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DLF (DLFU)
Property
Weak launches but still a good launch pad. DLF has (1) a relatively wide
geographical spread, (2) lower regulatory risk versus Mumbai firms, (3) no share pledges
and (4) a substantial non-residential portfolio which is seeing signs of volume uptick
and has lesser pricing risk due to lack of a run-up. Key negatives include (1) continuing
weak sales and (2) debt increase qoq. We retain ADD with a target price of Rs265/share
(earlier Rs375) with a WACC of 15% and cap. rate of 11% (both increased 100 bps).
Positives—wide geographical spread; low regulatory risk and no share pledges
Within large cap. real estate stocks, DLF stands out for absence of touch-me-not negatives—(1) no
single project or location-specific risk: Gurgaon (single largest geography is 55% of its current
development portfolio (40 mn sq. ft) and residential contributes less than 50% to our NAV
estimate; (2) no significant regulatory risk: DLF’s NAV estimate faces relatively lower risk of
regulatory action (redevelopment, car-park FSI among others) impairing value versus Mumbaifocused
firms and (3) no share pledges which could increase risk of a cash crunch in a tighter
funding scenario. Commercial leasing volumes have clearly bottomed and DLF has 16 mn sq. ft of
leasable space that can be made ready for fit-outs in 6-12 months.
Weak sales trend and stubborn debt are the key negatives
DLF has managed to sell only 6.5 mn sq. ft in 9MFY11 (versus 12.5 mn sq. ft in FY2010) and we
believe it is a challenging task to meet its FY2011E target of over 12 mn sq. ft. However, DLF has
chalked out plans to launch 8 mn sq. ft in 4QFY11E and exuded confidence that most of these
would be launched and has blamed the delay on excess time taken for regulatory approvals. Debt
increased marginally qoq (despite management intent to reduce it) though an almost similar
amount of increase in land and fixed assets gives comfort. Management has indicated their intent
to bring it down to 0.6X by end-FY2012E versus 0.8X at present.
Stock has value despite raising our hurdle rate and adopting a more conservative scenario
We increase our WACC and cap. rate assumptions by 100 bps to 15% and 11%, respectively, and
reduce gross developable area to 400 mn sq. ft in line with numbers disclosed by DLF in 3QFY11.
We substantially delay volume sales and volume booking—we are now assuming 9.2 mn sq. ft for
FY2011E (versus 13 mn sq. ft earlier), 12.8 mn sq. ft for FY2012E (18 mn sq. ft earlier) and 17.1
mn sq. ft (24 mn sq. ft earlier). We also adjust for a few high-value large projects (Mumbai and
Chanakyapuri, New Delhi)—selling price downwards and cost estimates upwards with the view
that either DLF will have to lower prices or delay launch—either of which will be negative for our
NAV estimate. Led by these changes, we are cutting our FY2011E/12E revenues and net profit
estimates by 16/17% and 26%/35%, respectively.
#1 Spread across geographies—less vulnerable to a particular market
DLF’s current development portfolio of 40 mn sq. ft (including development for rent, total is
56 mn sq. ft) is well spread with Gurgaon accounting for 22 mn sq. ft, Super Metros 7 mn
sq. ft and Rest of India at 11 mn sq. ft. While Gurgaon remains the largest geography, with
IT/ITES demand remaining buoyant, this is less of a concern in the current environment.
#2 Lower regulatory risk versus Mumbai-focused firms
While DLF has the NTC Mill project (3 mn sq. ft) in Mumbai which has been delayed due to
regulatory approvals , it is less than 5% of our gross NAV and likely DLF faces risk of a delay
in monetization versus an absolute loss of calculated value due to either beneficial
government policies changing or participating in a risky slum or other redevelopment.
# 3 This along with no share pledges makes DLF stand out among real estate
companies with >US$1 bn market cap.
HDIL is impacted by uncertainty surrounding its MIAL rehabilitation project while Unitech has
68% of promoter’s shares pledged adding to the fundamental risk given (1) constrained
funding for real estate developers and (2) recent stock price correction.
