[T.S.R:17542] DLF-Bent Over? (Citibank)

Citibank

DLF-Bent Over? Or a strategic shift ?

 

Management indicates that the operating environment would remain difficult in the near term w.r.t. inflationary trends and funding. This has led to a strategic shift in portfolio mix of FY12, where a majority of the launches are in the plotted development category. Company has returned to market with this product after many years (last seen in 1990s), moving away from their mainstay segment – Group housing, which carry higher risks associated with cost inflation. Also, plotted sales should help cashflows – which is important given DLF's D/E.

 

DLF surprised investors with Rs4.75b of cost reset (one-time as per the company) in 4Q. This highlighted inflationary pressures, which have been existent for a while. Steel and cement prices have risen ~16% and ~20% respectively since Aug-10. These two commodities constitute anywhere between ~25-40% of construction costs and hence, critical to developers' margins.  

This is what the management says:

 

Cost of construction break up

: Steel + cement make 40% of cost of construction and civil costs (i.e. – steel + cement + labour) are ~70% of total.  

Changes in last 6months/one year

: Management highlights that costs have risen to the tune of ~10-20% in the past one year across all product categories.   

Margin impact of inflation

: Company recently made one-time cost reset adjustment of Rs 4.75b in Q4 to account for increase in budgeted costs across their ongoing product portfolio.   

Terms with contractors

: DLF outsources 50-60% of their projects to external contractors like Ahluwalia Contracts, BL Kashyap and some local contractors. However, they do material (Steel + cement) procurement on their own.   

Budgetary cost adjustments in projects

: Going forward, company has clarified that they would make cost adjustments on a more regular basis (quarterly) to capture changes in budgeted costs.   

Outlook for margins/input costs

: Management opines that margins could see stagnation/some downward bias going into FY12 as these cost pressures continue.  

Any strategic shift in product mix to maintain margins:

Company's product mix for FY12 has majority of plotted developments planned as the associated risks due to inflationary pressures are lower. Mid income is most prone to such cost pressures/margin erosion- hence, company is planning no new launches in this segment.

 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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