DLF Limited Neutral
DLF.BO, DLFU IN
Making the right moves; debt reduction and asset
sales remain key rating triggers
We think DLF is taking the right strategic steps in terms of: 1) getting debt
under control via asset sales; 2) consolidating land bank back into performing
geographies; 3) resolving execution by completely outsourcing to reputed
Indian contractors; 4) focusing on improving infrastructure in Gurgaon; and 5)
continued investment into select high-value rental assets. Results of this will
likely show themselves over a 12-month horizon. In the interim, we see two
main catalysts: 1) asset sales of three big-ticket deals; and 2) launch of a highend
golf course project in Gurgaon in 2H. Given the macro we would like to
wait for gearing to come down before turning more positive. Maintain
Neutral.
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Asset sales program expanded to Rs100B from Rs60B: DLF has
increased the scope of its asset divestiture target to Rs100B. To date it has
achieved Rs48B in asset sales and has thus clawed back roughly half of the
equity raised in 2007. Currently there are three large deals i.e. NTC, Aman
and Wind power, which if crystallize over the course of FY13 could raise
additional Rs30-40B thus clearing gearing overhang.
Devco’s FY13 pre-sales target at Rs65B with 10-12msf of bookings:
Overall the company is looking to continue with its focus on plotted and
high-end launches to mitigate the impact of steep input price increases. This
should then help maintain EBITDA margins in the range of 45%-50%. Presales
in FY13 will be driven by launch of golf course project (Rs15B),
residential launches in Gurgaon/Chennai and plotted developments in rest of
the country. Prices in the core markets of Gurgaon/ New Gurgaon region
have surpassed our bull-case assumptions despite the macro, in part driven
by corporate movement out of Delhi.
Rentco build-out is still subdued given uncertain leasing environment;
Cybercity in our view holds potential to show long-term rent growth:
Target leasing for FY13 stands at a meager 2 msf (vs. peak levels of 8-10
msf). An uncertain macro and the company’s gearing have constrained
growth here. However even at a subdued level we think a 15-20% growth in
rentco is still achievable over 2-3 years. Company’s focus on infrastructure
development around Cybercity / golf course area (Mono rail/16 lane roads),
in our view, provide tremendous scope for rents to increase materially.
Guidance for FY13
1. FY13 pre-sale target of Rs65B (12msf) vs. Rs53B achieved in FY12. This
would primarily come from plotted and luxury projects. FY13 pre-sale
target includes Rs15B from its prime Gurgaon project -Magnolia Phase 2,
which is expected to be launched in 2H. Further, plotted sales will continue
to remain high in FY13 (similar to FY12) to counter inflationary trends.
2. FY13 lease target of meager 2msf –Focus to remain on leasing semi
finished and completed projects. No new projects are being commenced
thereby limiting the capex needs.
3. EBITDA margins to remain at 45-50% despite inflationary pressures.
This is due to the company’s focus on plotted and luxury developments.
Company has scaled down its plans for mid-income segment in the near
term to protect margins.
4. Asset sales of Rs30-40B in 1HFY13 – primarily on the back of closure of
three large deals – Aman, NTC, and Wind Power.
5. Delivery target of 10-12msf in FY13 across projects in Gurgaon, Kolkata,
Chennai, Kochi etc.
Asset sales were subdued in 4Q; closure of large
transactions (Aman Resorts, NTC) expected in 1H FY12
Asset sales during the quarter were low at Rs1.5B (no new deal signed), taking full
year asset sales to Rs17.7B. Overall, company reiterated its focus asset sales
program despite macro headwinds. Management sounded fairly confident about
transaction closures of Rs30-40B in the next six months. These would primarily
involve key assets such as Aman Resorts, NTC and Wind Power.
Recent news flow around these assets points to some progress, with discussions at
advanced stages with potential buyers. Conclusion of these big-ticket transactions
holds the key for the debt reduction plans ahead. The company did highlight that
even while these deals are likely to be concluded in 1H FY12, cash flows would be
staggered.
