DLF - Buy amidst Weakness; Expect a strong 2H:: UBS

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UBS Investment Research
DLF Limited
Buy amidst Weakness; Expect a strong 2H
􀂄 Muted 2QFY11 – Earnings were above UBSe but missed consensus
Revenues were up 17% QoQ and 35% YoY, while earnings were muted on YoY
and QoQ due to lower EBITDA margin of 39%. This was a little disappointing,
however company explained this is temporary due to project mix and some cost
increases, and expects annual EBITDA margins to range between 45-50%.


􀂄 Lacklustre pre-sales, but strong pick-up in leasing the silver lining
DLF sold 2.08msf vs. 1.9msf in 1Q – however the company guided for >12msf of
sales in FY11. With most launches pushed back to 2H, we see risk of
disappointment. Non-core asset sales (~Rs7bn raised in 1H vs. targeted Rs25b in
FY11) have been slow as well. That said, strong pick-up in leasing at 1.56msf (vs.
0.98msf in 1Q) and annualized rentals of Rs12bn is the silver lining.

􀂄 Key catalysts – Aggressive residential pre-sales, sustained leasing pick-up
We expect strong pre-sales response to key launches (eg. Gurgaon plots in Nov’10)
and more in South India, Mumbai, Chandigarh in 2H to boost stock sentiments.
This apart, DLF is on track to meet its leasing target of 4msf for FY11E – with
enquiries picking up, and sustained leasing recovery – we see DLF as best poxy to
play the leasing recovery theme.

􀂄 Good buying opportunity with stock at 30% disc. to NAV
We believe stock’s recent underperformance to sensex by 9% over last 1-mth
largely prices in concerns of likely FY11 sales target disappointment and high
leverage (Rs200bn). With stock at 30% disc to NAV (vs. target 15% disc),
expectation of strong 2H and superior business model, we reiterate BUY.