DLF’s Q1FY18 residential new sales were severely impacted as beginning May 2017 it had halted sales across projects citing RERA compliance. While sales should pick up in coming quarters, we expect slow pace until demand improves in Gurgaon market and/or DLF launches new inventory. We envisage meaningful rental uptick only post FY19 when ongoing rental assets become operational. We, hence, perceive limited earnings scale-up visibility. Deleveraging hinges on GIC deal valuation. Maintain Hold. Q1FY18 miss; RERA uncertainty impacts new sales: Q1FY18 revenue of Rs 20.5 bn was driven by POCM-based revenue recognition in ongoing projects. Ebitda margin was healthy at 44 %. Net profit came at Rs 1.1 bn versus our estimate of Rs 1.4 bn. Net debt increased by Rs 8 bn q-o-q to Rs 259 bn driven by negative operating cash flows.
Challenges ahead: DLF’s residential sales have seen a structural slowdown over the past 4 years due to tepid demand in its mainstay Gurgaon market and limited new launches. We expect Gurgaon market revival to take some time and DLF’s commentary indicates little new launches planned in the near future. Focus on completing ongoing residential projects coupled with slow new sales and capex towards ongoing rental assets should result in operating cash deficit of Rs 7.5 bn/quarter for the next 2-3 quarters and stretch b/s further.
GIC deal should de-leverage b/s meaningfully though will lead to loss of 40% DCCDL rentals. Outlook and valuations: We expect muted operations for DLF in coming quarters. Valuation of promoter stake sale in rental assets, improvement in Gurgaon market and new launches are key stock catalysts. Earnings-based valuations appear rich versus peers—30x/27x FY18e/FY19e EPS (ex-CCPS deal impact).