Stock Review: DLF

Delhi-based leading real estate player, DLF has posted better-than-expected net profit compared to last quarter, supported by double-digit growth in the top line with improved realisation.

However, the stock price has not reacted positively due to a major contraction in the standalone numbers for the quarter ended June '11 and an outstanding issue tax issue of . 500 crore.

Higher realisation from the leasing business besides marginal improvement in the residential segment has helped the company to post a 21% revenue growth for the quarter ended June '11. Although earnings are under pressure due to high debt, DLF has been able to contain its debt in the past three months, which has resulted in a moderate decline to 6% compared to 12% in the quarter ended March '11. DLF witnessed improved demand from the leasing space — both in the office and retail segments — compared to the residential segment. Even though demand is more or less stable in both segments, rental income is up by 64% to . 236 square feet in the retail segment and 9%to . 47 square feet in the leasing space on a quarter-on-quarter basis.

On the debt front, DLF has been able to contain its debt with a flat growth to . 21,524 crore on a sequential basis. This has also helped in improving operating cash flow, which is up 24% for the quarter ended June '11. The improvement in cash flows highlight the company's strategy of launching plotted development. This strategy was undertaken to reduce debt by improvising the working capital cycle besides focusing on operational profitability with restricting cost. On the other hand, DLF has also to reaffirm the strategy to reduce its debt by divestment of non-core asset of . 6,000-7,000 crore in at least 2-3 years.

Overall, the decline in the net earnings have disappointed analysts. The major worry for the company in the coming quarter is matching the growth in the topline with the increase in the cost of construction and average cost of borrowing, which is expected to move up due to high inflationary pressure in the past few months.

DLF has outperformed the 30-stock BSE Sensex with a 4% growth compared to a 2% decline in the benchmark in the past three months. This partially explains the sustainable demand in the sector despite the revision in the interest rate from across segments. The outlook for the company's revenue growth will depend on the success of new launches. However, an expected increase in borrowing costs besides higher asset prices affecting demand could be a risk factor for the company in sustaining volume growth in the coming quarters.