Buy DLF Ltd – FY11 annual report takeaways ::RBS

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


An analysis of DLF’s cash flows based on its FY11 annual report supports our view that its
debt has peaked (with DAL’s unwinding largely over) and, therefore, surplus cash will likely
be used for debt reduction. DLF’s de-leveraging strategy also appears to be on track.
Maintain Buy


FY11 cash flow and de-leveraging strategy suggests that debt is peaking
We note that DLF generated total cash of Rs88.6bn in FY11; of this Rs39.8bn (45%) was
from operations and Rs44.8bn (51%) from the redemption of liquid investments (see Tables
2 and 3 for details). About 82% of the total cash outflow was towards financing activities:
Rs53.5bn (50%) for redemption of preference capital (unwinding of DLF Assets Ltd, or DAL,
DLF’s promoter-owned entity); Rs25.9bn (24%) towards debt servicing; and the balance
towards dividend payment. The deficit of Rs19.1bn was bridged through new borrowings,
increasing the debt. With DAL’s unwinding largely over and DLF aggressively pursuing
plotted development and non-core asset monetisation (leading to faster cash realisation), we
see incremental cash flows being largely used for debt reduction.
DLF optimistic on recovery in most segments
DLF is focusing on plotted development as part of its strategy to increase asset monetisation.
Of the 12msf of launches planned in FY12, 10msf represents plotted development. In the
commercial segment, the company expects volumes to grow but with market rents flat in the
near term due to oversupply. Management acknowledges that the minimum alternate tax
(MAT) and dividend distribution tax (DDT) on special economic zones (SEZs) proposed
under the new direct tax code (DTC) could impact future SEZ development plans. However,
with the government withdrawing income tax incentives to IT parks, SEZs in comparison to
such parks remain favourably placed, which augurs well for DLF.


Potential benefits of de-leveraging should be visible from 2QFY12 onwards; Buy
DLF's de-leveraging strategy has kicked-off well, with successful plotted development sales in
New Gurgaon and positive news flow on monetisation of the company’s IT parks. We believe the
worst is over for DLF and expect a gradual business recovery. We see positive potential shareprice catalysts in the near to medium term: DLF’s debt gradually declining from 2Q; the interest
rate cycle peaking; successful non-core asset monetisation; and a sales volume pick-up. Our
target price of Rs250 comprises Rs204/share for DLF’s land bank and Rs46/share for the
company’s completed leased assets (in which it has a 60% stake). Maintain Buy.