Rise in DLF shares unexplained

Rise in DLF shares unexplained
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First Published: Sat, May 02 2009. 12 25 AM IST

Updated: Sat, May 02 2009. 12 25 AM IST
The size of India’s largest real estate company, DLF Ltd, shrunk drastically last quarter, with revenues falling by 69% to Rs1,351 crore, compared with Rs4,372 crore in the year-ago quarter. Net profit fell by as much as 93% to Rs159 crore.
Market expectations of the size of the company’s land bank have also been cut drastically in recent months. The company has withdrawn from two large projects, bringing down total developable area from 751 million sq. ft to 425 million sq. ft.
The company has said it is contemplating similar action in long-gestation projects and assets. This is a step in the right direction. On one hand, demand for property has dropped significantly. On the other, the company’s balance sheet is already getting stretched.
Also See Steep Gain (Graphic)
Needless to say, most analysts factor in a further fall in property prices across the country, and this would continue to exert pressure on revenues and profit.
The markets’ worry, however, is not so much that the size of large real estate developers is falling, but whether these companies would remain solvent. DLF seems to be taking drastic steps to induce sales and generate cash. While new project launches had come to a near standstill since late last year, the fourth quarter had new launches in affordable housing and an unusual step of cutting prices on apartments that had already been sold at higher prices. The company sold 450 units in its affordable housing segment in the March quarter, and a recent launch in New Delhi has resulted in sales of 1,356 units.
But developers have little choice but to cut prices, since demand continues to come in a trickle at current property prices and also because of their stretched balance sheets. While companies have been able to reschedule a large chunk of their debt repayments, financial institutions are likely to put pressure on them to generate cash flows to support debt servicing obligations. While many prospective property buyers are adopting the wait-and-watch approach, developers can ill afford doing so for long.
In the March quarter, the company’s earnings before interest, tax, depreciation and amortization stood at Rs383.6 crore, more than adequate to cover the the interest charges of Rs162.5 crore. But if one were to exclude the other income of Rs229.1 crore, the company’s interest cover ratio falls to below one.
It’s important to note that interest charges have risen by 73% compared with the December quarter, as a result of higher debt as well as higher interest rates. Unless the company aggressively targets new sales in the coming quarters, the situation would get even more precarious.
The company’s decision to lower prices of homes sold earlier at higher rates resulted in a hit of Rs688 crore in revenue and Rs302 crore in profit. While this is a first in the realty market and shows that bargaining power is clearly on the side of buyers, it’s a positive step by the company to induce further sales. It is even taking other steps such as the proposed disposal of its wind power business.
While there are these positive factors, it still doesn’t explain the steep 70% rise in the company’s shares from its lows in mid-March. With news flow expected to be negative for most of this fiscal, investors’ high hopes could come to a naught.
Write to us at marktomarket@livemint.com
Graphics by Ahmed Raza Khan / Mint
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First Published: Sat, May 02 2009. 12 25 AM IST