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DLF Limited - Launches coming, volume to follow; Maintain Buy
„Correction overdone; Maintain Buy
DLF reported in line 3Q revenue and earnings at Rs25bn and Rs4.66bn
respectively. The residential sales volume disappointed for 3Q at 2.5mn sq ft
though office leasing was in line at 1.5mn sq ft. We maintain our Buy rating with
PO of Rs340 (reduced by 17% to factor in higher debt and lower sales volume for
FY11-13) offering 53% potential upside. We have also lowered our EPS
estimates. The key triggers for the stock performance are 8.4mn sq ft of
residential launches leading to strong sales volume in 4Q, continued strength in
office leasing and reduction in debt.
Residential volume key for stock performance
DLF management is confident of meeting its sales guidance of over 12mn sq ft for
FY11 (as it expects to launch 8.4mn sq ft in 4Q) implying 4Q volume of over
5.5mn sq ft. While the volume may appear large given just two months are left in
4Q, DLF usually starts marketing its projects 3-4 months in advance, leading to
sale of 70-80% of the inventory in 10-15 days from launch.
Office recovery well entrenched
Office segment which contributes 34% of DLF’s NAV is poised for strong
performance over next 12 months as well. We have built in leasing volume of
5.5mn sq ft for FY12 and see upside risk given the strong growth outlook of the
IT/ITeS sector over next 12 months. The growing office portfolio also bodes well
for DLF ability to service its debt. Every incremental 5mn sq ft of leasing increases
its debt raising capacity by Rs16bn.
Elevated debt remains a risk
The high debt levels remain a risk in the medium term given the rising interest rate
environment and tight liquidity. Positively, management expects to reduce
leverage from current 0.78x to 0.6x levels by FY12
Reiterate Buy with PO of Rs340
We reiterate our Buy rating post the sharp correction in stock over last 3 months
but have reduced our PO by 17% to Rs340 from Rs410 to factor in higher debt,
lower sales volume expectation and flat pricing in FY12 against our earlier
expectation of 5% increase. We maintain Buy as we believe the stock correction
is over done and risk reward is favorable from current levels. Key reason for our
Buy rating-
„ First, we expect strong 4Q as DLF is all set to launch over 8mn sq ft with
potential realization of over Rs50bn. The successful launch will help reduce
fears of sharp slowdown of demand in NCR and improve visibility on future
earnings growth.
„ Secondly, office segment that contributes 35% to its NAV continues to show
better than expected demand growth.
„ Thirdly, while debt remained elevated in 3Q, we expect strong sales volume
in 4Q will help improve cash flows substantially. Also the superior quality of
assets (24mn sq ft of leased assets with annual rental potential of over
Rs16.5bn) does increase DLF ability to service higher debt as compared to
other developers.
We have cut our NAV estimate to factor in lower sales volumes for FY11-13 and
higher debt -
„ Reduction in sales volume estimate by 15% for FY11-13 to factor in slower
launches and persistent delay in getting approvals for its projects. We believe
DLF’s strategy of preserving margin against volume in the current rising
interest rate environment will also impact sales volume.
„ Flat sales price in FY12 against 5% increase factored in earlier
„ We have increased our debt estimate to factor in land purchases (Rs6-8bn in
2hFY11 and further Rs4-5bn in FY12), lower cash inflows due to delay in
launches and over Rs10bn of cash outflow due to dividend payout and
buyout of preference shares. Also 3Q saw Rs7bn increase in debt against
our estimate of reduction in debt by Rs7bn.
Residential segment to bounce back
DLF has been falling behind its target in the residential segment since FY10
which has led to muted cash flows. But with clear visibility on 8.4mn sq ft of
launches in 4QFY11, this is set to change. We are positively surprised by
management’s guidance of over 12mn sq ft of sales volume for FY11, implying
over 5.5mnsq ft of sales in the current quarter. We have cut our sales volume
estimate for FY11-13 by 15% to factor in the impact on demand due to current
macro environment of higher interest rate and likely delays in some of the high
profile launches like Lower Parel in Mumbai (pending approvals, launch likely only
by 2QFY12) and Chanakyapuri in Delhi (still under litigation).
Launches finally coming through
DLF is finally all set to launch over 8mn sq ft in next two months. DLF has talked
about launching these projects since last 2 quarters, but has faced delay in
getting approvals from the government. It has already soft launched two projects
in January while management is very confident of launching rest of the projects in
next 30-45 days. The performance of the stock will be dependant on the new
launches and the kind of response they receive from the customers. Since
majority comprise of plotted development in Gurgaon/ Chandigarh (markets
where plotted developments are generally high in demand) we expect 4.5mn sq ft
of sales in 4Q.
