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DLF's Q2FY18 results (Underperformer) - Awaiting promoter cash infusion

Q2FY18 results

• Revenues came in sharply lower at Rs15.9bn (Rs20.4bn in Q1) vs est of Rs20.5bn
• Net pre-sales came in significantly lower at Rs0.55bn vs Rs1.25bn as the company had stopped sales from 1 May due to RERA implementation. With the sales commenced from 1^st Nov, meaningful pre-sales booking is likely to start from Q3FY18 onwards only
• Gross leasing was 1.75msf (1.20msf in Q1) with lease expiry of 1.38msf (1.1msf in Q1). Net leasing stood at 0.2msf (flat qoq)
• Led by lower revenues EBITDA came in lower at Rs7.9bn (Rs9bn in Q1) vs est of Rs9.1bn. However led by better operational performance OPM came higher at 49.6% (44.1% in Q1) vs est 44.4% due to lower material cost of Rs5.bn (-31%/41% yoy/qoq) vs est of Rs8.4bn and lower SG&A (incl emp) exp at Rs2.9bn (-8% yoy) vs est of Rs3bn.
• Tax rate stood negative led by deferred tax (vs 13% in Q1 and est of 30%) while int cost stood higher at Rs7.95bn (up 8% yoy). Resultant PAT came in lower at Rs126mn (-94% yoy) vs est of Rs0.73bn.
• The net debt continue to increase and stood at Rs268bn (vs Rs259bn in Q1) reflecting significant negative free cash flow at operating levels.

Key positives: Shareholders approval for DCCDL deal, GIC received CCI approval; Expected fund infusion in Q4FY18

Key negatives: Net debt increase; no new sales

Impact on financials: maintained our FY18/FY19 earnings estimates.

Valuations & view

DLF’s weak operating cash flow status is reflected in ~Rs9bn increase in debt during the quarter. DLF is generating negative cashflow over the past few quarters. The fund infusion emanating from promoter’s decision to sell its 40% stake in the annuity business to PE players and then ploughing it back into DLF will take a couple of quarters to operationalize. Delay in asset monetisation will keep debt elevated and given weak operating cash flow on account of subdued demand in its key market of Gurgaon. While the DCCDL stake sale will partially address leverage issues, challenges hampering DLF’s ability to monetize its huge landbank into operating cash flows are likely to persist. Further, there are likely to be disappointments on market expectations of a debt-free development company post the DCCDL transaction closure. Maintain Underperform.