Rally in DLF share prices premature
Real estate firm DLF Ltd’s stock shot up 7% on Friday, along with a host of realty stocks, on news of the increase in area eligible for sops under the Pradhan Mantri Awas Yojana-Urban. However, note that most listed realty firms have little or no presence in the middle-income segment.
The jump in DLF’s stock price is unwarranted at this point as it predominantly operates in the upper middle class and luxury housing segments, which is reeling with a huge inventory of unsold homes.
In fact, September quarter results were deplorable because its home sales were nil, as was the case in the June quarter, too. The September quarter’s net revenue contracted 23% year-on-year (y-o-y), although it was a big 30% drop when compared with estimates on the Street.
After putting brakes on sales for six months, DLF resumed sales only from November after it registered projects under the Real Estate (Regulatory and Development) Authority of India, 2016—mandatory for property sales.
According to HDFC Securities Ltd, “DLF has a Rs150 billion (Rs15,000 crore) high-value inventory nearing completion, encompassing saleable area of 15 million sq.ft, of which 67% is high-value segment and in the National Capital Region.” This is a dark cloud looming over DLF’s profit and loss account. Inventory holding cost may also add up to interest costs.
In fact, DLF shares rallied as news of the much-awaited promoter stake sale in its rental arm, DLF Cyber City Developers Ltd (DCCDL), finally bore fruit. This would halve DLF’s debt and trim its net debt:equity from 1.1 to 0.3 by end-FY18. Fortunately, robust office sales and falling vacancies, along with a growing commercial rentals market, helped promoters monetize their stake to alleviate the debt burden of about Rs23,000 crore.
However, recovery in its premium homes segment is key to sustained cash flows. Analysts believe this is still 12-18 months away. New launches, too, are at a standstill. DLF’s debt inched up in the September quarter due to the need to complete construction of existing projects.
In other words, the prospect of a sharp debt reduction in DLF is a huge relief for investors who were in a quagmire for several years.
For instance, the September quarter’s net profit (due to interest costs) was 81% below Bloomberg’s average estimate.
An uptick in home sales is, therefore, the key to profit growth even after the debt comes down. Or, it should be able to sell its huge land bank and generate cash.
Otherwise, it won’t be long before debt starts to mount again to impact profits through higher interest burden.
For now, DLF’s stock price rally is misplaced and only mirrors the sentiment that the sector will move out of its long slumber on the back of the government’s push for housing.