With rising interest rates and high home prices forcing buyers to defer their purchases, the real estate sector has not been in good shape for the past six months. These conditions are not going to change overnight, hence, the outlook for the industry remains sombre.
DLF Ltd, which saw sales decrease during the previous fiscal, faces yet another problem. It had net debt of Rs21,424 crore at the end of March, an increase over the previous fiscal despite some asset sales. The company currently has a net debt-equity ratio of 0.9, one of the highest in the industry, according to calculations by India Infoline Ltd.
The debt weighs so much on the company that it plans to sell Rs10,000 crore of non-core assets, double of what it had planned earlier. It’s also scaling down investment and capital expenditure plans in an effort to reduce debt and prevent interest charges from wrecking profit.
While that may help the company reduce its debt, on the flip side, it’s an indication that DLF is not doing too well operationally. In the fourth quarter, its net profit declined by 19% from a year ago. Despite a rise in revenue because of a strong showing in the National Capital Region, operating profit fell by 44.7% from a year ago. That was because the company had to take a one-time charge of Rs475 crore in the fourth quarter, mainly on account of higher labour and raw material costs for older projects.
The company’s strategy to counter these issues is to sell an increasing proportion of plots—instead of constructed houses that will have associated costs—and lock in some 80% of its construction costs. But will that be enough?
DLF’s guidance of a 20% increase in volumes for the current fiscal may not be enough to generate sufficient cash flows to reduce debt, reckon brokerages.
On top of that, the note to accounts shows that the taxman has slapped a notice demanding Rs550 crore more against fiscal 2009 income. This is in addition to a similar demand of Rs1,160 crore a quarter ago.
No provisions have been made for these, even as the company has challenged these orders.
No wonder, investors hammered the stock that fell 4.04% on Wednesday, even as brokerages start cutting earnings estimates.
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