DLF is still on a shaky foundation as cash flows remain weak

A few months ago, DLF Ltd’s promoters infused funds to trim its ballooning debt through a stake sale in the rental subsidiary. That pulled it out of the debt trap.

But, weak cash flow prospects in the near-to-medium term raise fresh concerns on whether the company can achieve its guided “net zero-debt” milestone in fiscal year 2019 (FY19).

Although DLF’s rate of cash burn (cash spent higher than the operating cash flows) in the March quarter (fourth quarter) halved from the preceding quarter to 500 crore, the management reckons that it would remain so for the next few quarters. This may weigh on cash flows and push up debt again. Already, fourth quarter’s net consolidated debt inched up to 22,525 crore after receding significantly in the earlier one.

True, the company plans to retire some debt in FY19 through another round of funds infusion. But this is unlikely to appease investors as it gives the impression that the realty giant has to continuously rely on external funds to shore up its balance sheet. It is uncertain whether the company can generate sustainable operating cash flows given that most of its huge 14,000 crore worth of unsold housing inventory is in the Gurugram belt, which is the seat of unsold homes in the country.

Further, new launches may be still a few quarters away as DLF would focus on completion and sale of existing projects.

For that matter, even the 87% year-on-year jump in sales bookings during the March quarter was on the back of a low base in the year-ago period and mirrors the pent up demand due to the sales freeze in the earlier quarters on account of the Real Estate (Regulation and Development) Act.

Net revenue was 35% lower year-on-year and way below what analysts had penciled in. Worse, the company’s Ebitda (earnings before interest, tax, depreciation and amortization) loss was a shocker, given that analysts had forecast a profit of 604 crore.

Meanwhile, DLF’s commercial assets under the joint venture DLF Cybercity Developers Ltd (DCCDL) is churning out strong revenue traction on the back of robust rentals and utilization levels. Unfortunately, the entity is now treated as a joint venture after the promoter stake sale and hence does not accrue for revenue and operating performance of DLF, directly.

This is not all. The uncertainties on accounting formats due to 8,300 crore payable to DCCL over the next 12-18 months cloud future estimations. A report by ICICI Securities Ltd also says, “We retain our forward estimates assuming DCCDL’s consolidation in revenue/Ebitda as we await annual report details on numerous non-cash adjustments and reconciliations between DLF and DCCDL balance sheets.”

The new Indian Accounting Standards policies applicable from the current quarter may lead to a shift from the percentage completion to project completion methods that may again skew financials.

The downtrend in stock price after the March quarter results is therefore not surprising. Although it has gained 25% in the last six months, the upside will be capped unless there is strong traction in home sales, that too enough to drive cash flows.