At the receiving end

Updated: Nov 26 2012, 10:37am hrs
We believe DLFs 30-35% underperformance to high risk-beta property stocks over last three months is unjustified given its superior asset mix, better execution track record and increased visibility on early debt reduction. We foresee good upside potential, with our target of R280 based on 30% discount to the NAV (net asset value) of R400.

The formal closure of its Mumbai land sale for R27.27 billion in October-end has increased the visibility on early-debt reduction by R20-25 bn by the end of Q, which is positive given the skepticism among investors. Our informal channel check suggest a high probability of Aman Resorts sale taking place shortlythis would further enhance debt reduction visibility to R185 bn by March 2012, significantly boosting stock sentiment that was impacted by recent news on political links.

Attractive at 50% discount to NAV: The discount factors delays in efforts to cut debt and slower than expected execution ramp-up. That said, we still believe DLF has superior business model and good asset-geographic mix, strong growing rental income of R18 bn per annum, which differentiates it from peers. Our NAV per share of R400 includes R292 for the development portfolio and R108 for rental income yielding assets.

We have eliminated the land/assets sold and also factored in higher customer advances in our assumptions. Other key assumptions are cap rates of 10% ascribed to value its 22.5 million square foot (msf) leased commercial assets (20% of NAV), other developable commercial assets valued at 10-11% cap (17% of NAV), and non-core asset sales of R25 bn. Residential, although still dominates with 63% of NAV. Our other assumptions are no price escalation, 15% cost of capital, 25% tax rate, and development land reserve of 390 msf with 1-2 year execution delay.

We believe DLFs 30-35% underperformance to high risk-beta property stocks is unjustified, given DLFs prime land reserves (345 msf), 23 msf leased portfolio with rental of $350m per annum, our expectations of land prices to trend up, and steps to cut debt by R50 bn by March 2013. We foresee good upside potential with stock offering compelling risk-reward on asset play basis trading at 50% discount to NAV, 1.3x P/BV.

Conference call takeaways: DLFs Q2 earnings were down 63% year-on-year, 53% quarter-on-quarter on margin pressure and lower revenue recognition. Ebitda declined 36% y-o-y, 30% q-o-q with margins significantly lower at 36.6% due to cost inflationary pressure on old projects getting delivered and lower revenues recognised. Rental income was steady q-o-q at R4 bn. Interest cost declined by 16% q-o-q, 1% y-o-y for the first time after so many quarters, which is positive.

Operational performance in Q2 was relatively steady. DLF pre-sold 1.59 msf in the quarter. Further, leasing was slow at 0.24 msf leased versus 0.29 msf in Q1FY13. Pick-up in execution seemed to be encouraging with 7 msf added q-o-q to 55 msf should help drive cash flows. Net debt increased to R232 bn due to govt charges paid of R3.5 bn upcoming launches and increased tax pay-out of R3.7 bn.

Management however reiterated its guidance to bring this down to R185 bn by March 2013 with closure of Mumbai land sale and other asset sales in advanced stages of negotiation. Further, the management guided for strong H2FY13, with 9-10 msf of launches in Gurgaon, Bangalore, Chandigarh.

The company also talked about working towards delivering 12 msf of old projects in H2 versus 2.8 msf delivered in H1. The management reiterated two other large asset sales (Aman Resorts, wind power) are in advanced stages of finalisations with Aman likely in current quarter, windpower in Q4. Factoring which expects net-debt of R185 bn by March 2013.