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2QFY12: Key takeaways from conf call: Operational challenges resulted in weak quarter
1. The company noted that it was a challenging quarter operationally as 1) a delay in approvals resulted in a push back of new launches; and 2) a shortage of labour led to slow construction progress at its ongoing projects.
2. To address the problem of labour shortage, DLF is now planning to appoint experienced turnkey players for project execution instead of doing it through its in-house construction company. We view this move to be positive, given this should speed up the construction pace and help in faster realization of cash; however, on the flip side, this may push up the construction cost a bit for the company.
3. The company guided that it achieved an EBITDA margin of around c.45% on FSI sales, lower than our expectation but quite similar to its current overall margin of 47%. The company believes that it will maintain its EBITDA margin in the range of 45-50% going forward.
4. The company retained that it will continue to adopt a cash conservation strategy and focus on selling plotted developments. It is planning to launch nearly 4 mn sq ft of plots in 2HFY12 across Chandigarh, Gurgaon & Lucknow.
5. The company incurred capex of around INR2.3bn for 2QFY12 and INR6.3bn for 1HFY12 towards commercial projects and land replenishment. In the next few quarters, the company intends to spend at a similar run rate of around INR2-3bn per quarter. Recently, DLF acquired some contiguous land parcels in Chandigarh and Gurgaon.
6. The company sold nearly 3.5mn sq ft in 1HFY12. Despite targeted fresh launches of around 7-8mn sq ft (which include largely plotted development) in 2HFY12F, we believe the company may miss our FY12F sales volume estimates of nearly 11 mn sq ft (including plots+ residential + commercial projects).
7. Management remained confident on asset sale progress of an IT Park in Noida and SEZ in Pune and expects realization of these sales in the current quarter (3QFY12). Assuming sale of IT Parks (totaling c. INR11.7bn) plus INR8.8bn of asset sales achieved so far in 1HFY12, the company could achieve divestment totaling c.INR20.5bn in FY12F, on our numbers vs. its target of INR30bn. However, this doesn’t include sale of Aman resorts for which the company has received a total of 4 bids. So far, the company has received total cash of around INR4.1bn, on INR 8.8bn worth of assets sold in 1HFY12.
8. Addressing the market reports related to the sale of NTC Mill land in Mumbai, DLF noted that it has not formalized any plans for disposing or executing the project, citing the uncertain macro environment. In our view, given a large oversupply in the Lower Parel micro market and execution challenges related to Mumbai, where the company does not have any significant presence, the company may be looking to monetize this asset, especially considering the absolute quantum that can be realized from this sale. Notably, if it were to sell the property, management commented that DLF would receive 60% of the amount while remaining 40% would go to the promoters of DLF (on conversion of issued preference shares).
9. Due to an increase in gearing , the cost of debt moved up further by 0.75% to 12.5% (2QFY12) vs. 11.75% in 1QFY12 and 11.25% in 4QFY11. Separately, the company suffered a mark-to-market forex loss of INR1.42bn in the quarter on the outstanding foreign loan of US$240mn pertaining to its subsidiary Aman Resorts.
We look for gearing to drop in coming quarters underpinned by the sale of new launches (~7-8mn sq ft), cash inflows from
asset sales, increased focus on execution / delivery and lower capital expenditure towards commercial assets. We maintain our BUY rating on the stock.
Valuation Methodology and Investment Risks: We value DLF Ltd using a net asset value (NAV) methodology, which is a DCF valuation of the development potential of the company's land reserves and developed property. We do not attach any premium or discount to this NAV to arrive at our target price. Our target price of INR270 is based on INR219 for the land bank NAV, INR29 for noncore assets and land, and INR21 for its 57% stake in DLF Cyber City Developers Ltd(DCCDL). Downside risks include 1) further rapid increases in interest rates; 2) below-expectation growth in the economy; 3) execution lagging expectations; 4) a credit crunch-like environment resulting in developers being unable to refinance their debt; 5) equity dilution to repay debt; and 6) inability to sell noncore assets.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
2QFY12: Key takeaways from conf call: Operational challenges resulted in weak quarter
1. The company noted that it was a challenging quarter operationally as 1) a delay in approvals resulted in a push back of new launches; and 2) a shortage of labour led to slow construction progress at its ongoing projects.
