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DLF (DLFU IN)
Expect modest net profit growth of 4% in Q3 FY11
Cut earnings by 19-42% (FY11-13e) to factor in weak residential
launches; remain positive on DLF’s CRE exposure
Downgrade to N(V) from OW(V), lower TP to INR263 from
INR386, as we apply downcycle valuation for higher demand risk
3Q FY11 outlook
We expect DLF to report modest revenue growth
of c7.8% y-o-y for 3Q FY11, but a sequential
decline of c8% due to lower volumes in the past
few quarters. We expect EBITDA margin to
improve 500bp y-o-y, as property price growth
seeps in. However, a higher debt-equity ratio of
0.7x during 3Q FY11 (0.55x during 3Q FY10) is
likely to increase the interest cost, which may
keep earnings growth modest at 4.4%.
We remain positive on DLF’s commercial
business leasing portfolio and expect the company
to report c1.5m sq ft of fresh leasing at an average
price of INR48 psf pm. However, our weak
residential sector demand outlook is evident in our
forecasts for DLF’s volumes, where we expect the
company to record sales volume of 2.2m sq ft
during 3Q FY11.
Investors will closely watch DLF’s free cash flow
– which has maintained positive momentum over
the past three quarters – and management
commentary on new project launches during 4Q
FY11. DLF, in our view, would need to launch
c6-7m sq ft during 4Q FY11 to meet the target of
5-6m sq ft in new residential sales volumes.
Investment summary
Best proxy for India property: DLF offers
investors the best proxy for India’s property sector
across all business segments. The company is the
country’s largest real estate developer with panIndia development potential of c432m sq ft
(focused on National Capital Region (NCR)).
Biggest beneficiary of reviving CRE demand:
We like DLF’s leadership position in the Indian
CRE market. It has c15m sq ft of commercial
assets under construction, putting DLF’s industry
market share at c10%. We expect large players to
benefit disproportionately from the revival of
CRE demand as better balance sheet strength and
established brand (existing customer
relationships) restrict demand from percolating
through to small and medium sized players.
However, lack of new residential launches will
hurt earnings: DLF has slowed down its
residential launches over the past 12 months. A
majority of this has been due to not receiving
regulatory approvals in time as DLF launches
projects only after receiving all approvals. While
this is positive in the long term (3-5 years) as it
reduces delays after the project has commenced
construction, we expect this to impact negatively
in the short term as earnings take a hit.
While DLF could accelerate its residential launch
schedule during Q4 FY11, we expect the
company to still miss its FY11 sales volume
guidance of 12-15m sq ft (we expect c10m sq ft).
We also expect the company to report c11%
volume drop during FY12 to c9m sq ft. With DLF
relying heavily on new sales volume for revenue
booking, earnings could take a hit during FY12.
We now estimate DLF to report only 12% EPS
CAGR during FY11-13.
Key forecast changes
We have cut our residential volume estimates by
c15-35% over FY11-13e (figure A.17) as the
company continues to face delays on new project
launches, leading to a 9-18% cut in the top line
over FY12-13. Slower than anticipated new
project launches, along with delayed sale of noncore assets, suggest leverage will remain high. In
line with this, we have cut our EPS forecasts by
c19-42% over FY11-13, as we perceive increased
risk to the company’s new project launches.
Valuation
We calculate Net Asset Value (NAV) using a
discounted cash flow method based on real estate
project realizations (Cost of Equity 15.0%, risk
free rate 7.5%, market risk premium 5.5% and
WACC 14.3%). We value DLF at INR279, which
is a 30% discount to its NAV of INR344, with
INR22 as terminal value.
We have cut our target price from INR386 to
INR263 as we factor residential sector demand
risk into our valuation, thereby increasing the
NAV discount to 30% from 0% earlier. DLF’s
premium valuation (peers valued at c40-50%
discount to NAV) seems justified, given its
industry leadership position, stable balance sheet
and sector position as a large market capitalisation
proxy play on India’s reviving property industry.
Under our research model, the Neutral rating band
is 10ppt above and below the hurdle rate of 10.5%
for volatile India equities, or 0.5-20.5% above the
current share price. Our target price implies a
potential return of 6% (including prospective
dividend yield), which is within the Neutral band.
Thus we downgrade our rating on DLF to
Neutral (V) from Overweight (V) earlier.
Risks
We anticipate the following key risks to our
investment thesis:
Inability to successfully launch new
residential projects owing to weak demand
driven by falling affordability due to rising
interest rates and high property prices.
Drop in CRE space absorption could impact
DLF’s valuation as c32% of the gross asset
value is contributed by CRE.