Cash flows to follow
The upcoming launch of 8mn sq ft is expected to generate revenue of over
Rs50bn, with 40% being contributed by plotted sales where the cash flows are
upfront with very little execution risk. We do expect these launches to help
improve cash flows from operations which are currently at around Rs2bn/qtr. Also
DLF’s strategy to launch projects only when all approvals are in place will help it
reduce the execution period of its project by at least 6 months and thus improve
cash flows (as customer advances are linked to construction progress)
Focus on execution to show results from FY12
We believe DLF had been slow on launches due to execution challenges. In the
residential segment it already has 44mn sq ft sq ft sold projects yet to be
delivered. At the start of FY08 it had 8mn sq ft under construction of which only
5mn sq ft has been delivered. But from FY12 we expect this to change
dramatically as DLF has been focused on execution since last 18months.The
slower pace of new launches in last 18 months has meant more focus on the
execution of the older projects. We expect DLF to start delivering its premium
luxury projects in Gurgaon along the golf course road and mid income project in
Chennai in FY12. Further the recent launch of plotted sales will push delivery
volume going forward since plotted projects require only infrastructure
development.
Office leasing – Strong growth ahead
The office segment contributes 35% to the NAV of DLF and it continues to do
extremely well on volumes as IT/ITeS sector is expected to do record hiring in
2011. This we expect in turn will lead to continued strong leasing demand for
office in India in 2011. Gurgaon and Bangalore are the key centres leading the
revival in demand for office space and are considered as the preferred destination
among the IT/ITeS companies. We expect DLF to end FY11 with over 5.5mn sq ft
of leasing and expect it to achieve similar leasing in FY12 as well. This in turn
would imply over 90% occupancy of DAL assets in 1HFY12 and pave way for its
potential REIT listing in 2HFY12.
Rentals to remain stable
The rental environment will continue to remain stable as large supply is under
construction. Even though vacancy is expected to come down sharply in
Bangalore and Gurgaon in 2011, vacancies in other locations like Chennai/ Pune/
Kolkata/ Noida will keep rentals under check.
Well positioned to deliver over 5mn sq ft annually
DLF is well positioned to deliver ~5mn sq ft of office space annually since it has
15mn sq ft under construction, of which over 30% is nearing completion (these
projects were already in advance stages of construction when downturn hit in
2008). Also it has been consistently adding new area under construction to
maintain its delivery potential at 5mn sq ft for next 2-3 years.
High leverage, but well funded
DLF has seen consistent increase in debt over last 12 months with debt equity at
all time high of 0.8x. But the quality of debt for DLF is far better than its peers
since majority of the debt has been raised by discounting the rent receivables. As
per the management, currently it has securitized around Rs10bn of annual rentals
and therefore it can raise another Rs20bn of debt by securitizing the current
rentals. We estimate every additional 5mn sq ft of leasing in office provides DLF
with additional borrowing capacity of around Rs16bn. It has debt repayment
obligation of around Rs30bn till FY12 and well placed to meet the obligation.
Deleveraging to be slower than expected
The management is targeting debt equity of 0.6x by FY12 implying reduction of
debt by Rs25-30bn in next 15 months. We have conservatively modeled cash
surplus of around Rs15bn in FY12. We have primarily factored in only 10%
growth in sales volume in FY12 and investment of all the proceeds from the sale
of non core assets in land purchases (strategic investments in land in New
Gurgaon/ Greater Chandigarh). DLF has indicated around Rs2-3bn of investment
in land for next 2-3 qtrs. Also DLF expects increase in capex since it is restarting
construction on some of the commercial assets like Mall of India in Gurgaon.
Cut our earnings estimate for FY11-13
We have cut our earnings estimate for FY11-13 by 20-25% as we are now
building flat pricing for Fy12 against 5% increase expected earlier and have
lowered our sales volume estimate by 15% to factor in 1) delay in launches, 2)
challenging environment due to high interest rate likely to impact volume and 3)
DLF’s strategy on preserving margin against volume. The cut in earnings also
factors in delay in launches of key luxury residential projects – NTC Mills in
Central Mumbai and Chanakyapuri in Delhi. We had earlier expected the launch
of Mumbai project in 4QFY11, but now it is likely only in 2HFY12 while
Chanakyapuri project may be delayed even further
Price objective basis & risk
DLF Limited (XVDUF)
Our preferred valuation methodology is NAV, calculated by discounting the cash
flows from each of the real estate projects. Our price objective of Rs340 is
therefore based on our NAV of Rs340. We expect DLF to trade at its NAV
because of its benchmark position in the Indian real estate market, large size, and
well diversified land bank. Key assumptions underlying our NAV are WACC of
14.2%, capitalization rate of 11% and inflation of 5% from FY13 on both selling
price and construction costs. On a P/E basis, at our PO of Rs340, the stock would
trade at 22x FY12E earnings. Downside risks are lower than expected volume
and higher than expected debt.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� �
DLF Limited - Launches coming, volume to follow; Maintain Buy
„Correction overdone; Maintain Buy
DLF reported in line 3Q revenue and earnings at Rs25bn and Rs4.66bn
respectively. The residential sales volume disappointed for 3Q at 2.5mn sq ft
though office leasing was in line at 1.5mn sq ft. We maintain our Buy rating with
PO of Rs340 (reduced by 17% to factor in higher debt and lower sales volume for
FY11-13) offering 53% potential upside. We have also lowered our EPS
estimates. The key triggers for the stock performance are 8.4mn sq ft of
residential launches leading to strong sales volume in 4Q, continued strength in
office leasing and reduction in debt.
