Stock Review: DLF

 

THE country's largest realty player DLF may miss its targeted sales of residential properties in the year ending March 2011. This could impact its projected annual revenue, at a time when rising debt on its books is already eating into net margins. A strong year-on-year growth in the volume of residential housing sales helped DLF post a 22% increase in revenues for the quarter ended December 2010 over the year-ago period. But the company needs to sell at least 5.5 million square feet of residential apartments in three months to end-March 2011, just a tad below what it managed to sell through the first nine months of the year, to achieve its target for the full year.

   Considering the rising cost of borrowing, which is expected to dampen the demand for new housing, this appears unlikely. The company's performance in the commercial leasing segment has been positive, in line with expectations, but that may not be enough to make up for lower than expected sale of residential property this quarter.

   DLF's debt rose to 20,694 crore as of December 31. Higher debt has also added up on its interest payments, which, coupled with rising costs of operations and a onetime increase in cost from minority interest, led to a flat growth in net profit for the third quarter over the year-ago period. This was despite a high revenue increase and a reasonable rise in operating profit. The realty firm plans to raise 2,500 crore by selling non-core assets. Much of its future performance will hinge on how fast it manages to reduce debt and cut interest costs to boost margins.

   On a sequential basis, its topline rose by a modest 5% for the three months to end-December over the quarter ended September 2010 as volume growth in both residential housing and commercial leasing space was strong over the last two quarters. But, better realisation from the residential segment and higher volume from the commercial space increased its net profit 11% sequentially compared with a mere 2% rise in the quarter-ended September 2010 over the three months to end June 30.

   The stock has lost over a third of its value in three months despite an improvement in fundamentals. It is trading at a price earning multiple of 21 on a consolidated basis as against the historical ratio of 40-50, which makes the stock attractive.