We have an overweight rating on DLF with a March 2016 price target of R210. Our target is SOTP-based, valuing the dev co at 1x land cost and the rent co at 15x Ebitda.
Key upside risks include higher-than-expected pre-sales/launch activity, significant upward revisions to Cyber City rentals; and a sharp cut in policy rates.
While key downside risks are delay in the new launches and sustained weakness in pre-sales trends, an increase in debt levels, a material de-rating of overall macro fundamentals in India.
Asset sales should help reduce residential net debt. DLF’s residential business has a net debt of ~R7,000 crore and is currently running cash neutral given drag of old low margin book (sold at low prices).
Asset sales for the year (R2,600 crore) should enable the company to be largely cash neutral for the year. This as construction costs in the business will be elevated given planned 20msf deliveries of old low margin projects.
Once cash flows from its new projects start building up from F17 onwards, we think DLF will break into positive FCF zone. We note that DLF’s ongoing residential projects embed R15,000 crore of pre-tax FCF, more than enough to fully reduce the residential debt on a four-year view. In one of the largest residential PE transactions in India, DLF signed a JV agreement with govt Of Singapore which will enable GIC to invest in two of DLF’s residential projects in Delhi. GIC will invest R1,990 crore as part of this transaction. With this DLF has achieved 90% of its asset sales guidance for the year.