now post buyouts of PE
preference shares
Throughout FY10 and FY11, DLF has been cleaning up its balance sheet by
DAL consolidation and
Buying out outstanding preference shares in its subsidiary companies.
DLF spent ~Rs54B in FY11 to buy out PE investors (Lehman, SC Asia, Aman, etc.)
across various subsidiaries. These redemptions have happened at ~15-20% premium,
implying a ~5% p a return over their holding period. While these buyouts have led to
substantial debt increase over the last two years, private equity investors are out
from underlying SPVs ,thereby implying a cleaner balance sheet, in our view.
There is, however, one large pref share outstanding of Rs16B allotted to promoters in
lieu of its 40% stake in DLF Cyber City (on account of DAL merger). As of now, the
coupon on this instrument is 9% p.a. and is due to conversion/redemption between
Apr-11 and Apr-13. Net impact on dividend (Rs 1.7B)
Table 3: DLF – Key Subsidiary preference share details. Most of the pref shares have been bought out in FY11
Rs B FY11 FY10 Comments
Shivajimarg Properties Limited - 4.8 Lehman pref shares redeemed in Aug-10 for
Rs5.9B
DLF Southern Homes Private Limited - 4.6 Lehman pref shares redeemed between Jul to
Sep-10 for Rs5.6B
DLF New Gurgaon Home Developers Pvt Ltd - 4.5 Redeemed at Rs6.6B
DLF Assets Pvt Ltd (in lieu of DE Shaw stake) 2.0 29.3
DLF Cyber City Developers Limited
16.0 16.0
Promoter pref shares of Rs16B in lieu of its
40% stake in DLF Cyber City post DAL Caraf
merger
Total 18.0 59.1
Source: Company reports, J.P. Morgan.
Table 4: DLF - Key preference share redemptions done in FY11
Rs MM
SC Asia 30.8
New Gurgaon home developers 6.6
Lehman 11.5
Others 4.5
Total 53.4
Source: Company reports.
….However, pending tax claims could pose an additional
burden
As per the annual report, DLF has pending tax claims of Rs20B which are yet to be
provided for. The company is contesting the same with the tax authorities. These tax
claims primarily pertain to the SEZ sales to DAL over FY07-09, which as per the
company are tax exempt. Adverse judgment on these tax appeals could pose an
additional liability for the company. However, we note of late DLF has got a Rs4.1B
relief on one claim.
FY11 debt break up
Of the total net debt of Rs214B, Rs50B is earmarked for divestments. The remaining
Rs165B of debt primarily comprises: (a) Rs105B of lease rent discounting debt
(securitized by rental income of Rs17.5B pa); (b) Rs59B of debt at development
company (~2x debt/ annualized devco EBITDA). Averge cost of debt increased
during FY11 to 11.2% from 10.5% in FY10.
Table 5: Debt break up
Rs B
Net Debt 214
Break up
Earmarked for divestment/non core/others 50
Lease Rent Discounting 105
Development business 59
Source: Company reports.
Average land cost at Rs531 psf
On DLF’s FY11 balance sheet, we find that the total land cost on the company’s
books is Rs 195B. This implies an average land cost of Rs531 psf for 367msf of land
bank that the company currently holds. Our MTM analysis of key parcels shows a
2.5x multiple on land cost (see Table 7).
Table 6: DLF: Land cost
Particulars Rs MM
Fixed Assets 33,548
Investment (JV/associates) 2,839
Inventory 76,456
Development rights 48,547
Loans & advances 33,443
Total cost 194,832
Area (as of FY11 end) 367
Land cost Rs Psf 531
Source: Company reports.
Asset sales target of Rs70B over next 2-3 years. Recent
news flow points to increased traction...
In FY11, DLF achieved Rs12.7B of non core asset sales, thereby taking overall sales
done to date to Rs30B. Looking ahead, the company is looking to do asset sales of
Rs70B over the next 2-3 years. This probably includes Aman Resorts.
