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As realty firms brace for the worst, DLF’s reduced leverage a saving grace

  • Company can bank on cash flows that accrue primarily from its commercial rental arm, DLF Cyber City Developers
  • According to CLSA Ltd, DLF has one of the lowest gearing in the residential business (net debt:equity of 0.13) with an interest coverage of about two times

DLF Ltd shares have fallen 44% so far this year, which isn’t surprising considering the expected sharp contraction in home sales and yields of commercial real estate. As one of the largest real estate developers in the country, the company is bound to feel the tremors of covid-19 and the consequent lockdown.

However, analysts say its relatively low leverage and strong cash flows from the commercial segments make DLF well poised to tide over the crisis, compared to peers.

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Graphic: Satish Kumar/Mint

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In this context, the sharp debt reduction from about 12,000 crore in Q3 FY18 to 4,900 crore in Q3 FY20 by monetizing assets, holds it in good stead.

According to CLSA Ltd, DLF has one of the lowest gearing in the residential business (net debt:equity of 0.13) with an interest coverage of about two times.

This does not ease the business hurdles. Home sales have been hit as construction activity came to a halt after the lockdown. Brokerage firms have forecast a sharp double-digit decline in the company’s Q4 FY20 stand-alone revenue, which reflects home sales.

Fortunately, DLF can bank on cash flows that accrue primarily from its commercial rental arm, DLF Cyber City Developers Ltd. So far, analysts do not expect a steep decline in the 3,000-crore per annum rental income from offices, although new lease rental negotiations may take time.

Industry experts have also trimmed the office rental increase from 5% per annum to 3% over the next two years. But these assumptions may also well prove to be generous if the economic impact of the lockdown turns out worse than expected.

There is also a significant risk to the company’s mall rentals, which comprise about 17% of the total commercial revenue, due to mall closures.

Further, DLF’s revenue growth from home sales is likely to be tepid for a few quarters. Even though it has an edge over peers with a 9,400-crore ready-to-occupy inventory, social distancing norms due to covid-19 will delay sales.

Given these adversities across all businesses, and the grim revival outlook, brokerage firms have trimmed FY20 earnings estimates by 17-20%, with a sharper cut for FY21. From an investor’s perspective, the saving grace is that DLF’s balance-sheet position has improved. Still, its shares have fallen more than the NSE Realty index, which is down 41% this year.

“DLF’s strong rental income ( 3,000 crore per annum) and ready unsold inventory ( 9,000 crore), with its strong balance sheet (interest cover of about two times), should help the company overcome an expected slowdown," said the CLSA report.

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