#4 Commercial leasing showing signs of pick-up
We take comfort from (1) quarterly run-rate remaining stable at 2 mn sq. ft which looked
fairly unlikely even 2-3 quarters ago, (2) DLF has restarted development of select commercial
properties and Mall of India at NOIDA given encouraging market signs and (3) With IT/ITES
accounting for around 60% of demand (anecdotal evidence) and our analysts view of
buoyant demand for the sector, we see a possibility of a further uptick.
Concern #1—weak sales in 9MFY11 remain a concern
DLF has sold 6.5 mn sq. ft in 9MFY11 versus 12.5 mn sq. ft in FY2010. While FY2011E
target remains at 12 mn sq. ft, we find it unlikely that DLF will manage to launch and sell
5.5 mn sq. ft in a single quarter.
However, DLF has showcased a list of projects (totaling 8 mn sq. ft) which it plans to launch
in 4QFY11E. DLF mentioned that they have soft-launched a couple of these already and
many of them already have all approvals in place (lack of which was the reason for the delay
in launches).
#2 Debt increased qoq despite management intent of keeping it under control
While debt has increased qoq and it is a concern, annualized EBITDA of Rs16.5 bn for its
rental business provides cash flow support and mandatory debt repayment of Rs29 bn can
be met through cash flow generation from its rental business and non-core asset sales which
have been averaging Rs4 bn a quarter.
We slash volume sales and NAV (down 30%) to arrive at fair value in the current
scenario
We increase WACC to 15% (increase by 100 bps) and cap. rate to 11% (a similar 100
bps increase).
We reduce gross developable area to 400 mn sq. ft in line with numbers disclosed by DLF
in 3QFY11.
We substantially delay volume sales and volume booking—we are now assuming 9.2 mn
sq. ft for FY2011E (versus 13 mn sq. ft earlier), 12.8 mn sq. ft for FY2012E (18 mn sq. ft
earlier) and 17.1 mn sq. ft (24 mn sq. ft earlier).
We also adjust for a few high-value large projects (Mumbai and Chanakyapuri) selling
price downwards and cost estimates upwards with the view that either DLF will have to
lower prices or delay launch—either of which will be negative for our NAV estimate.
Led by these changes, we are cutting your FY2011E/12E revenues and net profit
estimates by 16/17% and 26%/35%, respectively.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
DLF (DLFU)
Property
Weak launches but still a good launch pad. DLF has (1) a relatively wide
geographical spread, (2) lower regulatory risk versus Mumbai firms, (3) no share pledges
and (4) a substantial non-residential portfolio which is seeing signs of volume uptick
and has lesser pricing risk due to lack of a run-up. Key negatives include (1) continuing
weak sales and (2) debt increase qoq. We retain ADD with a target price of Rs265/share
(earlier Rs375) with a WACC of 15% and cap. rate of 11% (both increased 100 bps).
Positives—wide geographical spread; low regulatory risk and no share pledges
Within large cap. real estate stocks, DLF stands out for absence of touch-me-not negatives—(1) no
single project or location-specific risk: Gurgaon (single largest geography is 55% of its current
development portfolio (40 mn sq. ft) and residential contributes less than 50% to our NAV
estimate; (2) no significant regulatory risk: DLF’s NAV estimate faces relatively lower risk of
regulatory action (redevelopment, car-park FSI among others) impairing value versus Mumbaifocused
firms and (3) no share pledges which could increase risk of a cash crunch in a tighter
funding scenario. Commercial leasing volumes have clearly bottomed and DLF has 16 mn sq. ft of
leasable space that can be made ready for fit-outs in 6-12 months.
Weak sales trend and stubborn debt are the key negatives
DLF has managed to sell only 6.5 mn sq. ft in 9MFY11 (versus 12.5 mn sq. ft in FY2010) and we
believe it is a challenging task to meet its FY2011E target of over 12 mn sq. ft. However, DLF has
chalked out plans to launch 8 mn sq. ft in 4QFY11E and exuded confidence that most of these
would be launched and has blamed the delay on excess time taken for regulatory approvals. Debt
increased marginally qoq (despite management intent to reduce it) though an almost similar
amount of increase in land and fixed assets gives comfort. Management has indicated their intent
to bring it down to 0.6X by end-FY2012E versus 0.8X at present.
Stock has value despite raising our hurdle rate and adopting a more conservative scenario
We increase our WACC and cap. rate assumptions by 100 bps to 15% and 11%, respectively, and
reduce gross developable area to 400 mn sq. ft in line with numbers disclosed by DLF in 3QFY11.