2. To address the problem of labour shortage, DLF is now planning to appoint experienced turnkey players for project execution instead of doing it through its in-house construction company. We view this move to be positive, given this should speed up the construction pace and help in faster realization of cash; however, on the flip side, this may push up the construction cost a bit for the company.
3. The company guided that it achieved an EBITDA margin of around c.45% on FSI sales, lower than our expectation but quite similar to its current overall margin of 47%. The company believes that it will maintain its EBITDA margin in the range of 45-50% going forward.
4. The company retained that it will continue to adopt a cash conservation strategy and focus on selling plotted developments. It is planning to launch nearly 4 mn sq ft of plots in 2HFY12 across Chandigarh, Gurgaon & Lucknow.
5. The company incurred capex of around INR2.3bn for 2QFY12 and INR6.3bn for 1HFY12 towards commercial projects and land replenishment. In the next few quarters, the company intends to spend at a similar run rate of around INR2-3bn per quarter. Recently, DLF acquired some contiguous land parcels in Chandigarh and Gurgaon.
6. The company sold nearly 3.5mn sq ft in 1HFY12. Despite targeted fresh launches of around 7-8mn sq ft (which include largely plotted development) in 2HFY12F, we believe the company may miss our FY12F sales volume estimates of nearly 11 mn sq ft (including plots+ residential + commercial projects).
7. Management remained confident on asset sale progress of an IT Park in Noida and SEZ in Pune and expects realization of these sales in the current quarter (3QFY12). Assuming sale of IT Parks (totaling c. INR11.7bn) plus INR8.8bn of asset sales achieved so far in 1HFY12, the company could achieve divestment totaling c.INR20.5bn in FY12F, on our numbers vs. its target of INR30bn. However, this doesn’t include sale of Aman resorts for which the company has received a total of 4 bids. So far, the company has received total cash of around INR4.1bn, on INR 8.8bn worth of assets sold in 1HFY12.
8. Addressing the market reports related to the sale of NTC Mill land in Mumbai, DLF noted that it has not formalized any plans for disposing or executing the project, citing the uncertain macro environment. In our view, given a large oversupply in the Lower Parel micro market and execution challenges related to Mumbai, where the company does not have any significant presence, the company may be looking to monetize this asset, especially considering the absolute quantum that can be realized from this sale. Notably, if it were to sell the property, management commented that DLF would receive 60% of the amount while remaining 40% would go to the promoters of DLF (on conversion of issued preference shares).
9. Due to an increase in gearing , the cost of debt moved up further by 0.75% to 12.5% (2QFY12) vs. 11.75% in 1QFY12 and 11.25% in 4QFY11. Separately, the company suffered a mark-to-market forex loss of INR1.42bn in the quarter on the outstanding foreign loan of US$240mn pertaining to its subsidiary Aman Resorts.
We look for gearing to drop in coming quarters underpinned by the sale of new launches (~7-8mn sq ft), cash inflows from
asset sales, increased focus on execution / delivery and lower capital expenditure towards commercial assets. We maintain our BUY rating on the stock.
Valuation Methodology and Investment Risks: We value DLF Ltd using a net asset value (NAV) methodology, which is a DCF valuation of the development potential of the company's land reserves and developed property. We do not attach any premium or discount to this NAV to arrive at our target price. Our target price of INR270 is based on INR219 for the land bank NAV, INR29 for noncore assets and land, and INR21 for its 57% stake in DLF Cyber City Developers Ltd(DCCDL). Downside risks include 1) further rapid increases in interest rates; 2) below-expectation growth in the economy; 3) execution lagging expectations; 4) a credit crunch-like environment resulting in developers being unable to refinance their debt; 5) equity dilution to repay debt; and 6) inability to sell noncore assets.
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