Q4FY11 PAT at Rs3.45bn was 36% below our expectations due to adjustment for a onetime cost reset for input price inflation of Rs4.75bn. Revenue at Rs26.8bn was better QoQ and marginally above our expectation of Rs25bn. Margins declined significantly to 25% (47.5% in Q3FY11)on account of rising input cost. In our view, DLF will have to commit to more launches and sales (non-core assets sales) to facilitate the real debt reduction (Net debt increased marginally to 0.85x as against 0.84x in Dec’10). We believe new subdued lease guidance, the weak results and no execution towards debt reduction may keep the stock under pressure in the near term. We maintain BUY but reduce our target price to Rs315 (Rs335 earlier).

Revenue increased by 8% sequentially: Revenue in Q4FY11 increased 8%QoQ and 35%YoY to Rs 26.8bn. The company has done sales booking of 10msf in FY11 and 3.8msf (max of plot sales) in Q4FY11 v/s 2.5 in Q3FY11. Sales booking is in line with our expectation but below the company’s guidance of 12msf. Going ahead also we expect absorption of 10 msf including commercial sale. Plot sale is likely to be one of the key factors both for revenue recognition and cash generation for the company in FY12.

Higher Input cost lead to fall in margin : EBIDTA margin in Q4FY11 from the core operation is 25% as against 48% in Q3FY11. The EBITDA was down mainly due to adjustment for a onetime cost reset due to input price inflation of Rs4.75bn. Adjusting this input cost the EBIDTA margin stands at 42.5%.We believe the cost over-run is especially on account of riwsing raw material cost (steel, cement, labour, brics). Going ahead also we believe there may be some cost-over run in the H1FY12 which may lower down the margin of DLF and may settle in the range of + - 2% of 40%.

VALUATIONS AND RECOMMENDATION

The disappointing performance on the operating side, and weak results should temper stock performance in the near term. We retain ‘BUY’ with a reduced target price of Rs315 (Rs335 earlier). Operating cash flow likely to pick up in FY12: Operating cash flow continued to disappoint at Rs4.9bn against the interest outflow of Rs7.1bn during Q4FY11. We expected reduction in debt but the company disappointed as net debt increased marginally to 0.85 to Rs 226 bn as against 0.84x in the previous quarter. The company has increased overall target for non core asset divestments to Rs 100bn from Rs45bn (ex wind power) previously (Rs 60 – Rs 70bn to be divested over the next
2-3 years). The company did Rs12.7bn of non-core asset divestment in FY11 which is also short of our estimate. In our view, DLF has to execute non-core assets transaction and plot sale launches that can bring in high levels of volumes to facilitate real debt reduction and not refinancing type of debt management and keep operational cash flow stronger than earlier years.

Leasing momentum fall short of expectation: DLF did 4 msf leasing in FY11 v/s 1 msf in FY10, total as on date 22.5 msf leased out. Gross leasing of ~1.4 msf in Q4 FY11. Net leasing primarily impacted by commitments of ~1 msf in Silokhera-Gurgaon currently kept on hold. We expected 5msf of leasing in FY11and therefore we reduce our leasing status by 2 msf.