Buy DLF on declines !!

Weak results; cash flows expected to improve

DLF’s 4Q FY13 dismal profits with net profit decline of 87% QoQ were primarily driven by lower margins on older products due to cost escalation. The company has not been able to reduce the net debt in 4Q FY13 due to lack of any non core asset sale. On a more positive note, the company has delivered 9mn sq ft in 4Q FY13. We remain optimistic on the stock and expect the net debt to reduce gradually from F14. We maintain Buy with target price of Rs363 based on 1xF14eNAV.   

Revenue grew 70% QoQ; but net profits declined 87% QoQ; Sales for 4Q F13 grew by 70% QoQ to Rs22.3bn compared to Rs13.1bn in 3Q F13. The net profits declined QoQ  by 87% to Rs320mn (before minority interest and prior period expenses). The net profits were helped by tax write back of Rs200mn.

EBITDA margins to remain between 30-40% in F14e- DLF is completing 25-30mn sq ft of residential property which had been sold about 3-5 years ago.  Due to the sharp escalation in many of the raw material prices like steel, cement etc, the cost of construction for these projects has increased leading to lower margin in these properties.  In the recent past, the company has been adding an escalation clause to the all the residential property sales which is expected to help in reducing the impact of escalation in raw material cost.

Net debt expected to reduce from F14e:  The net debt (Rs21.7bn in 4QF13) reduction is expected to be driven by the sale of non core assets. We expect the net debt to trend down in F14e due to the expected cash inflow of Rs4.6bn from sale proceeds of Aman resort, wind energy business and equity raising by the company which has been successfully completed.

Execution has improved in 4QF13: DLF has delivered 9mn sq ft in 4Q F13. The company has delivered 9.42mn sq ft in F13 which is similar to 10.24mn sq ft delivered in FY13. 

Valuation and recommendation: We are optimistic and expect the launch of high value properties in Gurgaon and sale of non core assets will help in improving cash flows to reduce the net debt. We maintain our Buy with a target price of Rs363 based on 1xF14e NAV

Smart Investor
Equity Research Division

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