DLF -Stock correction provides a favorable risk reward. Crest/Aman overhang more than discounted : JPMorgan

Following a period of restriction, we are moving DLF from Not Rated
designation to an OW recommendation and Mar-14 PT of Rs300/share. Over
the last 3 months, we note that progress on two of the most sensitive business
parameters has been positive i.e. Debt reduction and successful sell out in
launch of luxury phase 5 project. Recent stay order on Crest construction in
our view whilst worrying has knocked off more than the entire cash flow of
the project and reduced valuation on Aman resorts to zero. This in our view
presents an upside and a favorable risk reward opportunity. Near term
stock catalyst will be progress on Aman closure, launch of Camellia (strong
soft sale demand) and any resolution on stay order of Crest.

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 Crest sold out… but stay order will need to be resolved- Crest launched
in May received a strong demand with co selling out 0.85 msf at approx Rs
17K psf. However, in an ex parte order the high court has recently stayed
construction pending clarity on project FSI. Given the onset of monsoons
construction work would have been subdued and we note that the co. has 3-
4 months to clarify its position (Next hearing slated for Jul-13).
 Net Debt target of Rs 170B by F14 - Post recent issuance DLF's net debt
has come down to cRs 200B (Mar-Q Rs 217B). Target net debt for Mar-14
is Rs 170B contingent on mostly concluded asset sales of Rs 28B. Of this
Aman (Rs 16B) has been delayed over the last 4 months given the buyer
(MBO transaction) has not yet raised financing. Current expectation is for
closure till June-13 else the asset chain may be re sold to other parties.
 Headline earnings to disappoint given roll down of old projects and shift
to new revenue recognition policy. DLF’s Q4 earnings disappointed given
a shift to new revenue recognition policy (25% completion & sales). As we
had noted in Q3 analyst meet, earnings will likely be subdued for 4-6 Qs till
new project launches start reaching revenue recognition thresholds
(Camellia is possibly the only exception). Operating cash (cash EBITDA)
generation was Rs 36B for F13 vs. Rs42B in F12.
 Operating cash flow - Guidance for breakeven in F14 and return to
positive territory in F15: On a cash flow basis, the Q was business as usual
with negative cash flow of Rs 3B (last few Qs run rate) given land /rent
capex. Guidance is for breakeven in F14 and return to positive territory in
F15. As of now we are modeling in net negative CFO (ex asset sales, equity
raise) in F14.

Price target and valuation
analysis
Maintain Overweight rating with a Mar-14 Price Target of Rs
300/share. Our PT is derived from a stabilized cash flow model
valuing the development business at 10x and Rent co at 13x
cash flow.
.

Key downside risks – (a) Delay in resolution of stay order
served on Crest and delay in launch of Camellias (additional
launch in Phase V) ; b) Lower than expected debt reduction;
(c) Lower than expected policy rate cuts; and (d) Material de
rating of the overall macro fundamentals in India.