Buy DLF- Religare research

Potential improvement in operations not yet priced in
DLF has underperformed the sensex by 20% YoY, primarily led by concerns on high debt, low volumes and non-core issues. But the management now indicates potential improvement in operations led by: a) further reduction in debt on conclusion of Aman resorts/wind mills, b) improved volumes on fresh launches and c) delivery of ~25% of under-construction projects in the next year. These along with likely improvement in macro (including interest rate) starting Q4FY13 should help the stock near-to-mid-term. Maintain BUY.

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 Non-core issues/delay in debt reduction – Key overhangs till now: DLF has underperformed the sensex/BSE REAL by 20%/29% YoY, mainly on: a) non-core issues (land/IT related cases), b) high debt levels and c) weak volumes. We believe further news flow on debt reduction and new launches in the key markets should help the stock perform in the near term.
 Pick-up in asset sales to help pare net debt: After concluding the sale of NTC Mills, DLF’s net debt stands at Rs 212bn. The management is confident of cutting this further to Rs 185bn as the rest of its assets get divested, i.e. Aman Resorts (due in Q3FY13) and wind energy assets (in Q4FY13). Given lower outflow towards land/capex and benefits from lower interest rates and debt, we believe operational cash flow should turn positive from H2FY14.
 New launches to help improve volumes, cash: DLF plans to launch ~10msf in H2 (mainly in Gurgaon). Of these, three big projects in Gurgaon are scheduled over a month’s time. Given the resilience shown by the Gurgaon market, we believe, DLF should get good response in initial launches, especially for Phase V properties.
 Maintain BUY: Overall, the operation seems to be falling in place with: a) reduction in debt, b) increased launches, c) improved execution and d) expectations of improvement in liquidity/interest rates. The stock is trading at one-year forward P/B and P/E of 1.3x and 20x respectively.