>DLF: Parameters to monitor

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 environmentvin 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.


■ Spending on land purchase: management has mentioned that it will be going slow on the same in the near term to conserve cash.


■ New launches both plots and group housing: A pipeline of ~7mn sq ft exists which includes 4.5mn sq ft of housing projects in Gurgaon both mid-income and premium.


■ Deliveries of completed projects: 9.5mn sqft is complete in Gurgaon and ready for delivery. Another 15mn sqft is expected to be complete in FY13F. Faster deliveries of older projects will free up execution capability for new launches.


■ Asset sale progress: As mentioned above, while we do not expect any major announcement over the next two quarters, asset sales will have to be undertaken by the company just to keep its net debt at current levels in FY13F.


To read the full report: DLF
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