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DLF (DLF.BO)
Commercial Pick-Up A Big Plus
What we like in DLF — DLF has a diversified and a superior land bank with
good city-centre exposure. Also, the commercial market is doing well - DLF
will end FY11 leasing ~5-6msf, one of the best years in terms of leasing. D/E
at ~0.79x is high; however, we believe DLF is capable of servicing such debt
levels, as the strong rental annuity of ~Rs 16bn should support.
New Base NAV Rs 372 vs Rs 452/share — Our new NAV adjusts for the
following – a) roll forward to Dec-11 from Mar-11 earlier; b) building in further
delays; c) updated current prices and cost of construction; d) increased cost
of capital to ~15% versus 13% earlier - this assumes 50bps increase in debt
costs at 11.25%, long-term DE of 0.6, risk-free rate of ~8%, a market
premium of 8% and a tax rate of 30%.
Reduce Target Price to Rs 295 — Based on the geographic mix of
landbank and relatively high leverage, we have assumed a 50% probability
of a 15% price cut – the weighted average blended NAV/share comes to Rs
328. Based on our methodology and discount of 10%, we arrive at a target
price of Rs 295. We continue to like the stock and believe DLF will continue
to be a sector leader and should lead any recovery, given its size/liquidity.
1-year forward P/B of 1.3x attractive — DLF currently trades at ~1.3x
consensus 1-yr forward P/B as against a range of 1x – 5x P/B it has traded
in since April 2008, making valuations attractive, in our view.
Key upside drivers — Key drivers would include: a) commercial leasing
recovery across the country, which has already started to play out. Also,
experts believe rentals could see an uptrend from 2HCY11; b) pick-up in
launches/pre-sales which were relatively slow in last two quarters; c) with the
restructuring/consolidation overhang behind them, cash flows can be put
towards deleveraging, which has been slow up to now; d) DAL listing (though
unlikely in the near term).
Risks — a) D/E at 0.79x is high versus peers. Good annuity income (~Rs16-
17bn) supports and leverage should come down with further execution pickup;
b) slower-than-expected execution remains a challenge – the company
has disappointed in the recent past; c) slower growth in the global economy
could impact IT volumes, which in turn would adversely impact DLF’s leasing
portfolio.
Quants View − Unattractive
DLF currently lies in the Extreme corner of the Unattractive quadrant of our
Value-Momentum map with weak momentum and weak value scores. The
stock has moved from the Glamour quadrant to the Unattractive quadrant in the
past three months, indicating a fall in momentum along with valuations
remaining weak. Compared to its peers in the Real Estate sector, DLF fares
worse on the valuation metric and on the momentum metric. Similarly,
compared to its peers in its home market of India, DLF fares worse on the
valuation metric and on the momentum metric.
From a macro perspective, DLF has a high Beta to the region so is likely to rise
(or fall) faster than the region. It is also likely to benefit from small-cap
outperformance, falling Commodity (ex-oil) prices, tightening Asian interest
rates, falling EM yields, a weaker US dollar, and a weaker Yen.
DLF
Valuation
Our Rs295 target price is based on a 10% discount to our blended Dec-11E
NAV of Rs328. DLF has significant exposure to the NCR region. We believe
chances of price cuts are quite probable, given the price hikes the region has
seen since the last downturn. Hence, we have assigned a 50% probability of
potential 15% price cuts to arrive at our TP. This is in line with our valuation
methodology for the sector. Our Dec-11E base NAV (ex-price cut) of Rs 372
incorporates Rs302 for the development portfolio and Rs70 for other asset
holdings (mainly lease asset portfolio at Rs57). The lower discount vs. peers
(10%-25%) is attributed to DLF's: 1) rich land bank vs peers; 2) superior
business model and strong execution track record; and 3) strong rental annuity
flow. We believe a NAV-based valuation methodology is most appropriate for
developers as it factors in the varied development projects and spread-out time
frame. Our Dec-11E NAV is based on: 1) development portfolio of ~400msf; 2)
rental assets of ~14msf; 3) cap rate of 9%-11% for commercial/IT Park, IT
SEZs; 4) increased cost of capital of 15.3%; and 5) a tax rate of 25%.
Risks
While our quantitative risk-rating system, which tracks 260-day historical share
price volatility, assigns DLF a Medium Risk rating, we see low Risk as more
appropriate given the company's execution track record, good rental annuity
(~Rs16-17bn expected in FY12) and quality land bank. The main downside
risks to our investment thesis and target price include: 1) DLF's asset sale
strategy remains contingent on capital flows; 2) the response to DLF's
upcoming project launches in Q4FY11 and through FY12 are crucial for growth
ahead; 3) slowdown in the IT/ITES industry could lead to a decline in demand
for commercial real estate; 4) execution delays further to what we have built in
already, and 5) a slowdown in capital inflows or measures to regulate FDI in the
real estate sector.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
DLF (DLF.BO)
Commercial Pick-Up A Big Plus
What we like in DLF — DLF has a diversified and a superior land bank with
good city-centre exposure. Also, the commercial market is doing well - DLF
will end FY11 leasing ~5-6msf, one of the best years in terms of leasing. D/E
at ~0.79x is high; however, we believe DLF is capable of servicing such debt
levels, as the strong rental annuity of ~Rs 16bn should support.
