DLF Ltd. Q2FY15 results: Regulatory headwinds continue PhillipCapital (India) Pvt. Ltd. Real Estate: Quarterly Update 14 November 2014

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1 DLF Ltd. Q2FY15 results: Regulatory headwinds continue PhillipCapital (India) Pvt. Ltd. Real Estate: Quarterly Update 14 November 2014 DLF Q2FY15 Results were ahead of our estimates mainly on account higher than expected revenue growth & EBITDA margins. Key Highlights of the results Revenue grew marginally by 3% (YoY) at Rs 20bn. EBITDA margins were expanded by 910 bps to 39.5%. EBITDA grew by 34% (YoY). PAT stood at Rs 1bn (up 9% YoY). We note that the interest cost up 8% on sequentially basis. Gross debt would have increase by at least Rs 5.6bn. We note that during the quarter, a wholly subsidiary had made impairment provision of Rs 381mn. Management stated that they might miss their guidance as far as sales volume is Management stated the forthcoming launches (in addition to the existing Camellias) will aid in meeting its new sales target. These launches are: o New City Gurgaon Company plan for this project would be to structure the offering for pricing and payment options to generate volume and money. It will be independent floors. o Capital Greens (SBM) Delhi Ticket size for this project will be at lower end of existing Capital greens project. Project size is 0.3 sft. o Crest Phase 2 Pricing would be in line with the existing project. Company sees some uptick in lease rental rates and hence allocating more capex for this category. Company expects rental income of Rs 26bn by FY17E; this would be driven by 3 msf on WIP in office space, Noida mall and escalations. Mall of India at Chandigarh should be commissioning by Q1FY16. Net leasing area 0.3 msf during Q2FY15 vs 0.71 msf during Q1FY15. Time frame for revenue recognition for existing projects: o Camellias project revenue is being recognized o Crest Revenue recognition as per new POCM. Management guided the revenue recognition to hit by Q4FY15. o Sky Court Revenue recognition as per new POCM. Management guided the revenue recognition to hit by Q3FY15. o Ultima Revenue recognition as per new POCM would take 3 4 quarters to hit the revenue recognition criteria. Sequentially cash flow improvement is on account of two subsidiaries ceases to be subsidiaries i.e. Panchkula and Raidurg (Hyderabad). Company has received Rs5 bn for Raidurg property. The transaction would have contributed to Rs 8 bn cash flow improvement. Asset monetization plan Company has land parcels in Goa, South etc which can be monetized. Moreover the company may look at joint developments and private equity in some of the projects. Total sales booked for Q2FY15 in the residential segment were at 0.61MSF as against 0.38MSF in Q1FY15 and 0.9MSF in Q2FY14. During the quarter, DLF V has shown the early signs of improvement. Sales volume in most geography shall continue at a moderate pace similar to FY14. Valuations: The recent SEBI s order which banned the Company and its promoter from accessing the capital market along with other regulatory headwinds such as levy of Rs6.3 bn penalty by COMPAT, the cancellation of Wazirabad (in Gurgaon) Land allotment add to the headwinds which the company face. Moreover, The weak operating environment coupled with Rs200 bn debt adds to cash flow challenges a strong rental income portfolio will aid the company. We downgrade to Neutral on the regulatory challenges. NEUTRAL DLFU IN CMP RS 142 TARGET RS 152 (+8%) Company Data O/S SHARES (MN) : 1781 MARKET CAP (RSBN) : 253 MARKET CAP (USDBN) : WK HI/LO (RS) : 243 / 100 LIQUIDITY 3M (USDMN) : 46.8 FACE VALUE (RS) : 2 Share Holding Pattern, % PROMOTERS : 74.9 FII / NRI : 20.0 FI / MF : 0.4 NON PROMOTER CORP. HOLDINGS : 0.8 PUBLIC & OTHERS : 3.9 Price Performance, % 1mth 3mth 1yr ABS REL TO BSE Price Vs. Sensex (Rebased values) Apr 11 Apr 12 Apr 13 Apr 14 DLF BSE Sensex Source: PhillipCapital India Research Other Key Ratios Rs mn FY14 FY15E FY16E Net Sales 82,980 77,251 92,069 EBIDTA 24,854 28,781 33,706 Net Profit 9,980 2,026 3,054 EPS, Rs PER, x EV/EBIDTA, x P/BV, x ROE, % Debt/Equity (%) Source: PhillipCapital India Research Est. Abhishek Ranganathan ( ) abhishekr@phillipcapital.in Neha Garg ( ) ngarg@phillipcapital.in Please refer to Disclosures and Disclaimers at the end of the Research Report.

