In an environment of rising interest rates (owing to inflationary pressures and deposit rate hikes by financial institutions), developers? funding costs are likely to rise in CY11. Our channel checks indicate that debt funding to real estate companies has come under scrutiny as a fallout of the recent bribes-for-loan scam. The scam has also raised possibilities of delays in loan sanction to developers in the near-to-medium term.
As of Q2FY11, DLF had net debt of Rs 19,900 crore (net D/E of 0.73x) at an average cost of 10.5%. With mandatory debt repayment of Rs 1,670 crore in H2FY11 amid an environment of rising interest/construction costs, we believe that DLF should ideally focus on maximising volumes instead of margins over the medium term.
DLF has guided for new sales bookings of 12 msf in FY11, of which it has already achieved 4 msf in H1FY11. It is likely to generate the balance, largely from plot sales of 5-6 msf at Gurgaon/Chandigarh/Indore.
Though plot sales help to front-end cash flows, we believe the company?s pricing of Gurgaon plots at Rs 60,000+/sq yard could bring volumes under pressure since there are several other large landowners in the vicinity offering products at discount.
Further, RBI and NHB?s directives to limit loan-to-value (LTV) ratio on housing loans to 80% may dampen volumes, especially in the premium end, which is DLF?s focus area.
Robust demand for residential housing and recovery in commercial real estate are positives for DLF on the macro-economic front. However, rising operating/funding costs, along with downward pressure on volumes due to DLF?s focus on margin maximisation, are key concerns. Accordingly, we cut our NAV for DLF to Rs 326/share on FY12 basis (Rs 417 earlier), assuming 150 bps rise in cost of debt, higher operating expenses and lower sales volumes, going forward. Hence, we downgrade our recommendation to hold from buy. On relative return basis, we rate it ?sector performer?.
