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DLF Limited
Earnings Risk and Tight B/S
Drive Our Downgrade - EW
What's Changed
Rating Overweight to Equal-weight
Price Target Rs287.00 to Rs177.00
F12 and F13 EPSe Reduced by 23% and 26%
We believe DLF could remain in a financially tight
situation in terms of lower profits and stretched B/S
for next few quarters. Hence, we have downgraded
our rating to EW and our new PT is Rs177. Stock is
down 29% YTD underperforming the market by 10%.
Earnings risk ahead. DLF new sales have stagnated
for three years (F10-11; F12 DLF target) at 10-12 msf
(Rs60-70 bln) and land under execution is flat for the last
6 quarters. As the older projects get delivered (4-6
quarters), DLF will become more dependent on new
launches for cash generation. In addition, high input cost
and higher interest expense will hurt earnings. Though
we expect debt reduction to commence from F3Q12, we
believe it will be small (10% in F12 – MSe) and not
enough to re-rate the stock.
Valuation. Stock is trading at 18% discount to Mar’12
NAVe, 23x F12 P/Ee (5% CAGR for F12-13) and 1.4x
F12 P/B – all at roughly 1SD below mean. Though the
stock may not appear expensive relative to its history,
valuations should be viewed in the context of
deterioration in fundamentals (curtailed land bank,
higher gearing, slower new sales, tough local/global
macro and lackluster management track record of
delivery) and sluggish earnings growth/low ROE.
Upside risk to our downgrade includes significantly
better local macro – sharp decline in inflation leading to
interest rate down cycle; substantial debt reduction from
sale of non-core assets and significant increase in new
sales target by DLF. Downside risks include high
inflation for longer, slippage in new sales/debt reduction
targets.
Valuation and Price Target
The stock is trading at an 18% discount to our March 2012
estimate of net asset value (NAV) of Rs252, broadly in line
with sector valuations. It is trading at P/Es of 23x F2012E and
21x F2013E EPS, which appear expensive in view of slower
growth ahead (2 years CAGR of 5% - F11-13).
We arrive at our new price target of Rs177 per share by
valuing the stock at 30% discount to our March 2012 NAV
estimate of Rs252 (our previous price target of Rs287 was
derived using a 10% discount to our prior March 2012E NAV of
Rs319). Please see Exhibit 10 and Exhibit 17 (NAV & PT
calculation).
We argue for 30% discount (to NAV) valuation for DLF
(versus 10% discount earlier) for the following reasons:
1) DLF’s balance sheet appears stretched with Rs213 bn net
debt (Mar’11), implying 80% net gearing. In our view, this will
restrict re-investment upside for the company for the next 1-2
years.
2) Long gestation land bank of 363 msf, which could take more
than two decades to get monetized.
3) Limited visibility of scale-up in business given flat new
launch target (10-12msf) for F12. If the physical market slows
down, DLF’s prospects to scale up operations will weaken.
Versus some positives such as:
1) The company benefits from a premium brand and equity
investment scarcity (i.e., limited real estate plays in the Indian
equity market, which are liquid).
2) DLF has significant asset build-up on its balance sheet,
including 22msf of rent-yielding assets (60% DLF share) plus a
few more ongoing investment properties, which give high
visibility of stable rental income.
Changes from earlier PT calculations: We arrive at our new
March 12E NAV of Rs252 (Rs319 for F12 earlier) by updating
our model for:
1) Reduction in the land bank;
2) lower execution volumes given flat company target for F12
(25% average for F11-13; 20% for F11-17);
3) 50 bps higher discount rate due to higher interest rates and
4) project detail updates (pricing and timelines).
To this, we apply 30% discount (versus 10% earlier) to
recognize slower than expected de-leveraging, which restricts
DLF’s ability to grow its NAV and slower pace of new launches
(delaying NAV growth)
Valuation Pushback – Inexpensive relative to history?
While the stock may appear inexpensive relative to history (1
SD below average – P/NAV, P/E, P/B – Exhibits 11, 12, 13), we
also highlight the deterioration in fundamentals relative to its
history (last 3-4 years). DLF’s net debt has risen 67% (to Rs213
bln as on June’11 vs June’08 – Ex 8), land bank has shrunk by
more than 50% (to now 363 msf), new sales targets have been
lowered 30-35% (to 10-12 msf now) and ROE/PAT is
depressed (Exhibit 14, 15).
