After expanding sales in the first two quarters of FY-12, realty developer DLF saw its revenue decline by 18 per cent in the December quarter compared with a year ago. This was mainly a result of slower execution. DLF's balance sheet numbers too were disappointing, as it failed to reduce borrowings substantially despite Rs 1,200 crore of non-core asset sale.
Lower revenue and poor quality of sales, mainly on account of plotted development continuing to hurt operating profit margins. Operating margins slid from 41 per cent a year ago to 31.6 per cent for the quarter ended December 2011. Margin erosion and higher tax on account of sale of some assets all resulted in net profits dipping by 44 per cent over a year ago.
External contractors
DLF suffered due to inflationary pressures and cost overruns last fiscal. The company brought these costs to book in the March 2011 quarter. To avoid a similar situation, it decided to transfer projects that are being built in-house to external contractors such as Larsen & Toubro. This transition phase resulted in the company having to hold up work in its projects, resulting in slower execution. If this was the only reason for the slowdown, there may not be much cause for worry. In fact, project costs as well as construction time may become more predictable if outsourced, especially to large contractors.
This said, DLF booked higher sales volume of 3.3 million sq. ft in the latest quarter versus 2.5 million sq. ft a year ago. Clearly, the quality of revenue, increasingly coming from less lucrative plotted sales resulted in lower realisations.
This situation, though, may change, as the proportion of the more profitable group housing and commercial complex projects launched is slowly rising. The company has launched 8.5 million sq. ft of the latter compared with 7.2 million sq. ft of plotted development projects in FY-12 thus far. Once the housing projects reach a certain construction stage and are brought to books, the operating margins will improve. This may take 2-3 quarters though.
DLF's performance was also disappointing on other counts. For instance, the Rs 1,200 crore that it mobilised through sale of non-core assets was expected to reduce debt. But gross debt was reduced by only Rs 450 crore over the September quarter, as the cash had to be used for operations – both for interest repayment as well as to buy select parcels of land. Current gross debt stands at Rs 25,000 crore, but debt equity ratio remains at less than 1.