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DLF Ltd
Moving in the right direction
DLF's de-leveraging strategy has kicked off well with successful plot sales in new
Gurgaon and positive newsflow on monetisation of its IT parks. We believe the
interest rate cycle and DLF's debt are peaking out and expect further newsflow
(on asset sales, sales volume) to be largely positive. Upgrade to Buy
De-leveraging strategy finally kicking off
After DLFís muted performance in FY11 led by slower asset churn and higher interest costs,
it is now focusing to address these key concerns via the sale of plots and monetisation of
non-core assets. Our channel checks suggest DLF was successful in its new Gurgaon
(sector 90-91) plot sales, which were launched yesterday. We estimate the sales value of
these plots could be Rs6bn-7bn and could contribute significantly to an otherwise muted
1QFY12 earnings. The Economic Times reported today that DLF is in talks to sell its IT parks
in Noida and Pune for Rs13bn. Our discussions with real estate private equity (PE) players
suggest there is reasonable demand for low-yielding IT park assets.
Moving in the right direction; we expect a gradual recovery
DLFís large net debt (Rs226bn at end-FY11, +40% yoy) has been the biggest overhang on
the stock, in our view. To address this, it has guided asset sales of Rs70bn in the next 2-3
years. We expect DLF to embark on gradual but steady monetisation of non-core assets,
from which we forecast it generating Rs46bn in FY12 (including Rs10bn from IT parks,
Rs22.5bn from Aman resorts and others). In addition, we forecast gross operational
cashflows of Rs42bn-45bn (comprising Rs27bn from plot sales and Rs15bn-18bn from
Magnolia-2, its luxury residential project in Gurgaon). We thus expect positive share-price
catalysts in the near to medium term (DLFís debt gradually declining from 2Q, the interest
rate cycle peaking out, successful non-core asset monetisation, a sales volume pickup).
On potential asset monetisation, we raise our TP to Rs250 and upgrade to Buy
We incorporate our assumptions for a land bank reduction, an increase in realisation and
construction costs across projects, which collectively results in 20/27% cuts in our FY12/13
earnings estimates. We reduce our discount to gross asset value (GAV) from 15% to 10%
(as de-leveraging kicks off) and add Rs46bn (Rs26ps) from monetisation of non-core assets,
which results in our TP rising 28% to Rs250 ñ comprising Rs204/share for its land bank and
Rs46/share for completed leased assets (60% share). We believe the worst is over for DLF
and expect a gradual recovery. After underperforming the Sensex and BSE Realty indices by
16% and 6% in the last three months, the stock looks attractively priced. Upgrade to Buy
Moving in the right direction
DLFís de-leveraging strategy has kicked off well with the successful plot sales in New
Gurgaon and positive newsflow on IT parks monetisation. We anticipate a gradual recovery
and further positive newsflow. We raise our target price to Rs250 and upgrade to Buy.
De-leveraging strategy finally kicks off
After a disappointing performance in FY11 as a result of slower asset churn and higher interest
costs from DLFís large debt, it is now focusing on addressing these key concerns via the sale of
plots and debt reduction via the monetisation of non-core assets.
Focus on plotted development gets off to a good startÖ
DLF is focusing on plotted development as part of its strategy to increase asset monetisation. Of
the 12msf of launches planned in FY12, 10msf will be in plotted development ñ an activity that not
only increases asset monetisation but also mitigates inflationary and execution risks. Our channel
checks suggest DLF is pricing its plot launches judiciously after mixed success in its recent plot
launches. Its attractively priced plots near Chandigarh witnessed good demand while its higherpriced Alemada launches faced headwinds.
Channel checks suggest DLF was successful in its New Gurgaon (sector 90-91) plot sales, which
were launched yesterday. The plots were offered at a 5% discount to the launch price ñ ie, at a
price of Rs38,000 per sq yard (with other development and preferred location charges extra) ñ
and in three sizes, 300, 400 and 500 sq yards. We estimate that the total value of these plots
could be about Rs6bn-7bn and could significantly contribute to its otherwise muted 1QFY12
revenues and earnings respectively, in our view.