Residential volume key for stock performance
DLF management is confident of meeting its sales guidance of over 12mn sq ft for
FY11 (as it expects to launch 8.4mn sq ft in 4Q) implying 4Q volume of over
5.5mn sq ft. While the volume may appear large given just two months are left in
4Q, DLF usually starts marketing its projects 3-4 months in advance, leading to
sale of 70-80% of the inventory in 10-15 days from launch.
Office recovery well entrenched
Office segment which contributes 34% of DLF’s NAV is poised for strong
performance over next 12 months as well. We have built in leasing volume of
5.5mn sq ft for FY12 and see upside risk given the strong growth outlook of the
IT/ITeS sector over next 12 months. The growing office portfolio also bodes well
for DLF ability to service its debt. Every incremental 5mn sq ft of leasing increases
its debt raising capacity by Rs16bn.
Elevated debt remains a risk
The high debt levels remain a risk in the medium term given the rising interest rate
environment and tight liquidity. Positively, management expects to reduce
leverage from current 0.78x to 0.6x levels by FY12
Reiterate Buy with PO of Rs340
We reiterate our Buy rating post the sharp correction in stock over last 3 months
but have reduced our PO by 17% to Rs340 from Rs410 to factor in higher debt,
lower sales volume expectation and flat pricing in FY12 against our earlier
expectation of 5% increase. We maintain Buy as we believe the stock correction
is over done and risk reward is favorable from current levels. Key reason for our
Buy rating-
„ First, we expect strong 4Q as DLF is all set to launch over 8mn sq ft with
potential realization of over Rs50bn. The successful launch will help reduce
fears of sharp slowdown of demand in NCR and improve visibility on future
earnings growth.
„ Secondly, office segment that contributes 35% to its NAV continues to show
better than expected demand growth.
„ Thirdly, while debt remained elevated in 3Q, we expect strong sales volume
in 4Q will help improve cash flows substantially. Also the superior quality of
assets (24mn sq ft of leased assets with annual rental potential of over
Rs16.5bn) does increase DLF ability to service higher debt as compared to
other developers.
We have cut our NAV estimate to factor in lower sales volumes for FY11-13 and
higher debt -
„ Reduction in sales volume estimate by 15% for FY11-13 to factor in slower
launches and persistent delay in getting approvals for its projects. We believe
DLF’s strategy of preserving margin against volume in the current rising
interest rate environment will also impact sales volume.
„ Flat sales price in FY12 against 5% increase factored in earlier
„ We have increased our debt estimate to factor in land purchases (Rs6-8bn in
2hFY11 and further Rs4-5bn in FY12), lower cash inflows due to delay in
launches and over Rs10bn of cash outflow due to dividend payout and
buyout of preference shares. Also 3Q saw Rs7bn increase in debt against
our estimate of reduction in debt by Rs7bn.
Residential segment to bounce back
DLF has been falling behind its target in the residential segment since FY10
which has led to muted cash flows. But with clear visibility on 8.4mn sq ft of
launches in 4QFY11, this is set to change. We are positively surprised by
management’s guidance of over 12mn sq ft of sales volume for FY11, implying
over 5.5mnsq ft of sales in the current quarter. We have cut our sales volume
estimate for FY11-13 by 15% to factor in the impact on demand due to current
macro environment of higher interest rate and likely delays in some of the high
profile launches like Lower Parel in Mumbai (pending approvals, launch likely only
by 2QFY12) and Chanakyapuri in Delhi (still under litigation).
Launches finally coming through
DLF is finally all set to launch over 8mn sq ft in next two months. DLF has talked
about launching these projects since last 2 quarters, but has faced delay in
getting approvals from the government. It has already soft launched two projects
in January while management is very confident of launching rest of the projects in
next 30-45 days. The performance of the stock will be dependant on the new
launches and the kind of response they receive from the customers. Since
majority comprise of plotted development in Gurgaon/ Chandigarh (markets
where plotted developments are generally high in demand) we expect 4.5mn sq ft
of sales in 4Q.
