DLF : De-leveraging starting in earnest ::JP Morgan

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DLF’s strategy of reducing debt via asset sales seems to be finally bearing
fruit. Efforts at reducing debt in 2010 were constrained by various PE buyouts
and DAL consolidation. Incrementally, the company did close to Rs 17B worth
of asset sales last Q and additionally a few large transactions (i.e. Aman) are
in the pipeline, as per news flow. Markets too seem to be rewarding such a
strategy with the stock outperforming the index post June-Q. Additionally,
focus on plotted sales along with recent mid income-launches in Bangalore
seems to suggest earnestness in efforts at monetizing MTM gains on land.
However, risks to this de-leveraging effort lie in a challenging macro
environment and potential payouts from ongoing litigations (especially on
prior period tax). The company’s current forward P/B of 1.5x is largely in line
with its average trading range of 1.4x over Sep-08-Mar 09 (post Lehman
levels), implying valuation offers comfort. With only Rs 48B of the total Rs
90-100B target achieved to date, we believe the gearing reduction trade is
still on.
 Cash flow impact of asset sales - While DLF’s development business has
been cash flow positive, an overall drain has come from 1] rising interest
costs (~50% of CF), 2] land contiguity capex and 3] rental asset build out,
which have constrained net generation to pay down debt. Asset and plotted
sales hereon can then help reduce that burden. Any additional reduction in
rates going ahead in F13, could be a bigger positive (50bps reduction in
rates could lead to almost a 6% increase in cash generation). We aren’t
excessively concerned over refinance this year, given the experience of
2008-09 (one of the few RE players to have open credit lines) and still has
one of the lowest debt costs in the industry (at least a 300-400bps premium
to peer group).
 Impact of Aman sale - if it goes through - As per ET, DLF has received
certain binding bids for a stake sale in Aman. Any disposal here, in our
view, would be accretive given the company was making losses on the same.
Additionally, DLF gets to keep a large prime asset in the heart of Delhi
(Lodhi Road). This, in our view, is a very valuable and marquee land parcel
which would likely more than make up for the holding cost of Aman.