DLF-Still waiting for cash flows...:: JPMorgan

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DLF Limited Overweight
DLF.BO, DLFU IN
Still waiting for cash flows...



• Still waiting for cash flows… DLF’s net debt over 2QFY11 at Rs199B
remained largely stable, even as the company churned out a modest
operating surplus of Rs5.2B which, in turn, was aided by Rs4.1B of asset
sales. Operating cash flows were hit by higher cash tax payments, one-time
high expenses (total Rs1.8B), and lower construction progress on account of
good monsoons. However, incremental guidance on FCFE is very bullish at
Rs7.5-10B per quarter starting in 3Q. Cash generation from here onwards
will be critical, in our view, for stock price re-rating near term.



• Development business guidance has a heavy skew toward 2H … with
the company looking to launch/sell almost 12 msf in 2H. Pre-sales value
is expected to be Rs90B in FY11 vs. Rs31B achieved in 1H and JPM
est. of Rs72B. As per the company, high margin/quick turnover plotted
sales in Gurgaon/Chandigarh along with NTC Mill in Mumbai and some
mid-income launches (3-4 msf) would be the prime driver of
incremental bookings. While recent history on guidance is not
encouraging, we do note that in 4Q08 (pre-crisis) the company was able
to sell almost 9.8 msf in one single quarter, when physical markets
across key markets were at pretty much the same levels as they are now.

• Office leasing has picked up with DLF leasing almost 1.5 msf in Q2 vs.
1 msf in 1Q. Rentals seem to be stabilizing across most markets but we
believe the scope for them to go up is limited, given supply issues. DAL
as of now ha leased approx 8 msf (vs. 13 msf total area), however, an
improvement in office does raise prospects of its monetization in FY12.

• Investment view - DLF is now trading close to our Mar-11 PT of
Rs375/share with our PT based on 16x stabilized FY11E cash EPS.
Improvement in office business right now is offsetting slow sales in the
development business. Hence, a re-rating from hereon will be predicated on:
1) Improvement in residential sales over 2H; and 2) Consistent debt
reduction through FY11/12 on the back of operating cash flows, asset sales.