Hold DLF says religare research,

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DLF Ltd
Fresh supply may blur prospects of NTC mills project
While DLF is expected to launch the NTC mills project in Q4CY10, new launches
by competitors—such as the Lodha World Crest (Lower Parel) and soft launch of
IBREL’s project (Worli)—may impact the potential absorption capacity in south
Mumbai. While ~150 units of Lodha World Crest (next to DLF’s NTC mill land)
were launched at Rs 23,600psf with an interest subvention scheme (10:90), IBREL’s
project, on a recently won mill plot in Worli, saw a launch rate of Rs 27,000psf for
~190 units (Worli enjoys a location premium). In our view, these and other recent
launches (like 900 units of IBREL’s Sky Suites) have possibly capped price upsides
from DLF’s upcoming project in the area. In FY11, we expect the company to
launch ~1msf in Lower Parel (on NTC mill land) at Rs 20,000psf. The project may
add up to Rs 20/share to DLF’s NAV and Rs 8bn-9bn to cash flows over the next 5
years. The stock is currently trading at FY12 NAV. HOLD.
Interest subvention schemes cap price upsides from new projects: The Lower
Parel-Worli realty market seems to be heating up with more project launches of
late. Lodha World Crest (Lower Parel) was launched at Rs 20673psf (Rs 23670psf
with a 10:90 scheme) and IBREL’s Bleu (Bharat mill land at Worli) at
Rs 27000psf. In our view, these projects along with other recent launches (like
IBREL’s Sky Suites, Forest) may reduce near-term demand in this micro market.
This, in turn, may impact the response to DLF’s upcoming launch in Lower Parel.
Also, we believe that the new projects leave limited (or no) upside in prices from
new launches in this market. However, a new strategy (like low ticket size) or
lower pricing may perk up demand.
NTC mill project a cash/value driver for DLF: As part of its NTC mill project, we
expect DLF to launch 1msf in Lower Parel at Rs 20,000psf. With a total
developable area of 3.5msf-4msf, the project may generate gross cash of
Rs 80bn-90bn that could address concerns on the company’s high debt levels.
The project also adds Rs 20/share to DLF’s NAV. However, generating volumes
at high margins is the key. Though lower FSI cost (~Rs 2000psf) makes the
project viable even at a discount (like Capital Greens, Phase I in Delhi), such a
launch would impact its NAV and debt reduction plan.
Supply in South Mumbai market to remain high: Micro markets like Mahalaxmi,
Prabhadevi and Jacob Circle—catering to high-end residential buyers and within
a range of 1-1.5km from Worli—are likely to see significant supply in the coming
year. We expect ~10msf of fresh supply in the region over next 2-3 years. This
apart, we expect six more land auctions from NTC Mills by the end of this year.
Trading at FY12 NAV, Maintain HOLD: The stock has risen 23%/15% over the
past 3/6 months and is currently trading at FY12 NAV. Maintain