DLF Q3: Home sales stable, inventory drops; but rise in debt a dampener2 min read . Updated: 06 Feb 2020, 10:48 PM IST
- Even in the residential segment, DLF’s unsold units are down to ₹9,415 crore from ₹10,100 crore in Q2. Sales booking is improving with every quarter
- During the decade from 2009 to 2018, surging debt was a bane for DLF
A few quarters ago, DLF Ltd had outlined its intent to move towards zero debt. In that backdrop, all eyes were on debt reduction when the company announced its December quarter results (Q3 FY20).
So, even the marginal rise in debt and the drop in revenue, both in residential and commercial property segments, weighed on investor sentiment. The stock fell almost 3% on Thursday to ₹246.30 on NSE after yo-yoing through the day.
During the decade from 2009 to 2018, surging debt was a bane for DLF. Therefore, net debt increase in Q3 to ₹4,866 crore from ₹4,461 crore in Q2 is worrisome, albeit being lower from the year-ago period. Additionally, its subsidiary DLF Cyber City Developers Ltd’s (DCCDL’s) net debt rose by about ₹1,900 crore year-on-year to ₹18,171 crore.
While this does not have a direct bearing on parent DLF’s balance sheet, analysts are concerned that with robust lease rentals in DCCDL, higher cash flows should have brought down debt. However, the management explained that even with half of the cash flows ploughed-in for capital expenditure and paying dividends, it would be able to service the debt.
To be sure, DCCDL is on a firm foundation in lease rentals. Strong brand equity has enabled the renewal of rental contracts with top clients at higher rates. In its Q3 results presentation, DLF’s projected annual rental income is 40% higher year-on-year at ₹3,750 crore in FY20. For FY22, it has guided ₹4,700 crore rental income in DCCDL.
Even in the residential segment, DLF’s unsold units are down to ₹9,415 crore from ₹10,100 crore in Q2. Sales booking is improving with every quarter.
Nonetheless, the steep 40% year-on-year drop in net revenue in Q3 could also be another worry for investors. An analyst, who did not want to be named, says that with fresh bookings rising, the fall in revenue indicates slow realization of income and handover of property to customers. Present accounting standards require complete possession by the buyer before the realty firm can account for the sale in its profit and loss statement.
Lower revenue also impacted DLF’s earnings before interest, tax, depreciation and amortization margin, which fell to 27% from 34% a year ago. Thanks to the boost from an exceptional item, net profit rose by 24%.
In the past year, the DLF stock has rallied 53%. However, further increase in the stock will hinge on how soon the company can dispose of unsold inventory, apart from monetizing land parcels to improve cash flows and reduce leverage.
Thursday’s monetary policy attempts to improve lending and transmission of lower interest rates to the real estate sector, besides a few others. This should help branded developers such as DLF. But for now, the Street has ignored this measure given that several headwinds still loom over the real estate sector.