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DLF
Trigger happy
Event
DLF released 1Q FY12 results today. The PAT miss was an accounting issue.
Recognition of revenues from plot sales in the last week of the quarter seems
to have been pushed out into 2Q FY12. Importantly, we were looking at
commentary from management on the post-results call for indications on
whether the story of a pickup in cashflow and triggers would continue. We
came away with bullish take-aways. Maintain Outperform, while cutting our TP
to Rs302 from Rs314.
Impact
DLF has taken a beating: The stock fell from over Rs470 in October 2009 to
Rs210 in June 2011, primarily due to concerns regarding rising debt. Note that
net debt has risen from Rs120bn (before the DAL merger) to Rs215bn now.
DLF’s balance sheet was initially comfortable. With the cost of debt at just over
10%, annuity covered over 70% of interest expense. Bank financing was also
more easily available. There was thus no urgency to aggressively launch
projects. However, the overall debt level rose due to the DAL merger and slow
residential project launches. In a rising rate environment, DLF found itself with
an annual gap of ~Rs10bn between its interest expense and annuity income.
Good time to be tactically long. We believe this situation will now change.
We expect debt reduction (and stock triggers) for the following key reasons:
Plotted sales: DLF has already achieved 18.5% of FY12 sales guidance of
10-12m sqf (1.3m of plot sales). Our estimate is 10m sqf for FY12. We expect
this to continue in FY13. Cash collection improves as delivery time line
reduces to typically <12 mths. Consumers find this attractive due to low risk of
completion delays and preference for independent houses over apartments.
Non-core asset sales: We expect the sale of two IT parks (in Noida and
Pune), a hotel subsidiary (Aman Resorts) and land parcels in Gurgaon. Our
channel checks suggest that two deals (worth Rs15bn) could be closed within
6 months. We think the others are likely to happen by the end of FY12 (total
estimated at Rs30bn).
We are confident that this theme will play out at least until the gap between
interest expense/debt servicing and annuity income falls to under Rs2-3bn.
This can keep the stock buoyant for at least the next couple of quarters, in our
view.
Earnings and target price revision
We increased our earnings estimates for FY12 and FY13 by 5% and 3%,
respectively. We increase our free cash yield forecasts for FY12 and FY13
from 1.3% to 4.5% and from 3.5% to 6.6%, respectively. This reflects frontloaded
cash inflows. We cut our target price to Rs302 from Rs314.
Price catalyst
12-month price target: Rs302.00 based on a Sum of Parts methodology.
Catalyst: Policy rates, plotted sales, price trends and non core asset sales.
Action and recommendation
We maintain our Outperform rating due to the reasons discussed above.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
DLF
Trigger happy
Event
DLF released 1Q FY12 results today. The PAT miss was an accounting issue.
Recognition of revenues from plot sales in the last week of the quarter seems
to have been pushed out into 2Q FY12. Importantly, we were looking at
commentary from management on the post-results call for indications on
whether the story of a pickup in cashflow and triggers would continue. We
came away with bullish take-aways. Maintain Outperform, while cutting our TP
to Rs302 from Rs314.
Impact
DLF has taken a beating: The stock fell from over Rs470 in October 2009 to
Rs210 in June 2011, primarily due to concerns regarding rising debt. Note that
net debt has risen from Rs120bn (before the DAL merger) to Rs215bn now.
DLF’s balance sheet was initially comfortable. With the cost of debt at just over
10%, annuity covered over 70% of interest expense. Bank financing was also
more easily available. There was thus no urgency to aggressively launch
projects. However, the overall debt level rose due to the DAL merger and slow
residential project launches. In a rising rate environment, DLF found itself with
an annual gap of ~Rs10bn between its interest expense and annuity income.
Good time to be tactically long. We believe this situation will now change.
We expect debt reduction (and stock triggers) for the following key reasons:
Plotted sales: DLF has already achieved 18.5% of FY12 sales guidance of
10-12m sqf (1.3m of plot sales). Our estimate is 10m sqf for FY12. We expect
this to continue in FY13. Cash collection improves as delivery time line
reduces to typically <12 mths. Consumers find this attractive due to low risk of
completion delays and preference for independent houses over apartments.
Non-core asset sales: We expect the sale of two IT parks (in Noida and
Pune), a hotel subsidiary (Aman Resorts) and land parcels in Gurgaon. Our
channel checks suggest that two deals (worth Rs15bn) could be closed within
6 months. We think the others are likely to happen by the end of FY12 (total
estimated at Rs30bn).
We are confident that this theme will play out at least until the gap between
interest expense/debt servicing and annuity income falls to under Rs2-3bn.
This can keep the stock buoyant for at least the next couple of quarters, in our
view.
Earnings and target price revision
We increased our earnings estimates for FY12 and FY13 by 5% and 3%,
respectively. We increase our free cash yield forecasts for FY12 and FY13
from 1.3% to 4.5% and from 3.5% to 6.6%, respectively. This reflects frontloaded
cash inflows. We cut our target price to Rs302 from Rs314.
Price catalyst
12-month price target: Rs302.00 based on a Sum of Parts methodology.
Catalyst: Policy rates, plotted sales, price trends and non core asset sales.
Action and recommendation
We maintain our Outperform rating due to the reasons discussed above.
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