We substantially delay volume sales and volume booking—we are now assuming 9.2 mn sq. ft for
FY2011E (versus 13 mn sq. ft earlier), 12.8 mn sq. ft for FY2012E (18 mn sq. ft earlier) and 17.1
mn sq. ft (24 mn sq. ft earlier). We also adjust for a few high-value large projects (Mumbai and
Chanakyapuri, New Delhi)—selling price downwards and cost estimates upwards with the view
that either DLF will have to lower prices or delay launch—either of which will be negative for our
NAV estimate. Led by these changes, we are cutting our FY2011E/12E revenues and net profit
estimates by 16/17% and 26%/35%, respectively.
#1 Spread across geographies—less vulnerable to a particular market
DLF’s current development portfolio of 40 mn sq. ft (including development for rent, total is
56 mn sq. ft) is well spread with Gurgaon accounting for 22 mn sq. ft, Super Metros 7 mn
sq. ft and Rest of India at 11 mn sq. ft. While Gurgaon remains the largest geography, with
IT/ITES demand remaining buoyant, this is less of a concern in the current environment.
#2 Lower regulatory risk versus Mumbai-focused firms
While DLF has the NTC Mill project (3 mn sq. ft) in Mumbai which has been delayed due to
regulatory approvals , it is less than 5% of our gross NAV and likely DLF faces risk of a delay
in monetization versus an absolute loss of calculated value due to either beneficial
government policies changing or participating in a risky slum or other redevelopment.
# 3 This along with no share pledges makes DLF stand out among real estate
companies with >US$1 bn market cap.
HDIL is impacted by uncertainty surrounding its MIAL rehabilitation project while Unitech has
68% of promoter’s shares pledged adding to the fundamental risk given (1) constrained
funding for real estate developers and (2) recent stock price correction.
#4 Commercial leasing showing signs of pick-up
We take comfort from (1) quarterly run-rate remaining stable at 2 mn sq. ft which looked
fairly unlikely even 2-3 quarters ago, (2) DLF has restarted development of select commercial
properties and Mall of India at NOIDA given encouraging market signs and (3) With IT/ITES
accounting for around 60% of demand (anecdotal evidence) and our analysts view of
buoyant demand for the sector, we see a possibility of a further uptick.
Concern #1—weak sales in 9MFY11 remain a concern
DLF has sold 6.5 mn sq. ft in 9MFY11 versus 12.5 mn sq. ft in FY2010. While FY2011E
target remains at 12 mn sq. ft, we find it unlikely that DLF will manage to launch and sell
5.5 mn sq. ft in a single quarter.
However, DLF has showcased a list of projects (totaling 8 mn sq. ft) which it plans to launch
in 4QFY11E. DLF mentioned that they have soft-launched a couple of these already and
many of them already have all approvals in place (lack of which was the reason for the delay
in launches).
#2 Debt increased qoq despite management intent of keeping it under control
While debt has increased qoq and it is a concern, annualized EBITDA of Rs16.5 bn for its
rental business provides cash flow support and mandatory debt repayment of Rs29 bn can
be met through cash flow generation from its rental business and non-core asset sales which
have been averaging Rs4 bn a quarter.
We slash volume sales and NAV (down 30%) to arrive at fair value in the current
scenario
We increase WACC to 15% (increase by 100 bps) and cap. rate to 11% (a similar 100
bps increase).
We reduce gross developable area to 400 mn sq. ft in line with numbers disclosed by DLF
in 3QFY11.
We substantially delay volume sales and volume booking—we are now assuming 9.2 mn
sq. ft for FY2011E (versus 13 mn sq. ft earlier), 12.8 mn sq. ft for FY2012E (18 mn sq. ft
earlier) and 17.1 mn sq. ft (24 mn sq. ft earlier).
We also adjust for a few high-value large projects (Mumbai and Chanakyapuri) selling
price downwards and cost estimates upwards with the view that either DLF will have to
lower prices or delay launch—either of which will be negative for our NAV estimate.
Led by these changes, we are cutting your FY2011E/12E revenues and net profit
estimates by 16/17% and 26%/35%, respectively.
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