DLF’s market cap continues to erode; high interest costs trim profit

Realty firm DLF Ltd’s market capitalization is down to about one-fourth of what it was when the shares debuted on BSE in July 2007.

Even starker is the 90% erosion in market cap since the shares hit an all-time high on 14 January 2008, after which the global markets went into a tailspin with the Lehman-crisis.

If weak residential property sales and an inventory overload of existing projects is one reason for the loss of investor confidence, the bigger issue is its huge interest burden that erodes profits quarter after quarter.

For the March quarter, the firm paid out an interest of Rs.633 crore, as high as 25% of the net sales clocked during the period. Even the 20% year-on-year growth in net sales did not ease the cash flows. Although DLF’s sales came in significantly higher than Bloomberg’s nine-broker consensus estimate, in terms of area, it sold less in the residential segment than it did a year ago.

Besides, a report by Elara Capital Pvt. Ltd says that weak market conditions were mirrored in the company’s sales in fiscal 2016, with nearly 90% of pre-sales accruing from two projects, while the rest of its projects across the country saw no traction. Obviously, this leads to higher inventory, working capital and project cost overruns. The management, in its analyst conference call, reaffirmed the stress on this account, which is likely to ease only a year hence.

The bright spot during the quarter and through fiscal 2016 was a steady improvement in its commercial business segment. Yet this is insufficient to mend the debt problem. As of 31 March, DLF’s net consolidated debt is a huge Rs.22,000 crore and high interest outflows continue to take a toll on the company’s financials. The March quarter’s operating profit was about 23% higher than a year ago; but then, with the rising interest burden, net profit at Rs.131 crore was 25% lower and also fell short of what analysts had penciled in.

Still, if one wonders why DLF’s stock has been steadily moving up, it is because of the management’s decision to sell some of its assets and raise funds through real estate investment trusts and sell 40% of its stake in its rental business arm—DLF Cyber City Development.

Investors hope that such steps would eventually trim debt and unlock shareholder value, too.