DLF Ltd’s quarterly results for the three months ended 30 September paint a grim outlook. The company suffered a double whammy as sales volumes fell and working capital needs increased, which in turn, had an adverse effect on cash flow.
Primarily, revenue growth itself was nothing extraordinary. It rose 6.9% from the year-ago period and 3.5% from the June quarter to Rs 2,532.4 crore. Revenue included Rs 615 crore worth of receipts from land sales.
DLF Ltd. Hamilton court apartment complex, Gurgaon(File photo Bloomberg)
Given the tough real estate market scenario, with rising interest rates affecting demand in the residential segment, DLF sold only 1.3 million sq. ft in the quarter, which was the lowest in the past 10 quarters. The uptick seen in leasing activity in the previous two quarters failed to sustain in the September quarter, which clocked 0.7 million sq. ft, about three-fourths of what was posted in the year-ago period. However, land sales during the quarter, which provides a higher profit margin, shored up operating profit, which grew by around 6%. Operating margin expanded by about 710 basis points during the period under review. It’s also marginally higher than the June quarter. One basis point is one-hundredth of a percentage point.
But the biggest concern that would precipitate the already negative sentiment towards the sector and the company is its huge debt burden, which will be a drag on the already falling cash flows from operations. During the quarter, net cash generated from operating activities fell to Rs 276 crore from Rs 837 crore at the end of the June quarter. One key reason is rising interest costs to Rs 516.1 crore—up 21% from the year before and 6% from the June quarter. In an adverse interest rate scenario, DLF’s borrowings of a huge Rs 25,450 crore, increased by around Rs 1,587 crore when compared with even three months ago. The management, in an analysts’ call, reportedly attributed the same to higher working capital due to a slowdown in construction and labour shortage, apart from the slower pace of new launches. Besides, deferral of payment receipts (from sale of assets) to the current quarter and bunched up payments of taxes further hit cash flows.
Explaining concerns on the same, a CLSA Asia-Pacific Markets report says, “A large number of projects (more than 20 million sq.ft of deliveries over the next 18 months) are close to completion. Project cash flows typically turn negative in that phase.” Lower cash flows pulled down net profit by 15.1% to Rs 372.4 crore, compared with a year ago.
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Further, while the management reiterated that its current year’s debt reduction target of around Rs 3,000 crore is on track, the listless realty market is likely to limit the pace of monetizing and divesting its non-core assets and land bank. In fact, the DLF stock outperformed the realty index on BSE in the last three months, mainly on rising expectations towards debt reduction. The September quarter results, however, would not have met this expectation, and, hence, could be a drag on stock performance in the near term, until better tidings come by.
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