The company settled a pending dispute with minority investors in Aman Resorts and
bought out their stake (~4%) for ~Rs1.6B (US$33.8) during FY11. The settlement of
this dispute, in our view, paves the way for the company to divest its stake in Aman
Resorts.
Further, recent news flow on the sale of IT parks in Pune/Noida to PE players
(Rs13B) and stake sale in insurance business (Rs4.5B) points to an increased traction
on asset sales. While we factor in asset sales of Rs15B in FY12, the conclusion of
these large ticket transactions can provide a boost to debt reduction plans.
Table 8: DLF - Recent news flow on asset sales points to increased traction
Asset Recent news flow
Noida IT Park - In discussions with Blackstone to sell its IT Park in
Pune (in JV with Ackruti) for Rs9B.
Pune IT Park - In discussions to sell its stake in Noida land for Rs4B.
3C is co partner in the project
Aman Resorts - Settlement of minority investors paves way for a
strategic sale in the business
Insurance business - Looking to sell its stake to HCL group for Rs4.5B
Source: News reports (Economic Times).
FY11 revenue break up
FY11 revenues at Rs95.6B were up 29% Y/Y. Of the total revenues, Rs66B or ~70%
was accounted for by the development segment and annuity business (rental income
+ maintenance revenues) contributed an additional 20% (Rs20B). The remaining
was accounted for by other non core businesses like hotels, insurance, power supply
etc.
Development business revenues at Rs66B improved by 20% Y/Y in FY11, in line
with the bookings run rate of Rs65-70B over FY10/11; however, cash collections
were lower at Rs53B due to large unbilled receivables partly due to pending
collections from plotted sales (Rs72B as of FY11 end vs. Rs47B as of FY10).
Collections from these should be accurate as billings happen over the next few
quarters. Gross margins under the segment were adversely impacted in FY11 due to a
one-time cost reset of Rs4.75B done in 4Q.
Rental income witnessed a big jump in FY11 to Rs12.8B from Rs7.2B primarily on
the back of DAL consolidation. In addition to this, the company has maintenance
income of Rs7.5B in FY11 (vs. Rs4.4B in FY10). Overall annuity income for FY11
stood at Rs15.7B (net of costs).
Other non core businesses like power, insurance, hotels accounted for the remaining
10% of the revenues. While the company is scaling down its plans under the hotels
business and has disposed of some plots in FY11, the insurance business is in its
nascent stages as of yet. Overall these non core businesses registered a Rs3B loss in
FY11.
Bookings and launch update: product mix shift toward
higher plotted developments…
New bookings in FY11 were 10msf/Rs66B (vs. 12.5msf/Rs71B achieved in FY10)
below the company’s initial guidance of 12-15msf. This was primarily due to a delay
in new launches, given approval delays across most markets. Average realization
improved by 14% in FY11 to ~Rs6500psf.
The company shifted its product mix strategy during the year to higher-margin
plotted developments/luxury projects to counter the inflationary trends and mitigate
execution risks. Initial response to these launches has been quite encouraging. Key
launches in FY11 include Hydel Park- Chandigarh (Plotted development in
Chandigarh), Alameda- Gurgaon (plotted development in Gurgaon) and
Commander's Court – Chennai (luxury segment).
For FY12, the company is guiding to Rs65-70B of pre sales primarily coming from
plotted launches (Indore, Gurgaon, Chandigarh and Lucknow) and city center
projects in Gurgaon. In terms of launch plans, it is looking to launch 10-12msf of
projects in FY12. Approval delays have been highlighted as the key challenge
impacting new launch timelines.
