DLF: Poised for re-rating on favorable macro impetus:: Motilal Oswal

DLF: Poised for re-rating on favorable macro impetus

Operating consolidation, large ticket divestments to pay off

-      DLF is a major beneficiary of recent policy reforms and favorable macro trends.

-      Expect meaningful improvement in operating cash deficit (break-even by FY14) on the back of (1) re-aligning core operations to premium business mix, (2) focus on margin protection, and (3) execution ramp-up.

-      Success in large divestments implies higher potential to de-leverage, making DLF a strong play on rate downcycle. Expect net DER at 0.8x/0.69x in FY13/14.

-      The stock trades at 1.4x FY14E BV and 18% discount to NAV. Buy with TP of INR286.

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Major beneficiary of favorable macro impetus

Recent favorable macro trends – much-awaited FDI in multibrand retail coupled with expected interest rate downcycle – portend well for the real estate (RE) sector. We believe DLF is a major beneficiary in the sector of these positive developments. We expect the ongoing upswing to get further boosted by the dual effect of improving operating leverage and financial de-leveraging.

Operating consolidation should pay off

Amidst challenging macro, DLF embarked on a four-pronged operating consolidation strategy: (1) Core markets and assets, (2) Premium margins, (3) Execution outsourcing, and (4) Value creation through infrastructure development. Its favorable near-term market and product mix offer higher conviction on a meaningful uptick in FY13 sales (we estimate ~INR60b v/s INR53b in FY12). A key trigger would be launch of Magnolia II in 3QFY13, with expected FY13 sales value of ~INR15b). Expect margins and cash flow to be resilient on the back of super premium launches coupled with inflation-combating strategies. We estimate DLF’s operating cash deficit (post interest outgo) to improve significantly in FY13 to INR8.1b (v/s INR20.4b in FY12) before breakeven in FY14.

Large ticket divestments to drive de-leveraging

Recent success in NTC Mill divestment (INR27b to Lodha group) along with encouraging payment structure re-affirms DLF’s priority on immediate cash flow. Management has guided for Aman Resort transaction (by 3QFY13 at indicative value of INR17-18b) followed by windmills (~INR9b), and near-term de-leveraging of INR40-50b (target net DER 0.6x by FY14-end). Thus, we believe DLF is also a strong play on interest rate downcycle. We model in INR20-22b annual debt reduction over FY13/14, resulting into net DER of 0.8x/0.69x.

Upgrade of 6-8% in EPS and 10% in target price; Buy

We upgrade FY13/14 EPS by 6-8%, led by 3-4% upward revision in sales estimates and higher divestment. The stock trades at a P/E of 22x FY14E EPS and 1.4x FY14E BV and 18% discount to NAV. Buy with upgraded TP of INR286. We expect the 2HFY13 triggers to be (a) Divestment of Aman resort (INR17-18b) and windmills (INR9b), (b) Higher than expected (INR20b) debt reduction, and (c) successful launch of Magnolia II.