Building brick by brick

Updated: Jan 21 2013, 08:35am hrs
We upgrade DLF to Overweight with a Mar-14 price target of Rs 300 (earlier Mar-13 PT of R220). Debt reduction and launch of luxury Gurgaon projects should boost core operating cash flows, thus returning the company into a surplus free cash flow zone. Rate cuts through FY14 will be an added positive. We believe the companys turnaround strategy of fixing execution, de-leveraging and focusing back on performing north India markets should start bearing fruit henceforth. Over the next three months, we see multiple catalysts potentially pushing the stock higher. These are: (i) Q4 launch of luxury Magnolia/ Park Place projects, (ii) additional traction in asset sales, and (iii) rate cuts.

Initiatives on business consolidation paying off: We think DLF has been making the right moves in terms of fixing its business efforts, which have now started bearing fruit. Debt reduction has started to come through and more should follow. A revised execution strategy is also in place (15msf+-million sq ftdeliveries expected in FY13). As the company turns on launches in its core north India markets, we expect a turnaround in the operating cash flows for the company going into FY14. Some of the key steps undertaken to improve its business position over the last year are:

(i) Reducing debt levels by asset sales: Some of the key large transactions have been concluded (NTC, Aman Resorts) generating Rs 43bn in asset sales. The company now seems to be closer to its net debt target of R185 bn by FY13 end (JPMe-R190 bn). Post-NTC Mumbai transaction, net debt has come down to Rs 212bn and is expected to come down further as proceeds from Aman sale come in (R16 bn). We note there are additional transactions in the pipeline (Wind Power R8 bn, potential sale of certain operating hotels, plots, etc.).

(ii) Improving project execution by outsourcing to large contractors: The companys strategy of outsourcing of construction to two large reputed contractors, L&T/Shapoorji Pallonji, should aid the pace of construction and deliveries ahead. In H2FY13, the company expects to deliver almost 15 msf of projects, which should significantly de-stress business execution, enabling a restart of its construction portfolio starting FY14. This should also moderate focus on plotted developments, which is there currently.

(iii) Focusing back on the core north Indian markets: The companys portfolio is now concentrated mostly toward north India (NCR/ Punjab) and certain south India markets (Chennai/ Bangalore) in terms of value. We note that traditionally these have been some of the best-performing geographies of the company.

(iv) Continued capex in build-out of rental assets (office/malls) despite headwinds: We think the company should be able to deliver 15%+ pa in rental business over the next three years, even in the current subdued office leasing environment. We expect rental income to increase to R25 bn+ from R16 bn currently, driven by ongoing project completions and rental revisions (esp. in its Cyber City portfolio).

(v) Infrastructure development in Phase-V and New Gurgaon sectors: This will enhance the value of these core holdings.

JP Morgan