Rent co: FY11 witnessed decent momentum but guidance
for FY12 is muted
Leasing activity witnessed decent momentum in FY11 with the company leasing
over 4msf (vs. 1msf in FY10) after adjusting for cancellations in Silokhera (project
on hold due to land use dispute). Gross leasing was higher at 5msf. Overall the
company has 24msf under lease. FY11 rental income was Rs12.8B from office
(Rs11B) and retail projects (Rs1.7B). Average rentals, however, have remained
stable despite steady demand due to oversupply in certain micro markets.
The retail segment, too, witnessed a pick-up in enquiries in FY11; however, leasing
activity is yet to improve meaningfully. The segment faces oversupply issues and the
company is going slow on retail expansion plans. The key project under construction
under the retail segment includes Mall of India in Noida. Overall occupancy levels in
existing malls improved to 93% in FY11 from 89% in FY10.
In terms of outlook, the company is guiding to lease of 2.5-3msf for FY12 lower than
4msf done in FY11. This could be as the company is looking to restrict supply and
achieve better rentals under the segment.
Land bank changes
DLF land bank has reduced to 367msf as of Mar-11 from 416msf in FY10. This is on
account of:-
(a) Exit from non core land parcels (29msf) which do not have medium-term
development potential;
(b) Product mix shift (13msf) – Higher plotted which have lower FSI efficiency vs.
Group housing projects; and
(c) Deliveries done in FY11 (7msf).
The company also undertook selective land bank replenishment in Gurgaon and
Greater Chandigarh primarily for land contiguity/consolidation purposes. Overall
Rs11B was spent on land acquisition in FY11. Post the land bank rationalization
done in FY11, over 80% of the company's land falls under super metro (58%) and
metros (~23%).
Execution update
As of FY11 end, the company has 54msf under construction versus 56msf at FY10
end. While the company commenced construction on 5msf of new projects in FY10,
deliveries during the year stood at 7msf (vs. 2msf in FY10) across the cities of
Gurgaon, Indore, Chennai, Hyderabad & Delhi. Of the total 54msf, 39msf of area is
under construction in the development segment; while the remaining 14.5msf is
under construction in rent co. The company expects the deliveries to improve
substantially going forward (FY12 guidance of 12msf) as the number of projects in
Gurgaon, Kolkata and Chennai are nearing completion.
Management commentary – cautious near-term outlook
Management is guiding for a cautious near-term outlook, given tight liquidity and a
rate hike environment. Entering FY12, company will continue to focus on plotted
developments and luxury projects under development segment to counter inflationary
trends and mitigate execution risks.
Leasing guidance for FY12 is muted at 2.5-3msf (vs. 4msf in FY10). This could be
as the company is looking to restrict supply and achieve better rentals under the
segment. On retail, while leasing has not picked up meaningfully as yet, clarity on
FDI policy in retail is expected to provide a boost to leasing.
Debt reduction has been highlighted as the key focus area in FY12. A combination of
plotted sales, moderation in lease/land capex and non core asset sales is expected to
aid debt reduction plans going forward.
Table 13: DLF: Management Commentary on current trends and near-term outlook
Segment Management Commentary and Outlook
Residential - Overall demand remained healthy in FY11 while prices strengthened across most markets.
- Going ahead, Increasing mortgage rates coupled with high prices in few markets would adversely impact demand
near term
- Input price inflation and approval delays remain the key challenges under the segment
Office - Office recovery gained momentum in FY11 with companies resuming back their expansion and hiring plans. Rents
however are yet to witness any meaningful appreciation given the supply overhang
-Implementation of MAT/dividend distribution tax on SEZs could potentially impact the future demand and
development plans under the segment
- Demand outlook near term to depend on global macro outlook
Retail - Leasing enquiries improved in FY11; however actual leasing activity is yet to pick up meaningfully.
