Operating cash flows critical to DLF’s deleveraging story

Realty firm DLF Ltd stands out among peers by sheer size and brand equity. But its magnitude and multi-city operations seem to present a challenge during cyclical downturns in the market. Its March quarter results clearly mirrors this—net profit fell by 35.6% and 14.1% to Rs221.9 crore, compared with the year-ago period and preceding quarter, respectively.

This is in spite of robust sales of 6.8 million sq. ft of residential property versus 3.8 million sq. ft a year ago, which was the highest in many quarters and double that clocked in the December quarter. Unfortunately, higher volumes did not shore up revenue; it dipped by 2.5% year-on-year (y-o-y), to Rs2,616.8 crore, because a significant portion came from low-value plotted sales. Commercial leasing activity, too, saw some cancellations.

Subdued revenue amidst high fixed costs, working capital and receivables eats into cash flows. No doubt, DLF’s operating profit rose by 19.7% y-o-y to Rs797.6 crore. This was lower than estimates on the Street, as there was a surprise one-time impact of around Rs300 crore due to third party outsourcing to contractors. This is expected to ease the pressure on finances due to stretched working capital. Operating margin was 30.5%, down 560 basis points when compared with the year ago.

Finance charges have been DLF’s biggest burden for the last three years, since the realty market took a tailspin and interest rates rose at a scorching pace. March quarter interest cost was 32.5% higher than a year ago at a huge Rs605.9 crore.

Gross debt rose by Rs1,000 crore to Rs25,000 crore at the end of fiscal 2012—up by about Rs1,000 crore from the year ago. This was in spite of Rs1,770 crore being released during the year through sale of non-core assets. Robust cash flow from business operations is imperative so that any extra funds raised from sale of assets can rapidly bring down debt. For example, cash flow from operating activities in 2012 was Rs2,491.9 crore, outstripped by interest outflow and dividend payout together, which was about Rs3,500 crore. Such a gap will only entail fresh borrowings.

DLF’s management has stressed greater focus on luxury home projects, plotted land sales, inclusion of cost escalation clause for the customer and third party outsourcing of construction, which should ease cash flow pressures. An Emkay Global Financial Services Ltd report says that fiscal 2014 debt would increase if the company fails to revive its core business cash flow, which can meet its fixed cost and capital servicing obligations. Meanwhile, the targeted divestment of three non-core assets during the current year could fructify to fetch at least Rs3,000-4,000 crore, vital to reduce debt.

DLF shares which trade at around Rs182, are down nearly 20% from a year ago. Concerns on debt and cash flows will continue to weigh on the stock, unless there’s a reversal in demand.