DLF Limited - Gauging the potential of a successful phase 5 launch :: JPMorgan

DLF’s operating plan of Rs83B pa cash EBITDA generation 3 years out is
primarily contingent on the successful launch of its luxury Gurgaon projects.
These developments are expected to contribute as much as Rs 25B, almost
45% of the Rs 55B planned cash generation from the development business.
Given the high value ticket size of these projects (US$600K-$3MM) and the
current macro environment, there is understandable skepticism on the
company’s ability to achieve its target sell-through rate. We believe market
response to this launch will be the key near term driver of stock price.
 Limited inventory, infrastructure improvement and proximity to South
Delhi imply a prime location – DLF’s phase V development (20 msf) has
over the last few years emerged as one of the most sought-after luxury
developments in Gurgaon, given the limited inventory in the market (last
launch was in 2007), proximity to South Delhi, presence of a large office
development and ongoing infrastructure projects (Monorail/6 laning of
roads). Secondary market rates in the location range from Rs 25-35K psf
(golf course) and Rs 15K psf levels (for Belair/ Park place projects) vs.
average rates of Rs 6-7K psf at launch 5 years back. Details on micro
market inventory and pricing trend on page 3 .
 Weak macro is an overhang, but recent experience from other luxury
launches in Gurgaon/Mumbai seems to be positive – With most macro
indicators weakening in the last 3 months, the ability of the company to
successfully push through a high value luxury launch is met with skepticism.
However, we note that other high value launches done by peers in Mumbai
(L&T, Lodha) and Gurgaon (Sobha) have met with good success. DLF’s
ability to replicate this will be an important catalyst, in our view.
 Asking rate in units is not high, although in value terms it could be big –
Phase V launch comprises a 6.1 msf launch with a potential turnover of
Rs100-130B and net pre-tax cash flow of Rs 70-90B over 4 years. This
launch comprises 2 sub projects with 3.6 msf of Camillia, which is approx
600 units (ticket price US$3MM+) and 2.5 msf Crest, approx 700 units
(ticket price ~US$1MM). Whilst not big in terms of absolute number of
units to be sold over 4 years, the ticket size in these developments is high.

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