- Rentals started to stabilize in FY11; however unlikely to increase near term given oversupply concerns
- Clarity on FDI liberalization in retail is expected to provide a boost to the retail demand
Source: Company reports.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
DLF Limited Overweight
DLF.BO, DLFU IN
FY11 balance sheet: the big cleanup job... looks
largely complete now
DLF’s balance sheet, in our view, is incrementally getting cleaner and simpler as:
1) DAL now is fully consolidated and most preference share (PE) buyouts are
largely done; and (2) Land liabilities are now fully recognized. This “clean up”,
however, has come at the cost of increasing debt (for buyouts /consolidation)
despite the company generating an operating surplus. Going forward, a shift in
product mix to plotted sales (high margin, shorter execution cycle), land capex
moderation and non core asset sales (Rs70B target over two to three years)
should aid debt reduction. Recent news flow points to increased traction on all of
these. Progress on debt reduction plans remains the key catalyst for the stock, in
our view. Retain OW.
Key highlights of the annual report:
Operating surplus of Rs18.6B negated by PE buyouts implying incremental
rise in debt but they seem to be largely done for now. On our calculations, DLF
generated Rs18.6B of free cash flows (post interest/tax) in FY11; however,
preference share buyouts (Rs54B for DCCDL/Lehman, etc.) and higher
lease/land capex (Rs17B) led to a net debt increase of Rs62B in FY11. In its
annual report, management is guiding for a moderation in both.
Land cost on books is at Rs195B, implying an average cost of Rs530psf on
367msf of land bank. Our MTM analysis of key parcels shows a 2.5x multiple
on this book (see Table 7 on page 8).
Key red flag - Outstanding tax liabilities of Rs20B largely on account of DAL
sales (tax free) done during 2007-09. This could be a drag on cash flows if an
adverse ruling on the same comes. We note of late DLF received Rs 4.1B relief
on one of the claims.
Debt profile evenly spread between rent/development business -~50% or
Rs105B of the on books debt is secured against rental income. Dev co Debt/
EBITDA of ~3.6x is reasonable, we think. If asset sales happen, then this
number would improve going forward.
Key highlights of management commentary – (a) Cautious on demand given
tight liquidity and a rising rate scenario, (b) Debt reduction has been highlighted
as the main focus area in FY12, (c) Annuity business guidance moderated to 2.5-
3 msf (vs. FY11- 4 msf), this in order to improve rentals in core properties.
FY11 key balance sheet changes
Rs MM FY10 FY11 Ch Y/Y Comments
Net Block 165,580 178,721 13,141 - Increase on account of lease capex on commercial assets.
- Decline in WIP due to transfer of projects to fixed assets as a result of
deliveries on completion
CWIP 111,288 103,120 (8,168)
Total Fixed Assets 276,868 281,841 4,973
Goodwill 12,680 13,840 1,161 Increase on account of DAL/ DCCDL merger
Current Assets
Stocks
124,806 150,388 25,582
- Increase primarily on account of (a) Capitalization of ~Rs15B HSIIDC
land in Gurgaon (350 acre);
(b) New land acquisition of Rs11B; and
(c) Construction progress on on-going projects
Sundry debtors 16,190 17,257 1,068 - Marginal increase
Cash and Bank Balances 52,350 13,461 (38,889) Reduction due to (a) higher land acquisition/lease capex in FY11; (b) pref
share redemption of Rs54B during the year
Other Current Assets
46,847 78,900 32,053
- Primarily due to high unbilled receivables (Rs76B) on plotted sales done
in Q4. Collection from these should accelerate as billings happen over
next 2-3 Qs.
- Further, part of the increase was attributable to area increase in Phase
V ongoing projects. Under POCM, company recognizes these projects as
a whole rather than individual buildings.
Loans and advances 75,933 72,712 (3,221) - On account of asset sales (Rs12.7B in FY10) and movement to stocks.