Öwhile non-core asset monetisation should see traction tooÖ
DLF has guided an asset monetisation target of Rs70bn (within the next two to three years). While
its activity on this front has been weak in the past, our channel checks suggest the company is
close to monetising a few of its assets, which could help it reduce debt. The Economic Times
reported today that DLF is in talks to sell its IT parks in Noida and Pune (DLF holds 70% in each)
for Rs13bn. Our discussions with real estate PE players suggest there is demand for low-yielding
IT park assets, which augurs well for DLF.
Öwhich should address concerns of high debt and low asset turnover
The companyís high debt, to a considerable extent, and low asset turnover, to a lesser extent,
have been key overhangs on the stock of late. Managementís strategy of focusing on plotted
development and non-core asset monetisation seeks to address these concerns.
Moving in the right direction; we expect a gradual recovery
DLF plans faster monetisation of land bank via plot sales
After a muted performance in FY11 due to slower churn, DLF is now focusing on addressing
these concerns via the sale of plots (to both speed up its monetisation of the land bank and
mitigate inflationary and execution risks) in Indore, new Gurgaon, Lucknow and Chandigarh and
expects to generate Rs26.6bn (gross cashflows) from plotted development in FY12.
It also expects to launch and sell premium residential projects in Gurgaon (Magnolia-2), which we
forecast could generate cash flows of Rs15bn-18bn in FY12. If the realty market improves, we
could expect DLF to its launch super-premium residential projects in South Delhi (Chanakyapuri).
We expect net debt to start declining from 2QFY12
In our view, DLF has started taking the right steps and we expect gradual but steady asset
monetisation. DLF has guided to Rs70bn of asset sales in the next two to three years as follows:
! Aman resorts ñ US$500m
! Hotel land (US$100m) + other land (US$400m)
! Low-yield assets ñ Pune and Noida ñ US$250m-300m.
We expect DLFís debt to start declining gradually from 2Q as we expect monetisation of IT parks
to kick in by then and sales from Aman resorts and a few land parcel by FY12.
DLF missed FY11 guidance, but FY12 guidance appears realistic
Given the focus is on plotted development and the success of its recent launches, we expect the
company to be reasonably successful in achieving its FY12 guidance
We build in a gradual recovery aheadÖ
Despite a weak FY10, FY11 was muted. While revenues increased 29% yoy, the EBITDA margin
contracted to 39.3% from 47.3% in FY10. Excluding the impact of the one-time cost reset of
Rs4.75bn, the FY11 EBITDA margin would have been 44.2%. PBT declined 20% yoy
The companyís performance was no different on operational parameters. Launches in FY11 were
5.2msf vs 22.1msf in FY10. However, it scored well on execution (7.1msf vs 2.1msf) and in
leasing out assets (4.4msf vs 0.7msf).
Öleading to reductions in our estimatesÖ
We incorporate our assumptions for a reduction in the land bank from 399msf to 367msf (due to
the shift in development plans towards plotted development, which carries a lower floor space
index) and a 20-25% increase in realisation and construction costs across projects, which
collectively results in 20/27% cuts to our FY12/13 earnings estimates.
Öbut an increased target price and a recommendation upgrade to Buy
However, we reduce our discount to gross asset value (GAV) from 15% to 10% (as de-leveraging
kicks off) and add the potential contribution from the sale of non-core assets (Rs23bn from Aman
resorts and another Rs23bn from other assets). This results in our target price rising 28% to
Rs250 ñ comprising Rs204/share for its land bank and Rs46/share for completed leased assets
(60% share).
We expect a gradual recovery for DLF led by its de-leveraging strategy and our expectations of
interest rates peaking. After underperforming the Sensex and BSE Realty indices by 16% and 6%,
respectively, in the last three months, the stock looks attractively priced. Upgrade to Buy.
