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DLF (DLFU)
Property
Showing urgency but is it good enough? We believe outlook for DLF rests on two
key parameters – (1) faster/more launches and (2) debt reduction over FY2012E. While
faster/more launches are a function of the market and all indicators point to a subdued
one, debt reduction is reliant on ‘non-core’ asset sales where 2QFY12E is a make-orbreak
quarter. We maintain our ADD rating with a target price of Rs270/share, at par
with our March 2013E-NAV with a WACC rate of 15% and a cap rate of 11%.
Reiterates and executes on three-pronged strategy but not good enough to drive a re-rating
Cash inflow. Both of DLF’s launches in 1QFY12E and almost all of the planned launches in
2QFY12E will be plotted developments in two kinds of locations – (1) where they have
significant development already underway (e.g. Gurgaon with 21.5 mn sq. ft under execution)
and (2) locations where only plotted development will sell (e.g. Indore, Panchkula in
Chandigarh).
Margin management. DLF delivered 2 mn sq. ft in 1QFY12E (versus FY2012E target of 12 mn sq.
ft) but it’s too early to assess ability to sell higher-end products (which are higher margin) and
introduce ‘escalation clauses’ as DLF focused on plotted development in 1QFY12.
Conserve/Release capital. We see limited progress on this front as DLF’s capital expenditure for
1QFY12 is Rs3.3 bn versus a target of Rs8 bn and non-core asset disposal was only Rs1.7 bn
and bigger-ticket disposals are still awaited.
Debt repayment to be driven by ‘non-core’ asset sales
With operational cash flow (post working capital increase) of Rs8-9 bn utilized for (1) interest
payments (normalized Rs7 bn a quarter) and (2) capital expenditure of Rs2 bn, they are unlikely to
significantly help pay up debt. While there has been marginal progress on ‘non-core’ asset sales in
1QFY12, DLF indicated in their conference call that there are four assets for which they are
negotiating a sale and for two of these, such talks are at an advanced stage and could result in a
deal in 2QFY12E. These are the IT SEZ at Pune and the IT Park at NOIDA. Free reports indicate a
value of Rs13 bn for these two assets which would mean Rs9.1 bn for DLF’s 70% stake.
Retain ADD and target price of Rs270/share
We maintain our ADD rating with target price of Rs270/share, at par with our March 2013E-NAV.
The positives that we find in DLF are that it has (1) a relatively wide geographical spread, (2) lower
regulatory risk versus most Mumbai firms and (3) a relatively balanced portfolio between
residential and commercial segments. Key risks include (1) delay in approvals, (2) further inflationled
cost impact and (3) adverse environment causing delay in selling ‘non-core’ assets.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
DLF (DLFU)
Property
Showing urgency but is it good enough? We believe outlook for DLF rests on two
key parameters – (1) faster/more launches and (2) debt reduction over FY2012E. While
faster/more launches are a function of the market and all indicators point to a subdued
one, debt reduction is reliant on ‘non-core’ asset sales where 2QFY12E is a make-orbreak
quarter. We maintain our ADD rating with a target price of Rs270/share, at par
with our March 2013E-NAV with a WACC rate of 15% and a cap rate of 11%.
Reiterates and executes on three-pronged strategy but not good enough to drive a re-rating
Cash inflow. Both of DLF’s launches in 1QFY12E and almost all of the planned launches in
2QFY12E will be plotted developments in two kinds of locations – (1) where they have
significant development already underway (e.g. Gurgaon with 21.5 mn sq. ft under execution)
and (2) locations where only plotted development will sell (e.g. Indore, Panchkula in
Chandigarh).
Margin management. DLF delivered 2 mn sq. ft in 1QFY12E (versus FY2012E target of 12 mn sq.
ft) but it’s too early to assess ability to sell higher-end products (which are higher margin) and
introduce ‘escalation clauses’ as DLF focused on plotted development in 1QFY12.
Conserve/Release capital. We see limited progress on this front as DLF’s capital expenditure for
1QFY12 is Rs3.3 bn versus a target of Rs8 bn and non-core asset disposal was only Rs1.7 bn
and bigger-ticket disposals are still awaited.
Debt repayment to be driven by ‘non-core’ asset sales
With operational cash flow (post working capital increase) of Rs8-9 bn utilized for (1) interest
payments (normalized Rs7 bn a quarter) and (2) capital expenditure of Rs2 bn, they are unlikely to
significantly help pay up debt. While there has been marginal progress on ‘non-core’ asset sales in
1QFY12, DLF indicated in their conference call that there are four assets for which they are
negotiating a sale and for two of these, such talks are at an advanced stage and could result in a
deal in 2QFY12E. These are the IT SEZ at Pune and the IT Park at NOIDA. Free reports indicate a
value of Rs13 bn for these two assets which would mean Rs9.1 bn for DLF’s 70% stake.
Retain ADD and target price of Rs270/share
We maintain our ADD rating with target price of Rs270/share, at par with our March 2013E-NAV.
The positives that we find in DLF are that it has (1) a relatively wide geographical spread, (2) lower
regulatory risk versus most Mumbai firms and (3) a relatively balanced portfolio between
residential and commercial segments. Key risks include (1) delay in approvals, (2) further inflationled
cost impact and (3) adverse environment causing delay in selling ‘non-core’ assets.
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