Current Assets 316,125 332,717 16,592
Current liabilities 46,370 92,251 45,881 - Increase due to
(a) Capitalization of 350 acre HSIIDC Gurgaon land parcel
(b) Customers collections from sales;
(c) Adjustment for increase in area for Phase V projects an d
(d) Absorption of higher costs due to input inflation
Provisions 41,402 38,763 (2,638)
Current liabilities and
provisions
87,771 131,014 43,243
Liabilities
Secured loans 193,016 222,762 29,746
Increase due to (a) higher land acquisition/lease capex in FY11;
(b) pref share redemption of Rs54B during the year
Unsecured loans 23,751 17,141 (6,610)
Total Loans 216,766 239,903 23,136
Net Worth
304,327 263,321 (41,006)
- Decline in share capital due to buyouts of pref capital. This reflects only
principal redemption.
- While most of the pref shares have been bought back in FY11; promoter
pref shares in lieu of 40% stake in Cyber City is still outstanding (Rs16B).
Net Debt
164,417 226,442 62,026 - Increase of Rs62B mainly on account of (a) pref. share redemptions of
Rs53B; (b) Higher land/lease capex of Rs 17B
Closer look at FY11 working capital changes….
Below, we take a detailed look at the working capital changes over the last year. Key
items resulting in substantial changes in working capital items include:
a) Capitalization of ~Rs15B for 350 are land parcel in Gurgaon (HSIIDC land
parcel bought in FY10), resulting in increase in stock and current liabilities.
b) Increase in unbilled receivables partly on account of plotted sales in Q4.
c) Accounting adjustment for increase in area in Phase V projects which the
company recognizes under POCM as a whole and not as individual
buildings. These adjustments have been made in customer advances and
unbilled receivables resulting in the amount going up.
d) Land acquisition of Rs11B contributing to increase in stocks
e) Adjustments for stake increase in Aman post settlement with minority
investors
Overall net working capital increased by Rs12.2B primarily due to land acquisition
(Rs11B) and pending customer collections on plotted sales. Development revenues at
Rs66B are running in line with the pre bookings run rate (Rs65-70B for last two
years); however, cash collections were lower at Rs53B in FY11 primarily due to high
unbilled receivables on plotted sales. Collection from these should accelerate going
ahead as billings happen.
FY11 cash flows - operating surplus (Rs18B) negated by
preference share (private equity) buyouts and higher capex
Below, we try to work out a restated FY11 cash flow statement. In FY11, DLF
generated Rs18.6B of operational cash flows (post interest outflow); however, FCF
was negative (Rs 62B) primarily on account of two reasons:
(a) Large pref share buyouts of Rs54B – The company bought out most of the
private equity investors in FY11. These include SC Asia (Rs31B), Lehman
Brothers (Rs11B), Aman (Rs 1.5B) and others (Rs 9B). Post these buyouts,
promoter pref shares of Rs16B (on account of DAL merger) is the only large
pref share outstanding.
(b) Higher land lease capex (Rs17B) – DLF spent Rs11B on land replenishment in
FY11 primarily for consolidation/contiguity of existing land parcels in Gurgaon
and Chandigarh. In addition to this, lease capex for rent co. during FY11 was
high at Rs6B. Looking ahead, the company expects moderation in both.
Overall, this led to debt increase of Rs62B in FY11. Going ahead, company is
guiding to debt reduction primarily on the back of: (a) Higher plotted developments
in the sales mix, thereby accelerating cash flows; (b) Widened scope of asset sales
program to Rs70B over the next 2-3 years and (c) Lower land payments and lease
capex for rental assets.
Table 2: DLF: FY11 Cash flows
Inflow Rs B
Sales Inflow 53.1
Annuity Income 12.8
Asset Sales 12.7
Other income 5.8
Rent deposits 1.6
Total Inflow 86.0
Outflow
Development Capex (16.0)
Other exp (15.1)
Tax (7.5)
Interest (25.9)
Other business losses (3.0)
Total (67.4)
Operational cash flows 18.6
Lease capex (6.0)
Dividend (9.1)
Land acquisition (11.0)
Net cash flow (pref pref share buyouts) (7.5)
Pref share buyouts (54.0)
Net debt change (62.0)
Source: Company reports.