Risks to our rating
! A lower-than-expected ramp-up in sales due to sector headwinds;
! Lower-than-expected margins due to cost escalations and interest rates; and
! Slower-than-expected monetisation of non-core assets.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
DLF Ltd
Moving in the right direction
DLF's de-leveraging strategy has kicked off well with successful plot sales in new
Gurgaon and positive newsflow on monetisation of its IT parks. We believe the
interest rate cycle and DLF's debt are peaking out and expect further newsflow
(on asset sales, sales volume) to be largely positive. Upgrade to Buy
De-leveraging strategy finally kicking off
After DLFís muted performance in FY11 led by slower asset churn and higher interest costs,
it is now focusing to address these key concerns via the sale of plots and monetisation of
non-core assets. Our channel checks suggest DLF was successful in its new Gurgaon
(sector 90-91) plot sales, which were launched yesterday. We estimate the sales value of
these plots could be Rs6bn-7bn and could contribute significantly to an otherwise muted
1QFY12 earnings. The Economic Times reported today that DLF is in talks to sell its IT parks
in Noida and Pune for Rs13bn. Our discussions with real estate private equity (PE) players
suggest there is reasonable demand for low-yielding IT park assets.
Moving in the right direction; we expect a gradual recovery
DLFís large net debt (Rs226bn at end-FY11, +40% yoy) has been the biggest overhang on
the stock, in our view. To address this, it has guided asset sales of Rs70bn in the next 2-3
years. We expect DLF to embark on gradual but steady monetisation of non-core assets,
from which we forecast it generating Rs46bn in FY12 (including Rs10bn from IT parks,
Rs22.5bn from Aman resorts and others). In addition, we forecast gross operational
cashflows of Rs42bn-45bn (comprising Rs27bn from plot sales and Rs15bn-18bn from
Magnolia-2, its luxury residential project in Gurgaon). We thus expect positive share-price
catalysts in the near to medium term (DLFís debt gradually declining from 2Q, the interest
rate cycle peaking out, successful non-core asset monetisation, a sales volume pickup).
On potential asset monetisation, we raise our TP to Rs250 and upgrade to Buy
We incorporate our assumptions for a land bank reduction, an increase in realisation and
construction costs across projects, which collectively results in 20/27% cuts in our FY12/13
earnings estimates. We reduce our discount to gross asset value (GAV) from 15% to 10%
(as de-leveraging kicks off) and add Rs46bn (Rs26ps) from monetisation of non-core assets,
which results in our TP rising 28% to Rs250 ñ comprising Rs204/share for its land bank and
Rs46/share for completed leased assets (60% share). We believe the worst is over for DLF
and expect a gradual recovery. After underperforming the Sensex and BSE Realty indices by
16% and 6% in the last three months, the stock looks attractively priced. Upgrade to Buy
Moving in the right direction
DLFís de-leveraging strategy has kicked off well with the successful plot sales in New
Gurgaon and positive newsflow on IT parks monetisation. We anticipate a gradual recovery
and further positive newsflow. We raise our target price to Rs250 and upgrade to Buy.
De-leveraging strategy finally kicks off
After a disappointing performance in FY11 as a result of slower asset churn and higher interest
costs from DLFís large debt, it is now focusing on addressing these key concerns via the sale of
plots and debt reduction via the monetisation of non-core assets.
Focus on plotted development gets off to a good startÖ
DLF is focusing on plotted development as part of its strategy to increase asset monetisation. Of
the 12msf of launches planned in FY12, 10msf will be in plotted development ñ an activity that not
only increases asset monetisation but also mitigates inflationary and execution risks. Our channel
checks suggest DLF is pricing its plot launches judiciously after mixed success in its recent plot
launches. Its attractively priced plots near Chandigarh witnessed good demand while its higherpriced Alemada launches faced headwinds.
Channel checks suggest DLF was successful in its New Gurgaon (sector 90-91) plot sales, which
were launched yesterday. The plots were offered at a 5% discount to the launch price ñ ie, at a
price of Rs38,000 per sq yard (with other development and preferred location charges extra) ñ
and in three sizes, 300, 400 and 500 sq yards. We estimate that the total value of these plots
could be about Rs6bn-7bn and could significantly contribute to its otherwise muted 1QFY12
revenues and earnings respectively, in our view.