New Base NAV Rs 372 vs Rs 452/share — Our new NAV adjusts for the
following – a) roll forward to Dec-11 from Mar-11 earlier; b) building in further
delays; c) updated current prices and cost of construction; d) increased cost
of capital to ~15% versus 13% earlier - this assumes 50bps increase in debt
costs at 11.25%, long-term DE of 0.6, risk-free rate of ~8%, a market
premium of 8% and a tax rate of 30%.
Reduce Target Price to Rs 295 — Based on the geographic mix of
landbank and relatively high leverage, we have assumed a 50% probability
of a 15% price cut – the weighted average blended NAV/share comes to Rs
328. Based on our methodology and discount of 10%, we arrive at a target
price of Rs 295. We continue to like the stock and believe DLF will continue
to be a sector leader and should lead any recovery, given its size/liquidity.
1-year forward P/B of 1.3x attractive — DLF currently trades at ~1.3x
consensus 1-yr forward P/B as against a range of 1x – 5x P/B it has traded
in since April 2008, making valuations attractive, in our view.
Key upside drivers — Key drivers would include: a) commercial leasing
recovery across the country, which has already started to play out. Also,
experts believe rentals could see an uptrend from 2HCY11; b) pick-up in
launches/pre-sales which were relatively slow in last two quarters; c) with the
restructuring/consolidation overhang behind them, cash flows can be put
towards deleveraging, which has been slow up to now; d) DAL listing (though
unlikely in the near term).
Risks — a) D/E at 0.79x is high versus peers. Good annuity income (~Rs16-
17bn) supports and leverage should come down with further execution pickup;
b) slower-than-expected execution remains a challenge – the company
has disappointed in the recent past; c) slower growth in the global economy
could impact IT volumes, which in turn would adversely impact DLF’s leasing
portfolio.
Quants View − Unattractive
DLF currently lies in the Extreme corner of the Unattractive quadrant of our
Value-Momentum map with weak momentum and weak value scores. The
stock has moved from the Glamour quadrant to the Unattractive quadrant in the
past three months, indicating a fall in momentum along with valuations
remaining weak. Compared to its peers in the Real Estate sector, DLF fares
worse on the valuation metric and on the momentum metric. Similarly,
compared to its peers in its home market of India, DLF fares worse on the
valuation metric and on the momentum metric.
From a macro perspective, DLF has a high Beta to the region so is likely to rise
(or fall) faster than the region. It is also likely to benefit from small-cap
outperformance, falling Commodity (ex-oil) prices, tightening Asian interest
rates, falling EM yields, a weaker US dollar, and a weaker Yen.
DLF
Valuation
Our Rs295 target price is based on a 10% discount to our blended Dec-11E
NAV of Rs328. DLF has significant exposure to the NCR region. We believe
chances of price cuts are quite probable, given the price hikes the region has
seen since the last downturn. Hence, we have assigned a 50% probability of
potential 15% price cuts to arrive at our TP. This is in line with our valuation
methodology for the sector. Our Dec-11E base NAV (ex-price cut) of Rs 372
incorporates Rs302 for the development portfolio and Rs70 for other asset
holdings (mainly lease asset portfolio at Rs57). The lower discount vs. peers
(10%-25%) is attributed to DLF's: 1) rich land bank vs peers; 2) superior
business model and strong execution track record; and 3) strong rental annuity
flow. We believe a NAV-based valuation methodology is most appropriate for
developers as it factors in the varied development projects and spread-out time
frame. Our Dec-11E NAV is based on: 1) development portfolio of ~400msf; 2)
rental assets of ~14msf; 3) cap rate of 9%-11% for commercial/IT Park, IT
SEZs; 4) increased cost of capital of 15.3%; and 5) a tax rate of 25%.
Risks
While our quantitative risk-rating system, which tracks 260-day historical share
price volatility, assigns DLF a Medium Risk rating, we see low Risk as more
appropriate given the company's execution track record, good rental annuity
(~Rs16-17bn expected in FY12) and quality land bank. The main downside
risks to our investment thesis and target price include: 1) DLF's asset sale
strategy remains contingent on capital flows; 2) the response to DLF's
upcoming project launches in Q4FY11 and through FY12 are crucial for growth
ahead; 3) slowdown in the IT/ITES industry could lead to a decline in demand
for commercial real estate; 4) execution delays further to what we have built in
already, and 5) a slowdown in capital inflows or measures to regulate FDI in the
real estate sector.
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