Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
DLF
Reuters: DLF.BO Bloomberg: DLFU IN
Peaking rate cycle to benefit;
upgrading to Buy
Twin drivers - operational flexibility and financial leverage; upgrading to Buy
Our rating upgrade is premised on DLF's operational flexibility and financial
leverage (84% gearing) in an era of peaking interest rates. While its aggressive
accounting policy and inflation force us to cut EPS (a lag indicator) by 40%, we
believe that this is the end of EPS downgrade momentum for DLF. Peaking
interest rates with price cuts should kick-start demand, driving its leverage.
Despite an 8% cut in the target price, with 22% upside potential, we upgrade
DLF to Buy.
Significant strengths…
DLF appears well-positioned to maintain its leadership, given its large land bank,
strong brand equity, and flexibility. In the liquidity crisis, it downsized its land bank
and projects under construction and increased its focus on the cash-generating
residential vertical (with an earlier-than-expected launch of mid-end housing). In
the current era of sluggish demand, high inflation and its high gearing, DLF is
moving further away from office space (that is leased) in favour of plots. The
latter’s low unit price attracts customers but offers quicker cash and good
margins to DLF.
…partly neutralised by headwinds, but a levered play on peaking rates
The restructuring of DAL (company held by promoters) with integration into DLF,
inability of Indian financial markets to monetise DLF’s increasing pool of leased
assets (c.20msf with annual rental of c.INR13bn and capital value of c.INR100bn
on a conservative 13% cap rate) and delay in the sale of non-core assets resulted
in net debt ballooning to INR225bn and net gearing to 84% in March 11 – making
it a levered play on peaking interest rates (Figures 10-11). Operational cashflow
and asset monetisation should reduce gearing to 56% by March 2013E.
Cut estimates by c.40% and target price by c.8%; upgrading to Buy; risks
An aggressive accounting policy and high inflation should result in margins facing
pressure for another two quarters. Hence, we cut our near-term EPS estimates (a
lag indictor) by c.40% and target price by 8%. However, we believe that the
concerns are more than factored into the 105% underperformance to the Sensex
since January 2009. We upgrade to Buy. Risks include (a) continuing inflation
leading to prolonged rate tightening affecting demand and asset monetisation and
(b) weak demand in the office vertical.
Investment thesis
Outlook
DLF appears well-positioned to maintain its leadership, given its large land bank, strong brand
equity, and plans to enhance its significant execution capabilities. It addressed the sector
headwinds by significantly downsizing its land bank and construction projects from its peak
and is focusing more on the cash-generating residential vertical (with an earlier-than-expected
launch of mid-end housing). Although bookings improved even in luxury housing, aggressive
price hikes and increasing interest rates have slowed demand. While pre-leasing is picking up
traction, supply ramp-up remains ahead of the expected demand ramp-up. Continual high
inflation and DLF’s aggressive accounting policy are currently constraining margins. The
restructuring of DAL (company held by promoters) and its integration, the inability of Indian
financial markets to monetise DLF’s increasing pool of leased assets and a delay in the sale
of non-core assets resulted in reported net gearing increasing to 84% in March 2011. Hence,
while the focus on execution continues, DLF’s near-term product-mix is taking a significant
shift in favour of plots with even less focus on leased assets. With asset monetisation
expected to pick up momentum, we expect net gearing to fall over time. DLF, the market
leader by far with a clear focus only on real estate development and reasonable flexibility in
its product mix, is a levered play on the Indian property sector. We upgrade our rating to Buy.
Valuation
We value DLF on an adjusted DCF-based Gross Asset Value (GAV), with the assumptions of a
15.5% discount rate, 11% cap rate, and 25% tax rate, to arrive at a GAV of INR 381/share.
However, considering the significant sector risks, we increase the discount to GAV to 15%
(10% earlier) to arrive at an adjusted GAV of INR 324/share. We then exclude net debt,
preference capital and payables on land bank (INR 145/share), and add the value of
completed assets (which includes power, leased office and retail space, etc., which comes to
INR 96/share), to arrive at a SOTP based target price of INR 275/share.
