DLF’s net sales for Q2’09 increased 15.2% y-o-y but fell 1.7% on a sequential basis. The EBITDA margin fell 840 bps to 64.1% owing to a shift in focus towards the low-margined mid-income housing segment.
While we expect the liquidity crisis to impact the Company adversely, we believe that the current stock price factors in the expected slowdown in the real estate sector.
The real estate demand is expected to weaken further in the next few quarters, owing to the current economic slowdown and the cautious approach of the banks towards the sector.
This is likely to create downward pressure on property prices. Accordingly, we have assumed a 15% correction in property prices over the next six months across all the segments.
During Q2’09, DLF launched only 0.25 million square feet (msf) of new space, the least since Q1’08. We believe that the drying up of sources of funds and high receivables (63% of sales) will intensify the shortage of funds, thereby delaying the existing projects and new launches.
The EBITDA margin for Q2’09 fell 840 bps (y-o-y) to 64.1%. We expect the margin to fall further, given the anticipated price decline and increased emphasis on the low-margined mid-income housing segment.
However, the expected fall in prices of major raw materials such as steel and cement should help ease the pressure on the margins to some extent.
Based on NAV, our fair value estimate of Rs240 suggests a 7% premium to the current market price. Currently the RoE of the company is around 39% and the stock is trading at a P/B of 1.6x. We maintain our HOLD rating.