DLF with its large land bank could still be a long-term play


MUMBAI: DLF’s June quarter results disappointed on all counts but the stock was up 2.4% on Tuesday as the Street bets on an expected debt reduction. But is there more upside for the stock?

The company announced the sale of promoter’s 40% stake in the rental business -DCCDL (DLF Cyber City Development) -to raise money for equity infusion in DLF will bring down the company’s debt, lowering interest outgo to improve profitability.In the coming months, DLF’s performance hinges on two things.

First, when and at what valuation the promoter stake sale in DCCDL will take place. According to sources, few buyers have shown interest and the promoter is demanding a slightly higher price. This may be a negotiation tactic but eventually the deal should happen, they said.

DCCDL generates around Rs 2,500 crore rental income and has a debt of around Rs 8,500 crore. Based on this, analysts expect a deal size of Rs 10,00012,000 crore for the stake sale.

DLF with its large land bank could still be a long-term play
Second, how much equity will be infused? Promoter holding in DLF is 75%, which is the upper limit for any listed company. This means equal amount of equity infusion by other investors will have to take place. The weak property market and its low sales, raise concerns.

DLF recorded a net sales of Rs 1,867 crore, down 22% year-on-year in the June quarter. Profit before interest and tax was Rs 9 crore against Rs 246 crore last year. However, net profit jumped 82% to Rs 283 crore on account of onetime income of Rs 329 crore from sale of DT Cinemas.

Despite the asset sale, net debt increased marginally to Rs 24,100 crore. On an analyst call, management said the balance sheet will look very different by the end of the year. The company has also suspended some part of its projects due to cash crunch. There are many projects it has been delivering with a delay of 2-3 years. It is focussing mainly on high-value projects where the profitability and cash flows are higher.

The management gave a negative outlook on the Gurgaon residential market and said the situation will be the same for the next few quarters at least. So, will DLF be able to find investors?

Some analysts argue that DLF’s investors are mainly long term and they will come in if they see value over a longer period of time. The land parcels DLF owns have huge value, which the company , once it reduces debt, will eventually be able to capitalise.

The stock is up by over 80% in the last six months despite weak operational performance on expectations of debt reduction and a revival in the NCR market. These factors along with interest rates will continue to guide the direction of the DLF stock.