Balance sheet is much cleaner now post buyouts of PE
preference shares
Throughout FY10 and FY11, DLF has been cleaning up its balance sheet by
DAL consolidation and
Buying out outstanding preference shares in its subsidiary companies.
DLF spent ~Rs54B in FY11 to buy out PE investors (Lehman, SC Asia, Aman, etc.)
across various subsidiaries. These redemptions have happened at ~15-20% premium,
implying a ~5% p a return over their holding period. While these buyouts have led to
substantial debt increase over the last two years, private equity investors are out
from underlying SPVs ,thereby implying a cleaner balance sheet, in our view.
There is, however, one large pref share outstanding of Rs16B allotted to promoters in
lieu of its 40% stake in DLF Cyber City (on account of DAL merger). As of now, the
coupon on this instrument is 9% p.a. and is due to conversion/redemption between
Apr-11 and Apr-13. Net impact on dividend (Rs 1.7B)
Table 3: DLF – Key Subsidiary preference share details. Most of the pref shares have been bought out in FY11
Rs B FY11 FY10 Comments
Shivajimarg Properties Limited - 4.8 Lehman pref shares redeemed in Aug-10 for
Rs5.9B
DLF Southern Homes Private Limited - 4.6 Lehman pref shares redeemed between Jul to
Sep-10 for Rs5.6B
DLF New Gurgaon Home Developers Pvt Ltd - 4.5 Redeemed at Rs6.6B
DLF Assets Pvt Ltd (in lieu of DE Shaw stake) 2.0 29.3
DLF Cyber City Developers Limited
16.0 16.0
Promoter pref shares of Rs16B in lieu of its
40% stake in DLF Cyber City post DAL Caraf
merger
Total 18.0 59.1
Source: Company reports, J.P. Morgan.
Table 4: DLF - Key preference share redemptions done in FY11
Rs MM
SC Asia 30.8
New Gurgaon home developers 6.6
Lehman 11.5
Others 4.5
Total 53.4
Source: Company reports.
….However, pending tax claims could pose an additional
burden
As per the annual report, DLF has pending tax claims of Rs20B which are yet to be
provided for. The company is contesting the same with the tax authorities. These tax
claims primarily pertain to the SEZ sales to DAL over FY07-09, which as per the
company are tax exempt. Adverse judgment on these tax appeals could pose an
additional liability for the company. However, we note of late DLF has got a Rs4.1B
relief on one claim.
FY11 debt break up
Of the total net debt of Rs214B, Rs50B is earmarked for divestments. The remaining
Rs165B of debt primarily comprises: (a) Rs105B of lease rent discounting debt
(securitized by rental income of Rs17.5B pa); (b) Rs59B of debt at development
company (~2x debt/ annualized devco EBITDA). Averge cost of debt increased
during FY11 to 11.2% from 10.5% in FY10.
Table 5: Debt break up
Rs B
Net Debt 214
Break up
Earmarked for divestment/non core/others 50
Lease Rent Discounting 105
Development business 59
Source: Company reports.
Average land cost at Rs531 psf
On DLF’s FY11 balance sheet, we find that the total land cost on the company’s
books is Rs 195B. This implies an average land cost of Rs531 psf for 367msf of land
bank that the company currently holds. Our MTM analysis of key parcels shows a
2.5x multiple on land cost (see Table 7).
Table 6: DLF: Land cost
Particulars Rs MM
Fixed Assets 33,548
Investment (JV/associates) 2,839
Inventory 76,456
Development rights 48,547
Loans & advances 33,443
Total cost 194,832
Area (as of FY11 end) 367
Land cost Rs Psf 531
Source: Company reports.
Asset sales target of Rs70B over next 2-3 years. Recent
news flow points to increased traction...