Table 1: DLF – Non-core asset divestment plan
Projects Rs B
Hospitality 20
Wind/Utilities 10
Misc Assets 10
Strategic Projects in Mumbai, Chennai 35-40
Total 75
Source: Company
Operating Highlights
1. Development business – Strong pre-sales performance aided by pick up
in launch activity - DLF registered new bookings of Rs28B/6.75msf in Q4
(vs. Rs3.3msf in Q3), its highest quarterly booking over the last three years.
Launches for the company have started to pick up meaningfully after a gap
of almost three years. Overall the company launched 11msf in 2H FY12,
with New Gurgaon in Feb being the key launch. Response to the company’s
new Gurgaon launch has been fairly positive (avg prices of Rs5-7psf).
Overall for FY12, the company achieved Rs53B/13.6msf of pre-sales as
against Rs67B/10msf in FY11. Of the total bookings, close to 60% has
come from Gurgaon; while remaining was contributed by plotted/mid
income projects in other locations. Avg realizations at Rs3900psf were
lower Y/Y due to high contribution from plotted sales in Hyderabad (at
Rs600psf).
Going into FY13, the company’s focus remains on high-margin luxury and
plotted launches; while it is scaling down its plans for mid-income projects
in the near term due to inflationary trends. A key launch impending is superpremium
project in prime Gurgaon (Magnolias, Golf Links) in 2H FY13
and would be the key driver for the bookings in FY13. Company has guided
to pre-sales target of Rs65B (12msf) in FY13.
2. Rent business remained subdued with 1.4msf (gross – 2.7msf) being
leased in FY12 vs. management initial guidance of 2-3msf. The company
has also witnessed some lease cancellations over the past year. Office
leasing has been slow over the last 3Qs given uncertain macro environment.
Company indicated that focus near term will remain on leasing semi
finished and completed space and increasing the average rentals. Co’s avg
rentals in Cyber City at Rs55-60psf are lower than spot rents of Rs85psf pm.
Under the retail segment, vacancy has come down to 4%. Company has a
large 1.6msf mall under construction in Noida, which could provide a
significant boost to rental income in FY14 (current mall rental income of
Rs2.5B). A sister company now getting into the retailing business “DLF
Brands” should give some long term synergies with the overall retail mall
development business (akin to Shoppers Stop and K Raheja.
Overall rental income saw decent growth over the last year with FY12
ending with an annualized rental of Rs16B vs. Rs13B in FY11. Outlook for
this business remains cautious, with company looking to moderate its capex
commitments in the near term.
3. Execution issues now largely fixed by outsourcing to large reputed
contractors like Shaporji/ L&T and focus on plotted developments. While
this has led to some near term pain in terms of earnings hit and slow
collections over the last 2-3Qs; we think on a strategic level outsourcing to
large contractors is a step in the right direction and should help improve the
pace of construction.
Deliveries have picked up in FY12 with 13msf of projects being completed.
Further, company is looking to deliver 10-12msf of projects in FY13 across
Gurgaon, Kolkata, Chennai, Kochi etc. DLF has 28msf of projects which
are at handover stages or are at advanced stage of completion thereby
providing decent visibility on the delivery targets for FY13/14.
Area under construction increased to 50msf (vs. 45msf in 3Q) in Mar-Q due
to new project launches done under the Dev Co.
4Q results brief
DLF reported in-line 4Q earnings (pre exceptional) of Rs2.4B (-5% Y/Y) as betterthan-
expected revenue was negated by: (a) one-off cost impact of Rs3B on account
of shift to construction outsourcing to third-party contractors (Shaporji/L&T); and
(b) higher non core business losses (hotel/insurance), which increased to Rs760MM
(vs. Rs500MM over the last 3Qs). Adjusted for one-off impact, margins for core real
estate segment stood at steady 45%. Reported numbers also included tax writeback
of Rs410MM. Net debt for the Q at Rs227B decreased by marginal Rs330MM Q/Q.
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