DLF Ltd, India’s largest listed developer, on Wednesday reported a net profit of Rs2,145 crore for the quarter ended December as more people bought its developments?and it sold properties more profitably to its promoter entity, a business model it has adopted to good effect since last year.
The company did not provide comparable figures for 2006 because it wasn’t listed at the time.
DLF sold about Rs1,850 crore worth of properties to DLF Assets Ltd (DAL) this quarter, and booked the profits for the entire amount. However, it hasn’t received the full amount for this. Booking profits on such so-called receivables is allowed under the country’s accounting laws.
DLF wouldn’t say what the actual receivables are for the quarter. It plans to list DAL assets in Singapore by June. “We will get the remaining money from DAL after their IPO (initial public offering)” said Ramesh Sanka, DLF’s chief financial officer.
DLF, which was planning to list DAL, its office trust (the company holds only commercial properties) in Singapore, said it is waiting for regulatory approvals to come through and refused to disclose the size of the offering. An office trust is similar to a real estate investment trust (Reit).
DLF derived more than half its revenue and profit from selling assets to DAL and such sales have a profit margin in excess of 70%, said Sanka. The margins from non-DAL income was at 50%. Revenue during the three-month period ended December was Rs3,651 crore.
This isn’t the first time DLF has shown robust growth by selling assets to a promoter firm that hasn’t paid up in full. When it applied for a listing last year, it showed a more than 800% boost in profit in an eight-month period, mostly using the same model of selling assets to DAL.
DLF has sold around Rs5,000 crore worth of assets to DAL in the nine months ended December, though it has been paid only 50% in the period.
DAL has already attracted $600 million (Rs2,364 crore) worth of investments from two investors—Lehman Brothers Holdings Inc. and DE Shaw and Co. Lp.—before the listing.
Reits and office trusts are akin to mutual funds that invest in real estate properties, manage income from the assets they hold and distribute this to investors. These are traded on stock exchanges.
The Indian realty market, after years of being on a roll, is starting to slow down as interest rates that are at a five-year high make both genuine and speculative buying more expensive to finance. This has led companies to focus on the “mid-segment” or more affordable homes that cost up to Rs50 lakh. In the third quarter, DLF booked 3,000 flats in this mid-segment in markets such as Chennai and Kolkata. In the current quarter, it plans to book double that, mainly from its traditional stronghold Gurgaon, said Sanka.
He said these units are priced at Rs3,000 or less per sq. ft and generate a profit margin between 35% and 40%, against margins of 70% in the luxury segment, which is priced usually between Rs75 lakh and Rs1 crore. Despite this, Sanka said DLF would be able to maintain profit margins at 50%.
“The results are more or less in line with the expectations”, said an analyst with a local brokerage, who did not wish to be identified. “Companies that have execution capability and good quality land banks will perform better.”
“The demand is extremely good,” said DLF vice-chairman Rajiv Singh. “We don’t foresee any slowdown in growth. Demand from residential buyers is also strong,” he said when asked whether higher interest rates have dampened new unit sales in the third quarter.