In FY11, DLF achieved Rs12.7B of non core asset sales, thereby taking overall sales
done to date to Rs30B. Looking ahead, the company is looking to do asset sales of
Rs70B over the next 2-3 years. This probably includes Aman Resorts.
The company settled a pending dispute with minority investors in Aman Resorts and
bought out their stake (~4%) for ~Rs1.6B (US$33.8) during FY11. The settlement of
this dispute, in our view, paves the way for the company to divest its stake in Aman
Resorts.
Further, recent news flow on the sale of IT parks in Pune/Noida to PE players
(Rs13B) and stake sale in insurance business (Rs4.5B) points to an increased traction
on asset sales. While we factor in asset sales of Rs15B in FY12, the conclusion of
these large ticket transactions can provide a boost to debt reduction plans.
Table 8: DLF - Recent news flow on asset sales points to increased traction
Asset Recent news flow
Noida IT Park - In discussions with Blackstone to sell its IT Park in
Pune (in JV with Ackruti) for Rs9B.
Pune IT Park - In discussions to sell its stake in Noida land for Rs4B.
3C is co partner in the project
Aman Resorts - Settlement of minority investors paves way for a
strategic sale in the business
Insurance business - Looking to sell its stake to HCL group for Rs4.5B
Source: News reports (Economic Times).
FY11 revenue break up
FY11 revenues at Rs95.6B were up 29% Y/Y. Of the total revenues, Rs66B or ~70%
was accounted for by the development segment and annuity business (rental income
+ maintenance revenues) contributed an additional 20% (Rs20B). The remaining
was accounted for by other non core businesses like hotels, insurance, power supply
etc.
Development business revenues at Rs66B improved by 20% Y/Y in FY11, in line
with the bookings run rate of Rs65-70B over FY10/11; however, cash collections
were lower at Rs53B due to large unbilled receivables partly due to pending
collections from plotted sales (Rs72B as of FY11 end vs. Rs47B as of FY10).
Collections from these should be accurate as billings happen over the next few
quarters. Gross margins under the segment were adversely impacted in FY11 due to a
one-time cost reset of Rs4.75B done in 4Q.
Rental income witnessed a big jump in FY11 to Rs12.8B from Rs7.2B primarily on
the back of DAL consolidation. In addition to this, the company has maintenance
income of Rs7.5B in FY11 (vs. Rs4.4B in FY10). Overall annuity income for FY11
stood at Rs15.7B (net of costs).
Other non core businesses like power, insurance, hotels accounted for the remaining
10% of the revenues. While the company is scaling down its plans under the hotels
business and has disposed of some plots in FY11, the insurance business is in its
nascent stages as of yet. Overall these non core businesses registered a Rs3B loss in
FY11.
Bookings and launch update: product mix shift toward
higher plotted developments…
New bookings in FY11 were 10msf/Rs66B (vs. 12.5msf/Rs71B achieved in FY10)
below the company’s initial guidance of 12-15msf. This was primarily due to a delay
in new launches, given approval delays across most markets. Average realization
improved by 14% in FY11 to ~Rs6500psf.
The company shifted its product mix strategy during the year to higher-margin
plotted developments/luxury projects to counter the inflationary trends and mitigate
execution risks. Initial response to these launches has been quite encouraging. Key
launches in FY11 include Hydel Park- Chandigarh (Plotted development in
Chandigarh), Alameda- Gurgaon (plotted development in Gurgaon) and
Commander's Court – Chennai (luxury segment).
For FY12, the company is guiding to Rs65-70B of pre sales primarily coming from
plotted launches (Indore, Gurgaon, Chandigarh and Lucknow) and city center
projects in Gurgaon. In terms of launch plans, it is looking to launch 10-12msf of
projects in FY12. Approval delays have been highlighted as the key challenge
impacting new launch timelines.