2 Q2FY15 Results (Consolidated) Rs mn Q2FY14 Q1FY15 Q2FY15 YoY QoQ Sales and other receipts 19,561 17,252 20,132 3% 17% Cost of land, plots, development rights, constructed properties and others 8,781 7,129 8,369 5% 17% Gross Profit 10,780 10,123 11,763 9% 16% Employee benefit expenses 1, % 26% Other expenses 2,975 2,013 2,872 3% 43% EBITDA 5,948 7,369 7,961 34% 8% Depreciation, amortisation and impairment 1,660 1,345 1,394 16% 4% Other income 2,685 1,264 1,224 54% 3% EBIT 6,974 7,289 7,791 12% 7% Finance costs 6,091 5,581 6,031 1% 8% Profits before tax and exceptionals 883 1,708 1,760 99% 3% Exceptional Items (797) (295) (381) PBT 1,680 1,413 1,379 18% 2% Tax % 43% Net profit 825 1, % 15% Minority interest share of loss/ (profit) % 5% Share of profit/ (loss) in associates 10 (1) 1 89% 179% Net profit for the period (before prior period adjustments) 962 1,276 1,107 15% 13% Prior period adjustments (net) 39 2 (16) 143% 1193% Reported Net Profit 1,001 1,278 1,091 9% 15% Key Ratios (%) Gross Margins 55.1% 58.7% 58.4% Employee benefit expenses 9% 4% 5% Other expenses 15% 12% 14% EBITDA margins 30% 43% 40% Tax Rate 51% 21% 31% Balance Sheet (Consolidated) Q1FY15 Q2FY15 EQUITY AND LIABILITIES Shareholders funds 10 Share capital 21,560 21,556 Reserves and surplus 271, ,303 Minority interests 1,860 1,661 Long term borrowings 166, ,409 Other long term liabilities 22,010 21,788 Long term provisions Short term borrowings 31,660 32,281 Trade payables 19,350 20,325 Other current liabilities 124, ,984 Short term provisions 6,250 2,983 Sub Total 181, ,573 Total 664, ,820 ASSETS Net Fixed Assets 237, ,673 Goodwill on consolidation 11,970 12,044 Non current investments 3,840 4,931 Deferred tax assets (Net) 11,250 12,473 Long term loans and advances 38,760 41,604 Other non current assets Sub Total 304, ,538 Current investments 23,440 20,380 Inventories 184, ,789 Trade receivables 15,130 15,195 Cash and bank balances 17,730 24,031 2 of 9

3 Short term loans and advances 23,190 21,981 Other current assets 97,010 99,908 Sub Total 360, ,282 Total 664, ,820 The company achieved sales of 0.61 MSF in Q2FY15 as against 0.91 MSF in Q1FY15, with Q1FY15 sales booking at 0.38 MSF; it included ~0.2 MSF sales in Gurgaon, ~0.02MSF in New Gurgaon and ~0.39MSF in rest of India. Quarterly Residential Sales Trend (in MSF) Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 In office space, there was pick up evident with net leasing for the quarter up at 0.3 MSF as against 0.57 MSF in Q2FY14. This apart leasing status either improved or remained steady for most other properties. 3 of 9

4 Net area leased during quarters (in MSF) Q2FY15 Q1FY15 Q4FY14 Q3FY14 Q2 FY14 Q1 FY14 Q4 FY13 Q3 FY13 Q2 FY13 Q1 FY13 Debt reduction target of Rs 185bn in FY15 Debt levels Debt Position Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Gross Debt(Net of equity shown as Debt/JV Co Debt) 242, , , ,820 Pref. Shares 10,380 10, ,020 2,020 Gross Debt Position(Net of equity shown as Debt/JV Co Debt) 234, , , ,840 Less: Cash In Hand 35,730 32, ,210 43,400 Less: Exchange Fluctuations 3,810 3, Net Debt Position 195, , , , ,440 Project Status Area Sold in Projects Region Q2FY15 Q4FY14 Q1FY15 Under Q2FY15 Execution New Town Heights & express greens Gurgaon Yes Skycourt Gurgaon Yes Ultima Gurgaon Yes Regal Garden Gurgaon Yes Primus Gurgaon Yes Almeda Gurgaon Yes Garden City Gurgaon Yes Horizon Centre Gurgaon Yes Corporate Green Gurgaon Yes Crest Gurgaon Yes Camillas Gurgaon Yes Capital Greens Delhi/Mumbai/ROI Yes Okhla Delhi/Mumbai/ROI Yes GK Kings Court Delhi/Mumbai/ROI Yes Indore Delhi/Mumbai/ROI Yes NTH Kolkota Delhi/Mumbai/ROI Yes Bhubneshwar Delhi/Mumbai/ROI Yes Kochi Delhi/Mumbai/ROI Yes Chennai Delhi/Mumbai/ROI Yes Bangalore Delhi/Mumbai/ROI Yes Hyderbad Delhi/Mumbai/ROI Yes 4 of 9