Risks
Key downside risks are: (a) higher-than-expected near-term deterioration in the macro
environment (interest rates, liquidity in financial markets) and the level of price cuts necessary
to kick-start demand in residential; (b) weaker-than-expected demand in the office vertical that
prolongs the glut; (c) near-term liquidity stress for the sector; and (d) continual delay in the
monetisation of leased office space and of non-core assets.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
DLF
Reuters: DLF.BO Bloomberg: DLFU IN
Peaking rate cycle to benefit;
upgrading to Buy
Twin drivers - operational flexibility and financial leverage; upgrading to Buy
Our rating upgrade is premised on DLF's operational flexibility and financial
leverage (84% gearing) in an era of peaking interest rates. While its aggressive
accounting policy and inflation force us to cut EPS (a lag indicator) by 40%, we
believe that this is the end of EPS downgrade momentum for DLF. Peaking
interest rates with price cuts should kick-start demand, driving its leverage.
Despite an 8% cut in the target price, with 22% upside potential, we upgrade
DLF to Buy.
Significant strengths…
DLF appears well-positioned to maintain its leadership, given its large land bank,
strong brand equity, and flexibility. In the liquidity crisis, it downsized its land bank
and projects under construction and increased its focus on the cash-generating
residential vertical (with an earlier-than-expected launch of mid-end housing). In
the current era of sluggish demand, high inflation and its high gearing, DLF is
moving further away from office space (that is leased) in favour of plots. The
latter’s low unit price attracts customers but offers quicker cash and good
margins to DLF.
…partly neutralised by headwinds, but a levered play on peaking rates
The restructuring of DAL (company held by promoters) with integration into DLF,
inability of Indian financial markets to monetise DLF’s increasing pool of leased
assets (c.20msf with annual rental of c.INR13bn and capital value of c.INR100bn
on a conservative 13% cap rate) and delay in the sale of non-core assets resulted
in net debt ballooning to INR225bn and net gearing to 84% in March 11 – making
it a levered play on peaking interest rates (Figures 10-11). Operational cashflow
and asset monetisation should reduce gearing to 56% by March 2013E.
Cut estimates by c.40% and target price by c.8%; upgrading to Buy; risks
An aggressive accounting policy and high inflation should result in margins facing
pressure for another two quarters. Hence, we cut our near-term EPS estimates (a
lag indictor) by c.40% and target price by 8%. However, we believe that the
concerns are more than factored into the 105% underperformance to the Sensex
since January 2009. We upgrade to Buy. Risks include (a) continuing inflation
leading to prolonged rate tightening affecting demand and asset monetisation and
(b) weak demand in the office vertical.
Investment thesis
Outlook
DLF appears well-positioned to maintain its leadership, given its large land bank, strong brand
equity, and plans to enhance its significant execution capabilities. It addressed the sector
headwinds by significantly downsizing its land bank and construction projects from its peak
and is focusing more on the cash-generating residential vertical (with an earlier-than-expected
launch of mid-end housing). Although bookings improved even in luxury housing, aggressive
price hikes and increasing interest rates have slowed demand. While pre-leasing is picking up
traction, supply ramp-up remains ahead of the expected demand ramp-up. Continual high
inflation and DLF’s aggressive accounting policy are currently constraining margins. The
restructuring of DAL (company held by promoters) and its integration, the inability of Indian
financial markets to monetise DLF’s increasing pool of leased assets and a delay in the sale
of non-core assets resulted in reported net gearing increasing to 84% in March 2011. Hence,
while the focus on execution continues, DLF’s near-term product-mix is taking a significant
shift in favour of plots with even less focus on leased assets. With asset monetisation
expected to pick up momentum, we expect net gearing to fall over time. DLF, the market
leader by far with a clear focus only on real estate development and reasonable flexibility in
its product mix, is a levered play on the Indian property sector. We upgrade our rating to Buy.
Valuation
We value DLF on an adjusted DCF-based Gross Asset Value (GAV), with the assumptions of a
15.5% discount rate, 11% cap rate, and 25% tax rate, to arrive at a GAV of INR 381/share.
However, considering the significant sector risks, we increase the discount to GAV to 15%
(10% earlier) to arrive at an adjusted GAV of INR 324/share. We then exclude net debt,
preference capital and payables on land bank (INR 145/share), and add the value of
completed assets (which includes power, leased office and retail space, etc., which comes to
INR 96/share), to arrive at a SOTP based target price of INR 275/share.
Risks
Key downside risks are: (a) higher-than-expected near-term deterioration in the macro
environment (interest rates, liquidity in financial markets) and the level of price cuts necessary
to kick-start demand in residential; (b) weaker-than-expected demand in the office vertical that
prolongs the glut; (c) near-term liquidity stress for the sector; and (d) continual delay in the
monetisation of leased office space and of non-core assets.
No comments:
Post a Comment