Rent co: FY11 witnessed decent momentum but guidance
for FY12 is muted
Leasing activity witnessed decent momentum in FY11 with the company leasing
over 4msf (vs. 1msf in FY10) after adjusting for cancellations in Silokhera (project
on hold due to land use dispute). Gross leasing was higher at 5msf. Overall the
company has 24msf under lease. FY11 rental income was Rs12.8B from office
(Rs11B) and retail projects (Rs1.7B). Average rentals, however, have remained
stable despite steady demand due to oversupply in certain micro markets.
The retail segment, too, witnessed a pick-up in enquiries in FY11; however, leasing
activity is yet to improve meaningfully. The segment faces oversupply issues and the
company is going slow on retail expansion plans. The key project under construction
under the retail segment includes Mall of India in Noida. Overall occupancy levels in
existing malls improved to 93% in FY11 from 89% in FY10.
In terms of outlook, the company is guiding to lease of 2.5-3msf for FY12 lower than
4msf done in FY11. This could be as the company is looking to restrict supply and
achieve better rentals under the segment.
Land bank changes
DLF land bank has reduced to 367msf as of Mar-11 from 416msf in FY10. This is on
account of:-
(a) Exit from non core land parcels (29msf) which do not have medium-term
development potential;
(b) Product mix shift (13msf) – Higher plotted which have lower FSI efficiency vs.
Group housing projects; and
(c) Deliveries done in FY11 (7msf).
The company also undertook selective land bank replenishment in Gurgaon and
Greater Chandigarh primarily for land contiguity/consolidation purposes. Overall
Rs11B was spent on land acquisition in FY11. Post the land bank rationalization
done in FY11, over 80% of the company's land falls under super metro (58%) and
metros (~23%).
Execution update
As of FY11 end, the company has 54msf under construction versus 56msf at FY10
end. While the company commenced construction on 5msf of new projects in FY10,
deliveries during the year stood at 7msf (vs. 2msf in FY10) across the cities of
Gurgaon, Indore, Chennai, Hyderabad & Delhi. Of the total 54msf, 39msf of area is
under construction in the development segment; while the remaining 14.5msf is
under construction in rent co. The company expects the deliveries to improve
substantially going forward (FY12 guidance of 12msf) as the number of projects in
Gurgaon, Kolkata and Chennai are nearing completion.
Management commentary – cautious near-term outlook
Management is guiding for a cautious near-term outlook, given tight liquidity and a
rate hike environment. Entering FY12, company will continue to focus on plotted
developments and luxury projects under development segment to counter inflationary
trends and mitigate execution risks.
Leasing guidance for FY12 is muted at 2.5-3msf (vs. 4msf in FY10). This could be
as the company is looking to restrict supply and achieve better rentals under the
segment. On retail, while leasing has not picked up meaningfully as yet, clarity on
FDI policy in retail is expected to provide a boost to leasing.
Debt reduction has been highlighted as the key focus area in FY12. A combination of
plotted sales, moderation in lease/land capex and non core asset sales is expected to
aid debt reduction plans going forward.
Table 13: DLF: Management Commentary on current trends and near-term outlook
Segment Management Commentary and Outlook
Residential - Overall demand remained healthy in FY11 while prices strengthened across most markets.
- Going ahead, Increasing mortgage rates coupled with high prices in few markets would adversely impact demand
near term
- Input price inflation and approval delays remain the key challenges under the segment
Office - Office recovery gained momentum in FY11 with companies resuming back their expansion and hiring plans. Rents
however are yet to witness any meaningful appreciation given the supply overhang
-Implementation of MAT/dividend distribution tax on SEZs could potentially impact the future demand and
development plans under the segment
- Demand outlook near term to depend on global macro outlook
Retail - Leasing enquiries improved in FY11; however actual leasing activity is yet to pick up meaningfully.
- Rentals started to stabilize in FY11; however unlikely to increase near term given oversupply concerns
- Clarity on FDI liberalization in retail is expected to provide a boost to the retail demand
Source: Company reports.
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