5 Lucknow Delhi/Mumbai/ROI Yes Panchkula Delhi/Mumbai/ROI Yes Mullanpur Delhi/Mumbai/ROI Yes Shimla Delhi/Mumbai/ROI Yes Kasauli Delhi/Mumbai/ROI Yes Total of 9

6 Financials Income Statement Y/E Mar, Rs mn FY13 FY14 FY15E FY16E Net sales 77,728 82,980 77,251 92,069 Growth, % Total income 77,728 82,980 77,251 92,069 Raw material expenses 33,559 38,804 28,181 35,440 Employee expenses 5,957 5,759 6,047 7,257 Other Operating expenses 11,949 13,563 14,241 15,666 EBITDA (Core) 26,263 24,854 28,781 33,706 Growth, % (32.7) (5.4) Margin, % Depreciation 7,962 6,629 4,312 4,943 EBIT 18,301 18,225 24,469 28,764 Growth, % (32.7) (5.4) Margin, % Interest paid 23,140 24,633 29,744 33,338 Other Non Operating Income 13,229 14,916 8,000 8,803 Non recurring Items Pre tax profit 8,390 8,508 2,725 4,228 Tax provided 1, ,395 Profit after tax 7,139 9,344 1,826 2,834 Others (Minorities, Associates) Net Profit 7,625 9,980 2,026 3,054 Growth, % (37.8) 30.9 (79.7) 50.7 Net Profit (adjusted) 7,625 9,980 2,026 3,054 Unadj. shares (m) 1,699 1,707 1,707 1,707 Wtd avg shares (m) 1,699 1,707 1,707 1,707 Balance Sheet Y/E Mar, Rs mn FY13 FY14 FY15E FY16E Cash & bank 18,441 24,420 36,643 43,001 Debtors 16,533 15,612 14,063 12,672 Inventory 176, , , ,720 Loans & advances 53,304 58,047 50,257 55,704 Other current assets 84,805 94,834 88,196 82,022 Total current assets 349, , , ,119 Investments 13,337 8,912 8,021 7,219 Gross fixed assets 218, , , ,898 Less: Depreciation 34,420 41,049 45,362 50,304 Add: Capital WIP 77,360 77,360 77,360 77,360 Net fixed assets 261, , , ,953 Total assets 639, , , ,259 Current liabilities 146, , , ,194 Provisions 7,327 5,818 5,236 4,713 Total current liabilities 154, , , ,906 Non current liabilities 206, , , ,615 Total liabilities 360, , , ,522 Paid up capital 3,397 3,413 3,413 3,413 Reserves & surplus 271, , , ,411 Shareholders equity 279, , , ,737 Total equity & liabilities 639, , , ,259 Estimates Cash Flow Y/E Mar, Rs mn FY13 FY14 FY15E FY16E Pre tax profit 8,390 8,508 2,725 4,228 Depreciation 7,962 6,629 4,312 4,943 Chg in working capital 30,628 38,669 29,684 36,585 Total tax paid 4,464 2, ,395 Cash flow from operating activities 18,740 51,028 23,545 44,361 Capital expenditure 6,867 18,414 31,522 31,522 Chg in investments 2,077 4, Cash flow from investing activities 5,418 26,492 30,630 30,719 Free cash flow 13,323 77,520 54,175 13,642 Equity raised/(repaid) 20, , ,085 0 Debt raised/(repaid) 20,711 76,863 70,000 0 Dividend (incl. tax) 5,640 5,666 5,666 5,666 Other financing activities 19, , ,545 0 Cash flow from financing activities 16,702 71,541 66,398 4,961 Net chg in cash 3,379 5,979 12,223 8,681 Valuation Ratios & Per Share Data FY13 FY14 FY15E FY16E Per Share data EPS (INR) Growth, % (37.9) 30.3 (79.7) 50.7 Book NAV/share (INR) Return ratios Return on assets (%) Return on equity (%) Return on capital employed (%) Turnover ratios Asset turnover (x) Sales/Total assets (x) Sales/Net FA (x) Working capital/sales (x) Working capital days Liquidity ratios Current ratio (x) Quick ratio (x) Interest cover (x) Dividend cover (x) Total debt/equity (%) Net debt/equity (%) Valuation PER (x) Price/Book (x) EV/Net sales (x) EV/EBITDA (x) EV/EBIT (x) of 9

