DLF Debt reduction now a reality; Buy :: Anand Rathi

DLF
Debt reduction now a reality; initiating with a Buy
We believe that DLF, India’s largest real estate company has crossed
the critical junctures of interest rate overhang, adverse inflation and
delayed executions. On the positive side, it should benefit from 1)
Reduction in net debt (`190bn by Mar’13 from `235bn a year back) due
to sale of non-core assets with prospects of further reduction by FY14e;
2) Increased sales volumes and deliveries resulting in improved cash
flows; 3) higher annuity income from increase in leasing and lease
renewals; 4) stable margins at 40-45%. Accordingly, we initiate
coverage with a Buy rating and a price target of `290.

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  Further debt reduction on cards. Sale of non-core assets is as per
expectations. DLF has inked deals for NTC mills, Mumbai, and Aman
Resorts (ex Delhi Hotel) for `27bn and $300m respectively. These would
de-leverage its balance sheet and reduce debt to `190bn by Mar’13 (from
`235bn in FY12). It aims to reduce debt by a further `40bn next year
from the sale of its wind turbines, issue of shares (to comply with publicshareholding
norms) and other small-ticket sales.
  Operational improvement. After no launches in H1FY13, DLF has
aimed at launches of 9-10m sq.ft in H2FY13, with ~8.5m sq.ft. likely to
be in Gurgaon, msf in Lucknow and Bangalore each. This should
improve cash flow through increased sales bookings. Delivery of 12-15m
sq.ft. in H2FY13 is also likely to reduce costs and boost margin.
  Annuity income leading to stability. Annuity income in FY13 is
expected to be `19.6bn, against `18bn in FY12. Going ahead, we believe
leasing momentum should improve. The expected annuity income (`22bn
in FY14e) should be able to easily service the accompanying debt.
  Valuation. Attributing a 10% discount to the NAV of the company, we
arrive at a fair value of `290 for the stock, implying an upside of
29%from the current levels. Hence, we recommend a buy.