Why analysts do no buy DLF's claim on meeting debt reduction target

India’s largest realty firm DLF on Wednesday said its net debt has reduced by over 6 percent during quarter ended June to Rs 20,369 crore helped by improved sales and funds raised via share sale to institutional investors.

DLF said its net debt would come down to Rs 17,500 crore by the end of this fiscal even if the company is not able to complete the $300 million deal to sell hospitality chain Amanresorts to founder Adrian Zecha.

The realty major’s stock also ended 5 percent higher today, as the realty major’s sales by way of bookings in the housing segment almost doubled to Rs 2,430 crore in the April-June period from the previous quarter on strong response for its Gurgaon projects.

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DLF sold 1.81 million square feet of space for Rs 2,430 crore in the first quarter of this fiscal against 2 million square feet sold for Rs 1,240 crore in the January-March period, DLF said in an analyst presentation.

“Phase V (Gurgaon) super luxury launches Crest (0.83msf) and soft launch at Camellia have driven presales momentum, which recorded a strong uptick in 1QFY14 " said Motilal Oswal in a research report.

According to the brokerage, Crest and Camellia are estimated to have contributed Rs 1450 crore and Rs 550 crore respectively, implying almost 82% of 1QFY14 presales.

However, sales realisaton will only get reflected after four to six quarters and steady launches will be key to profitability from here on.

Moreover, given that a large portion of sales continue to be driven by brokers/investors, upfront payments are bound to be lower, which is why DLF is likely to disappoint on the debt reduction front as sales collections are unlikely to improve significantly in the medium term.

Net debt has declined to Rs 20,369 crore from Rs 21,731 crore as on March 31, 2013, DLF said in analyst presentation.

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During April-June, the realisation from sale of non-core assets stood at Rs 215 crore and proceeds from the IPP ( Institutional Placement Programme) was Rs 1,863 crore.

DLF is expecting to garner another Rs 2,870 crore this fiscal from divestment of land and non-core businesses such as wind energy and insurance. This fund would help the company meet the FY14 debt guidance.

“However, the guidance ignores the negative operating cash flows, which may to a large extent offset the cash flows received from sale of non-core assets,” said IDBI in a research report.

Even, Phani Sekhar, Fund Manager of Angel Broking, in an interview with CNBC-TV18 cautioned against investing in the stock.

“In an environment where economy is slowing, real estate never does well. Real estate stocks in India performed very well in the last boom when the economy was also growing at 9 percent plus. However, since the time the economy has started sputtering, real estate stocks have also performed pretty poorly. DLF is still suffering from the overhang and excesses of the last bull market which it is finding difficult to even get out of,” said Sekhar.

He further added, “In this kind of a scenario when the macro is not very helpful and also the micro issues are all compelling for not to invest. I think one should safely stay out of this entire sector and especially DLF.”