Cash flows to follow
The upcoming launch of 8mn sq ft is expected to generate revenue of over
Rs50bn, with 40% being contributed by plotted sales where the cash flows are
upfront with very little execution risk. We do expect these launches to help
improve cash flows from operations which are currently at around Rs2bn/qtr. Also
DLF’s strategy to launch projects only when all approvals are in place will help it
reduce the execution period of its project by at least 6 months and thus improve
cash flows (as customer advances are linked to construction progress)
Focus on execution to show results from FY12
We believe DLF had been slow on launches due to execution challenges. In the
residential segment it already has 44mn sq ft sq ft sold projects yet to be
delivered. At the start of FY08 it had 8mn sq ft under construction of which only
5mn sq ft has been delivered. But from FY12 we expect this to change
dramatically as DLF has been focused on execution since last 18months.The
slower pace of new launches in last 18 months has meant more focus on the
execution of the older projects. We expect DLF to start delivering its premium
luxury projects in Gurgaon along the golf course road and mid income project in
Chennai in FY12. Further the recent launch of plotted sales will push delivery
volume going forward since plotted projects require only infrastructure
development.
Office leasing – Strong growth ahead
The office segment contributes 35% to the NAV of DLF and it continues to do
extremely well on volumes as IT/ITeS sector is expected to do record hiring in
2011. This we expect in turn will lead to continued strong leasing demand for
office in India in 2011. Gurgaon and Bangalore are the key centres leading the
revival in demand for office space and are considered as the preferred destination
among the IT/ITeS companies. We expect DLF to end FY11 with over 5.5mn sq ft
of leasing and expect it to achieve similar leasing in FY12 as well. This in turn
would imply over 90% occupancy of DAL assets in 1HFY12 and pave way for its
potential REIT listing in 2HFY12.
Rentals to remain stable
The rental environment will continue to remain stable as large supply is under
construction. Even though vacancy is expected to come down sharply in
Bangalore and Gurgaon in 2011, vacancies in other locations like Chennai/ Pune/
Kolkata/ Noida will keep rentals under check.
Well positioned to deliver over 5mn sq ft annually
DLF is well positioned to deliver ~5mn sq ft of office space annually since it has
15mn sq ft under construction, of which over 30% is nearing completion (these
projects were already in advance stages of construction when downturn hit in
2008). Also it has been consistently adding new area under construction to
maintain its delivery potential at 5mn sq ft for next 2-3 years.
High leverage, but well funded
DLF has seen consistent increase in debt over last 12 months with debt equity at
all time high of 0.8x. But the quality of debt for DLF is far better than its peers
since majority of the debt has been raised by discounting the rent receivables. As
per the management, currently it has securitized around Rs10bn of annual rentals
and therefore it can raise another Rs20bn of debt by securitizing the current
rentals. We estimate every additional 5mn sq ft of leasing in office provides DLF
with additional borrowing capacity of around Rs16bn. It has debt repayment
obligation of around Rs30bn till FY12 and well placed to meet the obligation.
Deleveraging to be slower than expected
The management is targeting debt equity of 0.6x by FY12 implying reduction of
debt by Rs25-30bn in next 15 months. We have conservatively modeled cash
surplus of around Rs15bn in FY12. We have primarily factored in only 10%
growth in sales volume in FY12 and investment of all the proceeds from the sale
of non core assets in land purchases (strategic investments in land in New
Gurgaon/ Greater Chandigarh). DLF has indicated around Rs2-3bn of investment
in land for next 2-3 qtrs. Also DLF expects increase in capex since it is restarting
construction on some of the commercial assets like Mall of India in Gurgaon.
Cut our earnings estimate for FY11-13
We have cut our earnings estimate for FY11-13 by 20-25% as we are now
building flat pricing for Fy12 against 5% increase expected earlier and have
lowered our sales volume estimate by 15% to factor in 1) delay in launches, 2)
challenging environment due to high interest rate likely to impact volume and 3)
DLF’s strategy on preserving margin against volume. The cut in earnings also
factors in delay in launches of key luxury residential projects – NTC Mills in
Central Mumbai and Chanakyapuri in Delhi. We had earlier expected the launch
of Mumbai project in 4QFY11, but now it is likely only in 2HFY12 while
Chanakyapuri project may be delayed even further
Price objective basis & risk
DLF Limited (XVDUF)
Our preferred valuation methodology is NAV, calculated by discounting the cash
flows from each of the real estate projects. Our price objective of Rs340 is
therefore based on our NAV of Rs340. We expect DLF to trade at its NAV
because of its benchmark position in the Indian real estate market, large size, and
well diversified land bank. Key assumptions underlying our NAV are WACC of
14.2%, capitalization rate of 11% and inflation of 5% from FY13 on both selling
price and construction costs. On a P/E basis, at our PO of Rs340, the stock would
trade at 22x FY12E earnings. Downside risks are lower than expected volume
and higher than expected debt.
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