DLF’s stock up despite worrisome financials

One could wonder why DLF Ltd’s shares have been cruising steadily upwards in spite of the June quarter’s lacklustre performance. Declining residential project sales, dull leasing activity and sticky interest rates have dragged down revenue and profit at the country’s largest private sector real estate company. Yet, the stock rose 3% on Tuesday to Rs 217.55, helped partly perhaps by the overall market buoyancy.

Two reasons could have lifted sentiment on DLF. One, the latest company presentation highlighting that besides monetizing around Rs 370 crore from non-core assets during the quarter, three more divestments are in “the pre-closing diligence stage”. This should yield around Rs 5,000-6,000 crore, which would go some way towards easing DLF’s huge net debt burden of Rs 22,680 crore. A report by Emkay Global Financial Services Ltd said the company generated cash from operations of around Rs 665 crore against interest and guarantee charges of around Rs 740 crore. In fact, the firm met the shortfall by lowering cash on its books. Any relief on the debt front, especially during challenging times in the realty market, will improve investor sentiment.

Another factor that may have boosted the stock is the 500 basis points jump in operating margin to 51%. But this could be a one-off situation, as the impact of securing additional saleable area in one of its key projects helped to offset costs, thereby lifting margins for the quarter. A basis point is one-hundredth of a percentage point.

That said, DLF’s residential sales were down to 1.3 million sq. ft, against 2.3 million sq. ft a year ago. The real estate market is unlikely to bounce back in the near term, given the high interest rates that hit retail borrowing. Revenue for the June quarter declined 10% from the year-ago period, coming in below estimates. Net profit fell 13% to Rs 293 crore, marginally exceeding the estimates.

The key triggers for a strong rebound in the company’s financial health and the stock will be the twin factors of lowering debt through asset sales and stronger cash flows from operations.

Also See

Cruising ahead (PDF)

Intraday & quarterly performance (PDF)