DLF trims debt, but the onus is now on real estate to deliver

Although the company’s operating margin fell marginally to around 44%, DLF has begun churning out positive cash flows from operations. Photo: Priyanka Parashar/Mint

Vatsala Kamat  Live Mint 16 feb 14

DLF requires higher revenues from its residential properties to add to future cash flows and profitability

DLF Ltd’s December-quarter results were a mixed bag with an increase in revenues marred by an exceptional item, a provision that dragged down its net profit. The real estate firm’s settlement with the Delhi Development Authority (DDA) on an old contract came as a relief. However, the Rs.411.4 crore provisioning of a foreseeable loss led to a 49% dip in net profit to Rs.145.3 crore for the quarter compared with a year back.

DLF’s saga of high interest continues. Its interest cost of Rs.633 crore on account of its net debt of Rs.19,926 crore on 31 December also had an adverse impact on net profit. However, few positive developments since January have raised investor confidence about DLF’s ability to trim debt through sale of non-core assets.

A report by Religare Capital Markets Ltd, issued about a week back, pointed out that the sale of Aman Resorts at a price that was 19% higher than the earlier deal; the settlement of the DDA issue; and the divestment of its stake in an insurance joint venture has increased investor confidence on the company’s ability to trim debt. At present, net debt is down from the end-December level to Rs.17,400 crore as guided earlier.

With this, DLF is at an inflection point where it requires higher revenues from its residential properties to add to future cash flows and profitability. This would be tough to achieve in the near term given that interest rates continue to remain high and are unlikely to soften in the next couple of quarters. Even in the December quarter, DLF sold 0.6 million sq. ft worth Rs.600 crore versus 0.9 million sq. ft worth Rs.730 crore in the year-ago period.

Although the company’s operating margin fell marginally to around 44%, DLF has begun churning out positive cash flows from operations. In spite of a rise in expenses, its operating profit rose by 7% from the year-ago period to Rs.1,144 crore. Given the challenging economic environment, the stock fell by 43% over the last one-year, which was steeper than the fall in BSE realty index, while the benchmark Sensex rose by 5%.

Now that the realty firm has addressed several negatives despite recessionary market conditions, any triggers by way of higher sales volumes and operating cash flows, could pull the stock up from the present value ofRs.142.