Key upside risks include a sharp improvement
in residential sector demand and sustained
higher than expected new project launches.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
DLF (DLFU IN)
Expect modest net profit growth of 4% in Q3 FY11
Cut earnings by 19-42% (FY11-13e) to factor in weak residential
launches; remain positive on DLF’s CRE exposure
Downgrade to N(V) from OW(V), lower TP to INR263 from
INR386, as we apply downcycle valuation for higher demand risk
3Q FY11 outlook
We expect DLF to report modest revenue growth
of c7.8% y-o-y for 3Q FY11, but a sequential
decline of c8% due to lower volumes in the past
few quarters. We expect EBITDA margin to
improve 500bp y-o-y, as property price growth
seeps in. However, a higher debt-equity ratio of
0.7x during 3Q FY11 (0.55x during 3Q FY10) is
likely to increase the interest cost, which may
keep earnings growth modest at 4.4%.
We remain positive on DLF’s commercial
business leasing portfolio and expect the company
to report c1.5m sq ft of fresh leasing at an average
price of INR48 psf pm. However, our weak
residential sector demand outlook is evident in our
forecasts for DLF’s volumes, where we expect the
company to record sales volume of 2.2m sq ft
during 3Q FY11.
Investors will closely watch DLF’s free cash flow
– which has maintained positive momentum over
the past three quarters – and management
commentary on new project launches during 4Q
FY11. DLF, in our view, would need to launch
c6-7m sq ft during 4Q FY11 to meet the target of
5-6m sq ft in new residential sales volumes.
Investment summary
Best proxy for India property: DLF offers
investors the best proxy for India’s property sector
across all business segments. The company is the
country’s largest real estate developer with panIndia development potential of c432m sq ft
(focused on National Capital Region (NCR)).
Biggest beneficiary of reviving CRE demand:
We like DLF’s leadership position in the Indian
CRE market. It has c15m sq ft of commercial
assets under construction, putting DLF’s industry
market share at c10%. We expect large players to
benefit disproportionately from the revival of
CRE demand as better balance sheet strength and
established brand (existing customer
relationships) restrict demand from percolating
through to small and medium sized players.
However, lack of new residential launches will
hurt earnings: DLF has slowed down its
residential launches over the past 12 months. A
majority of this has been due to not receiving
regulatory approvals in time as DLF launches
projects only after receiving all approvals. While
this is positive in the long term (3-5 years) as it
reduces delays after the project has commenced
construction, we expect this to impact negatively
in the short term as earnings take a hit.
While DLF could accelerate its residential launch
schedule during Q4 FY11, we expect the
company to still miss its FY11 sales volume
guidance of 12-15m sq ft (we expect c10m sq ft).
We also expect the company to report c11%
volume drop during FY12 to c9m sq ft. With DLF
relying heavily on new sales volume for revenue
booking, earnings could take a hit during FY12.
We now estimate DLF to report only 12% EPS
CAGR during FY11-13.
Key forecast changes
We have cut our residential volume estimates by
c15-35% over FY11-13e (figure A.17) as the
company continues to face delays on new project
launches, leading to a 9-18% cut in the top line
over FY12-13. Slower than anticipated new
project launches, along with delayed sale of noncore assets, suggest leverage will remain high. In
line with this, we have cut our EPS forecasts by
c19-42% over FY11-13, as we perceive increased
risk to the company’s new project launches.
Valuation
We calculate Net Asset Value (NAV) using a
discounted cash flow method based on real estate
project realizations (Cost of Equity 15.0%, risk
free rate 7.5%, market risk premium 5.5% and
WACC 14.3%). We value DLF at INR279, which
is a 30% discount to its NAV of INR344, with
INR22 as terminal value.
We have cut our target price from INR386 to
INR263 as we factor residential sector demand
risk into our valuation, thereby increasing the
NAV discount to 30% from 0% earlier. DLF’s
premium valuation (peers valued at c40-50%
discount to NAV) seems justified, given its
industry leadership position, stable balance sheet
and sector position as a large market capitalisation
proxy play on India’s reviving property industry.
Under our research model, the Neutral rating band
is 10ppt above and below the hurdle rate of 10.5%
for volatile India equities, or 0.5-20.5% above the
current share price. Our target price implies a
potential return of 6% (including prospective
dividend yield), which is within the Neutral band.
Thus we downgrade our rating on DLF to
Neutral (V) from Overweight (V) earlier.
Risks
We anticipate the following key risks to our
investment thesis:
Inability to successfully launch new
residential projects owing to weak demand
driven by falling affordability due to rising
interest rates and high property prices.
Drop in CRE space absorption could impact
DLF’s valuation as c32% of the gross asset
value is contributed by CRE.
Key upside risks include a sharp improvement
in residential sector demand and sustained
higher than expected new project launches.
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