DLF’s profits declined 94% y-o-y as sales plummeted (down 74% y-o-y) and margins nosedived (from 65% to 14%) due to weak volumes and falling prices.
The weak result also strengthens our concerns on the fragility of cash flows due to weak sales volumes, rising debt, inability of DAL to pay for purchases, and evidence of rising cancellations.
The decline in DLF’s net profits was driven by lower revenues arising from falling sales volumes and declining prices; revenues dropped 74% y-o-y and EBITDA margins fell from 65% in Q4FY08 to 14% in Q4FY09.
Higher other income of Rs2,290 million (up 248% y-o-y) and zero tax, however, partially negated the drop in net profits.
To maintain cash flows, DLF is selling its non-core assets (like wind power business), postponing hotel expansion, and deferring the development of its commercial (11mn sq ft of office) and retail projects.
The company’s three new projects in the residential space (Bangalore, Hyderabad, and Delhi), focused on affordable housing, have met with some success as of now.
DLF plans to reduce its debt levels from the current Rs16.4bn to Rs8.5bn in FY10 through a combination of non-core asset disposal and inflow from DAL.
We remain concerned of DLF’s ability to meet its target due to DAL’s inability to raise funds amidst weak market conditions and DLF’s ability to sell its non core and other assets in a weak economy.
Sales to DAL have dropped sharply due to DAL’s incapacity to pay for purchases. DAL paid Rs8.6 billion in Q4FY09; the current outstanding from DAL is Rs49 billion.
Our interaction with brokers reveals that cancellation of residential units has increased amidst rising job insecurity and declining prices. We are concerned of the impact these rising cancellations will have on a already stretched cash flow.
The disappointing results and visible cash flow strains support our bearish view on the sector and on DLF.
Continued weakness in sales along with rising cancellations (implying lower cash inflows for meeting the construction and debt commitments) remains our key concern.
We reiterate SELL on DLF with target price of Rs80 based on a 20% discount to our NAV of Rs99.
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