Saturday, September 1, 2012

The Current Inflationary Scenario

It was an extremely difficult year for DLF Ltd. And things really started looking up only towards the end of the year. however, Debt remains a worrying issue for the company, as does the uncertainty of Realty Demand in the Current Inflationary Scenario. by Praveen Kumar

However, Q4 has been a visible sign of hope with consolidated revenues at `21.46 billion, which are up by 59% yoy; and consolidated PAT at `4.26 billion, which has risen by 170% yoy. Boost in the residential segment and divestment of non-performing assets have been the major contributors to the performance. As a follow up, DLF recorded consolidated revenues of `21.6 billion for the quarter ended June 30, 2010, an increase of 24% yoy.

Earnings before interest, taxes, depreciation and amortization (EBIDTA) stood at `1,112 crore, an increase of 32% as compared to `840 crore in the corresponding period last year. Net profit stood at `4.11 billion, showing a modest yoy increase of 4%. Commenting on the results, Saurabh Chawla, executive director of DLF Limited said, “Commercial segment continues to lag the momentum exhibited by residential segment, though we are seeing increasing traction on the leasing.” But inflation is the major concern that could dampen the demand sentiment.

In its July presentation to analysts, the company has explained its debt deleveraging plan for fiscal 2011. The company’s debt has been rising routinely over the last three quarters, resulting in a net debt outstanding of around `220 billion and a debt-equity ratio of 0.8 in end-June. The company needs to repay around `21.58 billion during fiscal 2011 out of its mandatory obligation to repay `28.9 billion.

However, a positive sign is the robust rebound in lease activity. DLF’s quality land bank also contributes favourably to valuations. The company has also expressed its intent to sell off its non-core businesses to generate cash. Talwar adds, “It’s already established that whatever overhead developmental costs or interest costs we have are well met from our usual leasing and launch businesses; so DLF doesn’t face pressures that some other overleveraged companies may face.”

Divestment is key to the group’s plans to bring back the balance in its balance sheet. DLF had a divestment target of `55 billion in FY 2009-10 and could manage actual divestment of `18 billion. A further divestment of `28 billion is targeted for this year. In the June quarter, it cashed out of its retail brands business and some land, too. Market watchers, though, are sceptical about the company’s ability to sell more land as prices have shot up in certain pockets, making buyers alert.

With respect to the challenges ahead, DLF’s rising debt also means that interest costs are still a drain on profits. In the June quarter, revenues rose by 23% on a yoy basis but profits rose only by 4%. Debt reduction has to be done, for which it is indeed important for the company’s divestment plans to achieve their stated target. The realty major also took some price cuts in the last two quarters, which it hopes will convert into increased demand in the latter half of the current fiscal and help it achieve the overall target of 15 million sq ft, even though the sales for the first quarter are quite low at just 1.44 mn sq ft in the residential segment. Delays in certain projects as well as new launches are in fact only making matters worse. Leasing really looks the only silver lining for the quarter as it stood at 1.2 mn sq ft, in fact more than the leasing that happened in the previous fiscal.

In the long run, there is no denying that the realty story remains robust due to the shortage of supply for a fast growing economy like India. After having burnt its fingers once, it is expected that K. P. Singh’s DLF will be more careful with respect to its expansion plans and its leverage levels, which brought it to the brink of capitulating in the recessionary period.


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