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DLF (DLF.BO)
Q2FY12: A Slow Quarter Operationally
Revenue/PAT up 4% QoQ — Revenue came in at ~Rs 25.3b, up 7% YoY/4% QoQlarge
portion of ~Rs 6 b of FSI sales was recognized. Margins at 46% improved 100bps
QoQ- management expects steady ~45% margins going forward. PAT at ~Rs3.7b
declined 11% YoY (higher interest cost & taxes/lower other income), up 4% QoQ.
Headlines numbers were ahead of expectations led by higher Topline/better margins.
Slow sales & launches in Q2, as expected — Sale of 1.3msf in Q2 (~0.6msf in
plotted, remaining in mid-income homes) vs 2.2msf in Q1. Launches largely absent in
Q2 due to delayed approvals– ~0.5msf added to execution schedule. Company has a
6.5-7.5msf launch pipeline in 2H - approvals in place for ~3.0msf expected in CY11.
Net D/E remains high at 0.81x… — This is versus 0.79x in Q1 and was led by net
debt increase of Rs 10b- Rs 1.4b was due to non-cash forex impact on Aman Resorts'
offshore loans and remaining led by bunching up of some payments and divestment
cash flow delays. Company is targeting debt reduction of ~Rs 30b by FY12 end.
…Clarity emerging on asset sales — While land FSI sale of ~3.0msf has already
come through and collection is under way, other transactions expected to close in Q3-
(1) Noida IT park sale definitive agreement signed, (2) Pune SEZ sale documentation
in process with approvals in place, (3) Aman resorts received 4 bids, evaluation is on.
Other updates — (1) Net leasing was weak at 0.2msf led by a cancellation of 0.4msf
in Chennai property. In 1H, 0.9msf of net leasing (gross-1.6msf) has been concluded-
FY12 guidance remains unchanged. (2) Delivered 2.2msf in 1H; company is looking to
hand over >12msf in FY12. (3) Cost of debt is ~12.3% (vs. 11.8% in end of Q1).
Tweak Estimates, New TP of Rs 271 — Based on 1H performance and management
commentary, we have modified our assumptions relating to cost of capital, reduced
land bank and increased net debt. 2H is typically more robust and should see volumes
improving, along with visible initiatives on deleveraging. DLF remains relatively better
positioned within large-cap/liquid property stocks.
DLF
Company description
DLF is one of India's oldest real estate developers. Established in Delhi in 1946, it
has continued to expand and diversify its real estate businesses, and is among the
largest developers in India. It has historically built its businesses in Delhi and
adjoining areas, known as the National Capital Region (NCR). DLF has diversified
into other geographic locations over the past few years. These expansions are
spread across India, with a focus on the Northern India belt, Kolkata, Mumbai,
Chennai, and a number of other large and rapidly growing cities. DLF enjoys a
strong brand franchise with a good track record in execution and delivery. This is
the flagship company of the KP Singh family, with the founders holding a 78.6%
stake. It is one of India's largest developers, with a diversified asset portfolio and an
emerging pan-India presence.
Investment strategy
We rate DLF as Buy (1) with a target price of Rs271. We view DLF as differentiated
by: (a) Rent yielding assets with >Rs 15b annuity run-rate already in place -
meaningfully higher than peers; (b) High quality land bank - particularly in
Gurgaon/metros; (c) Track record of quality/execution. A pickup in the commercial
segment should benefit DLF the most, while monetization of rent yielding assets at
a later stage could unlock significant value. Also, overhang of DAL-DLF integration
is out of the way. While liquidity appears slightly stretched for DLF, given its
execution track record, growing rental income, and geographic-asset mix, we
continue to believe the company is strongly positioned versus peers.
Valuation
Our Rs 271 target price is based on a 10% discount to our blended Sept-12E NAV
of Rs 302. DLF has significant exposure to the NCR region. We believe chances of
price cuts are quite probable, given the price hikes the region has seen since the
last downturn. Hence, we have assigned 50% probability of potential 15% price cuts
to arrive at our TP. This is in line with our valuation methodology for the sector. Our
Sept-12E base NAV (ex-price cut) of Rs 345 incorporates Rs272 for the
development portfolio and Rs72 for other asset holdings (mainly lease asset
portfolio at Rs57). The lower discount vs. peers (10%-25%) is attributed to DLF's: 1)
rich land bank vs peers; 2) superior business model and execution track record; and
3) strong rental annuity flow of >Rs15b/annum. Our Sept-12E base NAV is based
on: 1) development portfolio of ~359 msf; 2) rental assets of ~24 msf; 3) cap rate of
10%-11% for commercial/IT Park, IT SEZs; 4) Increased cost of capital of 15.3%;
and 5) a tax rate of 25%.
Risks
The key risks to our investment thesis on DLF are: 1) DLF's deleveraging remains
contingent on non-core asset sales (2) Any delays in upcoming launches / slow
response to launches could be detrimental (3) Slowdown in the IT/ITES industry
could lead to a decline in demand for commercial real estate (4) execution delays
further to what we have built in already (5) Slowdown in capital inflows or measures
to regulate FDI in the real estate sector. If any of these risk factors has a greater
downside impact than we anticipate, the share price will likely have difficulty
attaining our target price.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
DLF (DLF.BO)
Q2FY12: A Slow Quarter Operationally
Revenue/PAT up 4% QoQ — Revenue came in at ~Rs 25.3b, up 7% YoY/4% QoQlarge
portion of ~Rs 6 b of FSI sales was recognized. Margins at 46% improved 100bps
QoQ- management expects steady ~45% margins going forward. PAT at ~Rs3.7b
declined 11% YoY (higher interest cost & taxes/lower other income), up 4% QoQ.
