Home >Markets >Mark To Market >DLF’s debt woes ease, but there are challenges to its Build and Sell model

Realty developer DLF Ltd paring its debt, as per plan, is commendable. The company had a debt of Rs3,416 crore as of end of June quarter, down from Rs7,120 crore a year ago, and is confident of achieving zero debt status by March.

However, with the residential property market in turmoil, more so in the National Capital Region (NCR) where DLF’s huge unsold inventory is concentrated, it may take time for sales to gain traction.

No doubt, net sales booking during the first quarter of fiscal 2020 rose 17% year-on-year to Rs705 crore, but net total income fell 11.7% during the reporting quarter to Rs1,331 crore, also coming in way below the market estimate of about Rs2,300 crore.

Of course, income as a measure of growth is less relevant under new accounting norms, where income can be booked in the profit and loss account only from units handed over to the buyer.

Investors must take cognizance of the fact that DLF’s Q1FY20 Ebitda (earnings before interest, tax, depreciation and amortization) of Rs746 crore included net exceptional income of Rs296.5 crore. The exceptional income comprised profits from sale of a mall and a land parcel, which when clubbed with other income totalled Rs506 crore, which is substantially higher than the Rs150 crore in the year-ago period, implying weakness in core Ebitda.

To be sure, DLF’s unsold inventory is down to Rs10,970 crore from around Rs14,000 crore few quarters ago. Sale of these units will bring strong profitability given that cost of construction has been accounted for. However, given the current market scenario, with housing finance companies and banks going slow on home loans, it may take at least four to five years to liquidate the inventory.

Meanwhile, DLF’s new strategy--Build & Sell--requires strong cash flows and therefore a challenge. Investment is made upfront by the firm towards development and construction of homes, which are then sold only on completion. Indeed, Q1 operating cash flow (after interest and tax) of Rs204 crore is a big leap from - 27 crore in the year-ago period, though lower than Rs390 crore in the March quarter.

However, sticky property prices and scores of stranded projects pose a risk to robust sales and cash flow generation. Cost of capital also may be higher for real estate firms due to systemic challenges in the sector.

That said, Santhosh Kumar, vice-chairman, Anarock Property Consultants, in a note said post-demonetisation and Real Estate (Regulatory and Development) Authority era, branded firms have outpaced non-branded developers in launches. Liquidity crisis, stringent norms, multiple policy reforms, and millenials’ preference for branded developers will lead to consolidation in the sector.

Analysts have turned positive on DLF’s prospects as its robust rental portfolio under DLF Cyber City Developers measuring 30 million sq. ft. generates stable income and operating cash flows.

A May 2019 research report from Edelweiss Securities Ltd said “an attractive rental portfolio and a revamped balance sheet are likely to lead to better cash flows for DLF, which is likely to be a key beneficiary of the ongoing consolidation in the sector."

The firm’s shares have underperformed the Nifty realty index primarily due to the company’s large unsold inventory and debt overhang, which is slowly but surely on the ebb.

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