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UBS Investment Research
DLF Limited
C ore holding
�� Superior business model with best asset-geographic mix
We think DLF is best positioned to outperform based on its focus on development,
strong brand, fully paid-up quality land reserves (400msf) across cities, and a business
model that is relatively insulated from the ongoing 2G controversy. Its large and
growing rental annuity (Rs16.5bn) provides earnings stability and we believe makes it
the best proxy to a commercial real estate recovery.
�� Catalysts: strong pre-sales; large non-core asset sales; sustained leasing
We forecast: 1) strong pre-sales for its 10-12msf launch pipeline (despite approval
delays), large plot sales in FY12 across Gurgaon, North India, and key cities; 2) good
progress in large non-core assets sales (versus guidance of Rs16bn in FY12) and
execution to improve cash flow visibility; and 3) DLF’s ability to exceed leasing of 4-
5msf pa (FY11) in FY12, as share price drivers.
�� High leverage has been overhang for some time; but not a concern
DLF’s high debt of Rs207bn (a D/E of 0.8x) amid rising interest rates, tight liquidity
and increasing costs may impact near-term earnings. Its inability to reduce debt and
pending ownership restructuring of the rental portfolio has weighed on share price
performance. However, we are not concerned about interest/debt maturity payments
(Rs27bn in FY12), given its strong rental annuity and improving cash flows. We
believe debt is at a peak and any large repayments would be a positive share price
driver.
�� Valuation: lower price target from Rs400 to Rs350 on higher rate risk
We think the share price is attractive at a 52% discount to estimated NAV of Rs465 and
1.5x P/BV in FY11E, close to historical trough levels of a 60% discount and 1.0x
P/BV. However, we lower our price target, which is based on a higher 25% discount to
NAV (20% before) and lower NAV (-7%), on the risk of rising interest rates given its
high leverage.
DLF Limited
DLF is India's largest real estate company by market capitalisation. Established
as Delhi Land and Finance (DLF), it has a track record of more than 60 years in
real estate development. The major shareholders are KP Singh and family, who
own approximately 90% of the company. DLF commenced operations in Delhi,
expanded into the National Capital Region in the late 1980s, and now has a
presence in all major Indian cities. The company is a leader in office space and
has a large portfolio of residential and retail projects. It is expanding into SEZs
and hotels.
Statement of Risk
We believe key risks for real estate companies include a prolonged higher
interest rate environment (one+year), higher mortgage rates impacting consumer
affordability, slower annual GDP growth of <7% impacting demand for
residential and commercial properties, changes in foreign direct investment
regulations impacting capital availability for the sector, changes in regulatory
policies impacting commercial viability of development, and inflation impacting
consumer affordability.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
DLF Limited
C ore holding
�� Superior business model with best asset-geographic mix
We think DLF is best positioned to outperform based on its focus on development,
strong brand, fully paid-up quality land reserves (400msf) across cities, and a business
model that is relatively insulated from the ongoing 2G controversy. Its large and
growing rental annuity (Rs16.5bn) provides earnings stability and we believe makes it
the best proxy to a commercial real estate recovery.
�� Catalysts: strong pre-sales; large non-core asset sales; sustained leasing
We forecast: 1) strong pre-sales for its 10-12msf launch pipeline (despite approval
delays), large plot sales in FY12 across Gurgaon, North India, and key cities; 2) good
progress in large non-core assets sales (versus guidance of Rs16bn in FY12) and
execution to improve cash flow visibility; and 3) DLF’s ability to exceed leasing of 4-
5msf pa (FY11) in FY12, as share price drivers.
�� High leverage has been overhang for some time; but not a concern
DLF’s high debt of Rs207bn (a D/E of 0.8x) amid rising interest rates, tight liquidity
and increasing costs may impact near-term earnings. Its inability to reduce debt and
pending ownership restructuring of the rental portfolio has weighed on share price
performance. However, we are not concerned about interest/debt maturity payments
(Rs27bn in FY12), given its strong rental annuity and improving cash flows. We
believe debt is at a peak and any large repayments would be a positive share price
driver.
�� Valuation: lower price target from Rs400 to Rs350 on higher rate risk
We think the share price is attractive at a 52% discount to estimated NAV of Rs465 and
1.5x P/BV in FY11E, close to historical trough levels of a 60% discount and 1.0x
P/BV. However, we lower our price target, which is based on a higher 25% discount to
NAV (20% before) and lower NAV (-7%), on the risk of rising interest rates given its
high leverage.
DLF Limited
DLF is India's largest real estate company by market capitalisation. Established
as Delhi Land and Finance (DLF), it has a track record of more than 60 years in
real estate development. The major shareholders are KP Singh and family, who
own approximately 90% of the company. DLF commenced operations in Delhi,
expanded into the National Capital Region in the late 1980s, and now has a
presence in all major Indian cities. The company is a leader in office space and
has a large portfolio of residential and retail projects. It is expanding into SEZs
and hotels.
Statement of Risk
We believe key risks for real estate companies include a prolonged higher
interest rate environment (one+year), higher mortgage rates impacting consumer
affordability, slower annual GDP growth of <7% impacting demand for
residential and commercial properties, changes in foreign direct investment
regulations impacting capital availability for the sector, changes in regulatory
policies impacting commercial viability of development, and inflation impacting
consumer affordability.
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