Consequently, we focus more on the absolute valuations rather
than viewing the stock in the context of DLF’s history. The stock
is trading at 23x and 21x F12 and F13 EPSe (2 years CAGR of
5% - F11-13), which appears rich.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
DLF Limited
Earnings Risk and Tight B/S
Drive Our Downgrade - EW
What's Changed
Rating Overweight to Equal-weight
Price Target Rs287.00 to Rs177.00
F12 and F13 EPSe Reduced by 23% and 26%
We believe DLF could remain in a financially tight
situation in terms of lower profits and stretched B/S
for next few quarters. Hence, we have downgraded
our rating to EW and our new PT is Rs177. Stock is
down 29% YTD underperforming the market by 10%.
Earnings risk ahead. DLF new sales have stagnated
for three years (F10-11; F12 DLF target) at 10-12 msf
(Rs60-70 bln) and land under execution is flat for the last
6 quarters. As the older projects get delivered (4-6
quarters), DLF will become more dependent on new
launches for cash generation. In addition, high input cost
and higher interest expense will hurt earnings. Though
we expect debt reduction to commence from F3Q12, we
believe it will be small (10% in F12 – MSe) and not
enough to re-rate the stock.
Valuation. Stock is trading at 18% discount to Mar’12
NAVe, 23x F12 P/Ee (5% CAGR for F12-13) and 1.4x
F12 P/B – all at roughly 1SD below mean. Though the
stock may not appear expensive relative to its history,
valuations should be viewed in the context of
deterioration in fundamentals (curtailed land bank,
higher gearing, slower new sales, tough local/global
macro and lackluster management track record of
delivery) and sluggish earnings growth/low ROE.
Upside risk to our downgrade includes significantly
better local macro – sharp decline in inflation leading to
interest rate down cycle; substantial debt reduction from
sale of non-core assets and significant increase in new
sales target by DLF. Downside risks include high
inflation for longer, slippage in new sales/debt reduction
targets.
Valuation and Price Target
The stock is trading at an 18% discount to our March 2012
estimate of net asset value (NAV) of Rs252, broadly in line
with sector valuations. It is trading at P/Es of 23x F2012E and
21x F2013E EPS, which appear expensive in view of slower
growth ahead (2 years CAGR of 5% - F11-13).
We arrive at our new price target of Rs177 per share by
valuing the stock at 30% discount to our March 2012 NAV
estimate of Rs252 (our previous price target of Rs287 was
derived using a 10% discount to our prior March 2012E NAV of
Rs319). Please see Exhibit 10 and Exhibit 17 (NAV & PT
calculation).
We argue for 30% discount (to NAV) valuation for DLF
(versus 10% discount earlier) for the following reasons:
1) DLF’s balance sheet appears stretched with Rs213 bn net
debt (Mar’11), implying 80% net gearing. In our view, this will
restrict re-investment upside for the company for the next 1-2
years.
2) Long gestation land bank of 363 msf, which could take more
than two decades to get monetized.
3) Limited visibility of scale-up in business given flat new
launch target (10-12msf) for F12. If the physical market slows
down, DLF’s prospects to scale up operations will weaken.
Versus some positives such as:
1) The company benefits from a premium brand and equity
investment scarcity (i.e., limited real estate plays in the Indian
equity market, which are liquid).
2) DLF has significant asset build-up on its balance sheet,
including 22msf of rent-yielding assets (60% DLF share) plus a
few more ongoing investment properties, which give high
visibility of stable rental income.
Changes from earlier PT calculations: We arrive at our new
March 12E NAV of Rs252 (Rs319 for F12 earlier) by updating
our model for:
1) Reduction in the land bank;
2) lower execution volumes given flat company target for F12
(25% average for F11-13; 20% for F11-17);
3) 50 bps higher discount rate due to higher interest rates and
4) project detail updates (pricing and timelines).
To this, we apply 30% discount (versus 10% earlier) to
recognize slower than expected de-leveraging, which restricts
DLF’s ability to grow its NAV and slower pace of new launches
(delaying NAV growth)
Valuation Pushback – Inexpensive relative to history?
While the stock may appear inexpensive relative to history (1
SD below average – P/NAV, P/E, P/B – Exhibits 11, 12, 13), we
also highlight the deterioration in fundamentals relative to its
history (last 3-4 years). DLF’s net debt has risen 67% (to Rs213
bln as on June’11 vs June’08 – Ex 8), land bank has shrunk by
more than 50% (to now 363 msf), new sales targets have been
lowered 30-35% (to 10-12 msf now) and ROE/PAT is
depressed (Exhibit 14, 15).
Consequently, we focus more on the absolute valuations rather
than viewing the stock in the context of DLF’s history. The stock
is trading at 23x and 21x F12 and F13 EPSe (2 years CAGR of
5% - F11-13), which appears rich.
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