DLF: Debt burden, non-core business may prove a drag

Realty firm DLF's performance in the quarter to March was better than the preceding December quarter - but from the perspective of investors, their worries are far from over. A tough funding environment, high interest rates which have impacted demand, inflationary pressures denting margins, a slump in the commercial realty market and more discerning customers are taking toll on the local real estate sector. Little wonder the performance of the largest real estate player in the country has suffered on all these counts.

For the March quarter, DLF's net sales dropped 2.5% against the comparable period a year ago. Though operating profit grew by 20%, operating margins were at 30% - the lowest in the last four quarters. An encouraging sign has been higher sales booking at 6.75 million sq ft (msf) during the quarter against 3.3 msf in the preceding December quarter and 3.8 msf in the same quarter a year ago.

However, contrary to expectations, DLF failed to meaningfully cut down its net debt of over Rs 22,700 crore which is now five times the company's FY12 EBITDA of Rs 4,500 crore. It has not been able to divest its loss-making non-core businesses of hotels and insurance amid the current challenging period for the economy.

The company does not expect any respite in the next few quarters. It intends to preserve cash by going slow on capital expenditure and land acquisition. With an improvement in approvals, it intends to focus on fresh launches - especially high margin luxury projects. Debt reduction through operational cash flows and divestment of non-core assets remains a key objective. For the medium term, the company has increased the targeted divestment of non-core assets from Rs 4,500 crore to Rs 10,000 crore.

The company has lost appeal for short to medium-term investors.