Headlines numbers were ahead of expectations led by higher Topline/better margins.
Slow sales & launches in Q2, as expected — Sale of 1.3msf in Q2 (~0.6msf in
plotted, remaining in mid-income homes) vs 2.2msf in Q1. Launches largely absent in
Q2 due to delayed approvals– ~0.5msf added to execution schedule. Company has a
6.5-7.5msf launch pipeline in 2H - approvals in place for ~3.0msf expected in CY11.
Net D/E remains high at 0.81x… — This is versus 0.79x in Q1 and was led by net
debt increase of Rs 10b- Rs 1.4b was due to non-cash forex impact on Aman Resorts'
offshore loans and remaining led by bunching up of some payments and divestment
cash flow delays. Company is targeting debt reduction of ~Rs 30b by FY12 end.
…Clarity emerging on asset sales — While land FSI sale of ~3.0msf has already
come through and collection is under way, other transactions expected to close in Q3-
(1) Noida IT park sale definitive agreement signed, (2) Pune SEZ sale documentation
in process with approvals in place, (3) Aman resorts received 4 bids, evaluation is on.
Other updates — (1) Net leasing was weak at 0.2msf led by a cancellation of 0.4msf
in Chennai property. In 1H, 0.9msf of net leasing (gross-1.6msf) has been concluded-
FY12 guidance remains unchanged. (2) Delivered 2.2msf in 1H; company is looking to
hand over >12msf in FY12. (3) Cost of debt is ~12.3% (vs. 11.8% in end of Q1).
Tweak Estimates, New TP of Rs 271 — Based on 1H performance and management
commentary, we have modified our assumptions relating to cost of capital, reduced
land bank and increased net debt. 2H is typically more robust and should see volumes
improving, along with visible initiatives on deleveraging. DLF remains relatively better
positioned within large-cap/liquid property stocks.
DLF
Company description
DLF is one of India's oldest real estate developers. Established in Delhi in 1946, it
has continued to expand and diversify its real estate businesses, and is among the
largest developers in India. It has historically built its businesses in Delhi and
adjoining areas, known as the National Capital Region (NCR). DLF has diversified
into other geographic locations over the past few years. These expansions are
spread across India, with a focus on the Northern India belt, Kolkata, Mumbai,
Chennai, and a number of other large and rapidly growing cities. DLF enjoys a
strong brand franchise with a good track record in execution and delivery. This is
the flagship company of the KP Singh family, with the founders holding a 78.6%
stake. It is one of India's largest developers, with a diversified asset portfolio and an
emerging pan-India presence.
Investment strategy
We rate DLF as Buy (1) with a target price of Rs271. We view DLF as differentiated
by: (a) Rent yielding assets with >Rs 15b annuity run-rate already in place -
meaningfully higher than peers; (b) High quality land bank - particularly in
Gurgaon/metros; (c) Track record of quality/execution. A pickup in the commercial
segment should benefit DLF the most, while monetization of rent yielding assets at
a later stage could unlock significant value. Also, overhang of DAL-DLF integration
is out of the way. While liquidity appears slightly stretched for DLF, given its
execution track record, growing rental income, and geographic-asset mix, we
continue to believe the company is strongly positioned versus peers.
Valuation
Our Rs 271 target price is based on a 10% discount to our blended Sept-12E NAV
of Rs 302. DLF has significant exposure to the NCR region. We believe chances of
price cuts are quite probable, given the price hikes the region has seen since the
last downturn. Hence, we have assigned 50% probability of potential 15% price cuts
to arrive at our TP. This is in line with our valuation methodology for the sector. Our
Sept-12E base NAV (ex-price cut) of Rs 345 incorporates Rs272 for the
development portfolio and Rs72 for other asset holdings (mainly lease asset
portfolio at Rs57). The lower discount vs. peers (10%-25%) is attributed to DLF's: 1)
rich land bank vs peers; 2) superior business model and execution track record; and
3) strong rental annuity flow of >Rs15b/annum. Our Sept-12E base NAV is based
on: 1) development portfolio of ~359 msf; 2) rental assets of ~24 msf; 3) cap rate of
10%-11% for commercial/IT Park, IT SEZs; 4) Increased cost of capital of 15.3%;
and 5) a tax rate of 25%.
Risks
The key risks to our investment thesis on DLF are: 1) DLF's deleveraging remains
contingent on non-core asset sales (2) Any delays in upcoming launches / slow
response to launches could be detrimental (3) Slowdown in the IT/ITES industry
could lead to a decline in demand for commercial real estate (4) execution delays
further to what we have built in already (5) Slowdown in capital inflows or measures
to regulate FDI in the real estate sector. If any of these risk factors has a greater
downside impact than we anticipate, the share price will likely have difficulty
attaining our target price.
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