7 Recommendation History N (TP 279) N (TP 246) N (TP 240) N (TP 213) N (TP 225) B (TP 240) B (TP 208) B (TP 240) B (TP 208) 100 B (TP 218) N (TP 152) /3/2011 8/8/2011 3/16/ /19/2012 5/29/2013 1/3/2014 8/12/2014 Source: PhillipCapital India Research 7 of 9

8 Management Vineet Bhatnagar (Managing Director) (91 22) Kinshuk Bharti Tiwari (Head Institutional Equity) (91 22) Jignesh Shah (Head Equity Derivatives) (91 22) Research Automobiles Engineering, Capital Goods Pharma Dhawal Doshi (9122) Ankur Sharma (9122) Surya Patra (9122) Priya Ranjan (9122) Hrishikesh Bhagat (9122) Retail, Real Estate Banking, NBFCs Infrastructure & IT Services Abhishek Ranganathan, CFA (9122) Manish Agarwalla (9122) Vibhor Singhal (9122) Neha Garg (9122) Pradeep Agrawal (9122) Varun Vijayan (9122) Paresh Jain (9122) Technicals Midcap Subodh Gupta, CMT (9122) Consumer, Media, Telecom Vikram Suryavanshi (9122) Naveen Kulkarni, CFA, FRM (9122) Production Manager Manish Pushkar, CFA (9122) Metals Ganesh Deorukhkar (9122) Dhawal Doshi (9122) Cement Ankit Gor (9122) Database Manager Vaibhav Agarwal (9122) Vishal Randive (9122) Oil&Gas, Agri Inputs Economics Gauri Anand (9122) Sr. Manager Equities Support Anjali Verma (9122) Deepak Pareek (9122) Rosie Ferns (9122) Sales & Distribution Corporate Communications Ashvin Patil (9122) Sales Trader Zarine Damania (9122) Shubhangi Agrawal (9122) Dilesh Doshi (9122) Kishor Binwal (9122) Suniil Pandit (9122) Sidharth Agrawal (9122) Execution Bhavin Shah (9122) Mayur Shah (9122) SINGAPORE Phillip Securities Pte Ltd 250 North Bridge Road, #06 00 Raffles City Tower, Singapore Tel : (65) Fax: (65) JAPAN Phillip Securities Japan, Ltd 4 2 Nihonbashi Kabutocho, Chuo ku Tokyo Tel: (81) Fax: (81) THAILAND Phillip Securities (Thailand) Public Co. Ltd. 15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok Thailand Tel (66) Fax: (66) UNITED STATES Phillip Futures Inc. 141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building Chicago, IL USA Tel (1) Fax: (1) Contact Information (Regional Member Companies) MALAYSIA Phillip Capital Management Sdn Bhd B 3 6 Block B Level 3, Megan Avenue II, No. 12, Jalan Yap Kwan Seng, Kuala Lumpur Tel (60) Fax (60) INDONESIA PT Phillip Securities Indonesia ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 10220, Indonesia Tel (62) Fax: (62) FRANCE King & Shaxson Capital Ltd. 3rd Floor, 35 Rue de la Bienfaisance Paris France Tel (33) Fax : (33) AUSTRALIA PhillipCapital Australia Level 37, 530 Collins Street Melbourne, Victoria 3000, Australia Tel: (61) Fax: (61) INDIA PhillipCapital (India) Private Limited No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai Tel: (9122) Fax: (9122) HONG KONG Phillip Securities (HK) Ltd 11/F United Centre 95 Queensway Hong Kong Tel (852) Fax: (852) CHINA Phillip Financial Advisory (Shanghai) Co. Ltd. No 550 Yan An East Road, Ocean Tower Unit 2318 Shanghai Tel (86) Fax: (86) UNITED KINGDOM King & Shaxson Ltd. 6th Floor, Candlewick House, 120 Cannon Street London, EC4N 6AS Tel (44) Fax: (44) SRI LANKA Asha Phillip Securities Limited Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka Tel: (94) Fax: (94) of 9

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