Öwhile non-core asset monetisation should see traction tooÖ
DLF has guided an asset monetisation target of Rs70bn (within the next two to three years). While
its activity on this front has been weak in the past, our channel checks suggest the company is
close to monetising a few of its assets, which could help it reduce debt. The Economic Times
reported today that DLF is in talks to sell its IT parks in Noida and Pune (DLF holds 70% in each)
for Rs13bn. Our discussions with real estate PE players suggest there is demand for low-yielding
IT park assets, which augurs well for DLF.
Öwhich should address concerns of high debt and low asset turnover
The companyís high debt, to a considerable extent, and low asset turnover, to a lesser extent,
have been key overhangs on the stock of late. Managementís strategy of focusing on plotted
development and non-core asset monetisation seeks to address these concerns.
Moving in the right direction; we expect a gradual recovery
DLF plans faster monetisation of land bank via plot sales
After a muted performance in FY11 due to slower churn, DLF is now focusing on addressing
these concerns via the sale of plots (to both speed up its monetisation of the land bank and
mitigate inflationary and execution risks) in Indore, new Gurgaon, Lucknow and Chandigarh and
expects to generate Rs26.6bn (gross cashflows) from plotted development in FY12.
It also expects to launch and sell premium residential projects in Gurgaon (Magnolia-2), which we
forecast could generate cash flows of Rs15bn-18bn in FY12. If the realty market improves, we
could expect DLF to its launch super-premium residential projects in South Delhi (Chanakyapuri).
We expect net debt to start declining from 2QFY12
In our view, DLF has started taking the right steps and we expect gradual but steady asset
monetisation. DLF has guided to Rs70bn of asset sales in the next two to three years as follows:
! Aman resorts ñ US$500m
! Hotel land (US$100m) + other land (US$400m)
! Low-yield assets ñ Pune and Noida ñ US$250m-300m.
We expect DLFís debt to start declining gradually from 2Q as we expect monetisation of IT parks
to kick in by then and sales from Aman resorts and a few land parcel by FY12.
DLF missed FY11 guidance, but FY12 guidance appears realistic
Given the focus is on plotted development and the success of its recent launches, we expect the
company to be reasonably successful in achieving its FY12 guidance
We build in a gradual recovery aheadÖ
Despite a weak FY10, FY11 was muted. While revenues increased 29% yoy, the EBITDA margin
contracted to 39.3% from 47.3% in FY10. Excluding the impact of the one-time cost reset of
Rs4.75bn, the FY11 EBITDA margin would have been 44.2%. PBT declined 20% yoy
The companyís performance was no different on operational parameters. Launches in FY11 were
5.2msf vs 22.1msf in FY10. However, it scored well on execution (7.1msf vs 2.1msf) and in
leasing out assets (4.4msf vs 0.7msf).
Öleading to reductions in our estimatesÖ
We incorporate our assumptions for a reduction in the land bank from 399msf to 367msf (due to
the shift in development plans towards plotted development, which carries a lower floor space
index) and a 20-25% increase in realisation and construction costs across projects, which
collectively results in 20/27% cuts to our FY12/13 earnings estimates.
Öbut an increased target price and a recommendation upgrade to Buy
However, we reduce our discount to gross asset value (GAV) from 15% to 10% (as de-leveraging
kicks off) and add the potential contribution from the sale of non-core assets (Rs23bn from Aman
resorts and another Rs23bn from other assets). This results in our target price rising 28% to
Rs250 ñ comprising Rs204/share for its land bank and Rs46/share for completed leased assets
(60% share).
We expect a gradual recovery for DLF led by its de-leveraging strategy and our expectations of
interest rates peaking. After underperforming the Sensex and BSE Realty indices by 16% and 6%,
respectively, in the last three months, the stock looks attractively priced. Upgrade to Buy.
Risks to our rating
! A lower-than-expected ramp-up in sales due to sector headwinds;
! Lower-than-expected margins due to cost escalations and interest rates; and
! Slower-than-expected monetisation of non-core assets.
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