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

01 Sep 2016

dlf images 1DLF's June quarter results disappointed on all counts yet 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 organization declared the sale of promoter's 40% stake in the rental business - DCCDL (DLF Cyber City Development) - to raise fund for equity infusion in DLF will cut down the organization's debt, lowering interest outgo down to enhance profitability. In the coming months, DLF's execution relies on two things.

First, when and at what valuation the promoter stake deal in DCCDL will occur. As indicated by sources, few purchasers have demonstrated interest and the promoter is demanding a slightly higher cost. This might be a negotiation strategy but eventually the deal should happen, they said.

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

Second, how much equity will be infused? Promoter holding in DLF is 75%, which is the upper limit for any recorded organization. This implies 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 `1,867 crore, down 22% year-on-year in the June quarter. Profit before interest and tax was `9 crore against `246 crore last year. However, net profit jumped 82% to `283 crore on account of onetime income of `329 crore from sale of DT Cinemas.

In spite of asset sale, net debt increased marginally to `24,100 crore. On an analyst call, administration said the accounting report will look altogether different by the end of the year. The organization has likewise suspended some part of its projects due to cash crunch. There are numerous projects it has been delivering with a delay of 2-3 years. It is focusing basically on high-value projects where the profitability and cash flows are higher.

The administration gave a negative attitude toward the Gurgaon residential market and said the circumstance will be the same for the next few quarters at least. So, will DLF be able to find investors?

A few 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 capitalize.

The stock is up by more than 80% in the most recent six months in spite of 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.

By Sanjay Bansal | Founder & CEO | Affordable Homes India

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