BackWeak home sales may hit DLF turnaround plan
DLF, which met its debt reduction target, may not generate better operating cash flows if sales remain sluggish
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Bangalore: Realtor DLF Ltd seems to be on the verge of a turnaround after selling units that aren’t central to its main business and by almost reaching its debt reduction target, but weak home sales remain a concern for India’s largest real estate developer by market value.
In the fiscal year ended 31 March, the Gurgaon-based developer sold ₹ 5,930 crore of assets related to non-core businesses such as wind energy, insurance and hospitality, raising more than the targeted ₹ 5,000 crore.
The company also lowered its debt to ₹ 18,500 crore against a targeted ₹ 17,500 crore.
Among key asset sales, DLF Global Hospitality Ltd, a subsidiary, entered into a share purchase agreement with Aman Resorts for the sale of its 100% stake in Silverlink Resorts for an enterprise valuation of around $358 million in January.
With big-ticket asset sales almost done, analysts are now concerned that if home sales don’t pick up, DLF may not be able to sustain the lower debt level and generate better operating cash flows.
Slowing economic growth, which has slumped to a 10-year low, and high borrowing costs have hurt home sales in India.
Last week, in an earnings conference call with analysts, DLF’s management indicated it would take another 18 months for the company to return to its sales momentum and the target it specified in early 2013.
For the March quarter, DLF posted a net profit of ₹ 219.68 crore compared with a loss of ₹ 4.19 crore in the year-ago period. It posted an 11.5% fall in revenue to ₹ 1,969.45 crore in the same period.
The company said it had achieved gross sales of 3.74 million sq. ft during the year from new launches and existing projects.
DLF’s interest outflow for the year stood at ₹ 3,230 crore as against operating cashflows of around ₹ 1,970 crore, analyst reports show. Operating cashflows were weak mainly because of lacklustre demand and higher contribution of low-margin projects.
A 30 May Motilal Oswal Securities Ltd report said the three months ended March was its lower ever quarter in terms of sales bookings at 400,000 sq. ft. Comparatively, business from rentals performed better, at 0.5 million sq. ft of leasing. Weak demand and lack of fresh launches have resulted in deterioration in core operating cash flow, the report said.
“DLF’s key challenges would be to get its project execution and sales on track so that the debt is in check and to generate positive cash flows from its current negative cashflow situation," said Sandipan Pal, analyst at Motilal Oswal. “Concerns over leverage have moderated with success in divestments and recent entry in CMBS (commercial mortgage-backed securities). However, prolonged weakness in operating cash flow remains a big threat for any further deterioration."
In May, DLF raised ₹ 525 crore by issuing securities against its luxury mall DLF Emporio Ltd in south Delhi to help cut down its exposure to the banking sector.
What also worries analysts is that DLF’s individual performance apart, the property market in the national capital region centred on Delhi has been struggling with slow sales and weak launches, something that will take at least a year to turn around.
“Since the last four quarters or so, sales have plummeted in NCR and it will take 12-18 months for it to get better," said Rajeev Bairathi, executive director, capital transactions group and north India, at Knight Frank India, a property advisory.
Launches have also reduced by more than half and there has been negligible price increase in the last year or so, said Bairathi.
According to a presentation by DLF, it has ready stock worth around ₹ 4,000 crore and under-construction stock in excess of ₹ 13,000 crore and new launches in the pipeline worth ₹ 7,000 crore.
“As market improves, the company shall monetize this mature stock," DLF said in the presentation.
Due to lack of new sales and cost overruns on execution of old projects, DLF’s core property operations continue to remain weak, according to Adhidev Chattopadhyay, an analyst at HDFC Securities Ltd.
Though it may not have any major financial implication, in another setback of sorts, last month, the Competition Appellate Tribunal (COMPAT) upheld an order by Competition Commission of India imposing a ₹ 630 crore penalty on DLF. The developer said it will contest the penalty in the Supreme Court.
In 2011, CCI had imposed the fine on DLF for alleged abuse of its dominant market position in Gurgaon with respect to some its luxury projects.
DLF’s shares on Monday fell 0.14% to 209.05 on BSE, while the benchmark Sensex rose 1.93% to close at 24,684.85 points.
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