DLF trims expenses; interest costs weigh

DLF trims expenses; interest costs weigh

The December quarter performance did not negate concerns on the outlook for DLF Ltd. But if one were to look only at revenue and profit growth, the country’s largest realty firm fared in line with expectations.

It posted a 22.4% year-on-year (y-o-y) and 4.7% quarter-on-quarter (q-o-q) growth to Rs2,479.9 crore. Operating profit, too, jumped 39.7% y-o-y and 26.8% q-o-q to Rs1,178 crore as a result of relatively lower expenses. Raw material costs as a percentage of sales fell by 440 basis points (bps) q-o-q and 90 bps y-o-y to 38.4%. On the whole, DLF’s total expenses as a percentage of sales were lower by 60 bps y-o-y and and 850 bps q-o-q at 61%. One basis point is one-hundredth of a percentage point. With this, operating profit margin (OPM) for the quarter at 47.5% was higher by 590 bps y-o-y and 830 bps q-o-q. DLF’s management reiterated that the focus on margin protection shall continue with “due moderation in volumes", if required.

With just one more quarter to close fiscal 2011, DLF’s sales could fall short of its sales guidance. In the nine months till date, the firm sold 6.5 million sq. ft, a little over half the guided target for the year. Analysts estimate that when extrapolated annually to nine million sq. ft, there will be a shortfall of 25% from the lower end of the targeted 12 million sq. ft. This will dampen investor sentiment, given that higher interest rates could also keep demand subdued. One positive is that the firm till date has surpassed its guided target of 4 million sq. ft of lease volumes in the commercial space. Meanwhile, despite higher OPM, cash flows have not been able to offset high interest outflows. Land acquisition, coupled with payment towards preference shares and dividends, led to a Rs850 crore increase in net debt, which burgeoned to Rs21,334 crore at the end of the December quarter.

This was in spite of sale of non-core assets worth Rs403 crore in the quarter. DLF’s debt-to-equity ratio at 0.8 is not comforting as it weighs down overall profitability.

But planned new launches of around 8 million sq. ft, along with sale of non-core assets, may bring some relief, boosting revenue and improving cash flows in the near term. Net profit after adjusting for losses from associates grew 8% y-o-y and 20% q-o-q to Rs501 crore for the quarter.

DLF’s share trades at around Rs223. Along with the realty index of the Bombay Stock Exchange, the scrip has hugely underperformed the benchmark Sensex. Taking cues from tightening liquidity, inflation and stricter norms towards lending to real estate firms, investors do not seem enthused about the sector as a whole.

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