Stock Review: DLF

IMPROVING asset realisations have helped DLF report a double-digit growth in revenue during the June 2010 quarter. But the company's margins have suffered due to higher debt burden. In the coming quarters, though topline is expected to see a healthy growth, higher leverage may eat into profitability.

The country's largest realty firm reported a 23% growth in sales, aided by higher asset prices and a onetime gain from sale of non-core assets. Net profit, on the other hand, rose at a slower rate of 9%.

Overall, the numbers for the first quarter were in line with analyst expectations though growth moderated compared with the past two quarters. This is because the financial results in the past two quarters were boosted partly due to lower base in the previous year. Lesser number of new project launches was another reason for tapering growth.

Demand recovery is reflected from the increase in the leasing space. DLF's office lease space increased 30% to 1.2 million square feet (msf) during the quarter. Further, leasing rental also improved 60% to Rs 48 psf per month for office building during the same period. This shows demand is slowly reviving in the commercial segment.

A cause for concern is higher debt on DLF's balance sheet. The company has piled up loan funds due to the acquisition of group firm DLF Assets. DLF's net debt increased 24.5% during the quarter to Rs 18,463 crore. This has pushed its debt-equity ratio to 0.7, higher than DLF's long-term target of 0.5.

One way the company can reduce its debt leverage is by selling off non-core assets. The firm has said it plans to raise up to Rs 2,500 crore from divestment of such non-core assets in the coming 15-18 months, besides diluting its stake in ongoing projects and cash generation from sale of new projects. If the improvement in the commercial leasing business is sustained, it could add further revenue for the company.

In the past six months, DLF's stock has been an underperformer. It lost 9% during the period against the 10% gain in the Nifty.

Going forward, growth in revenues would depend on the success of new launches. The company is awaiting approvals for some of its new projects. This, together with existing inventory, may keep its sales growth ticking, even though the impact of low base of the year ago quarters will be neutralised. Margins will largely be a function of how well the company can control the cost of servicing debt in the coming quarters.