DLF’s operations continue to improve as: (i) it restarted sales from November 2017 (halted since May 2017 due to RERA uncertainties); net bookings stood at Rs 4.8 bn and will translate into revenue in Q4FY18; (ii) collections from these sales will aid cash flows going ahead; and (iii) deleveraging process has started with the promoters infusing Rs 90 bn of funds; the company expects Devco to become net debt free by FY19-end post infusion of balance promoter funds/QIP, which will ease DLF’s access to and cost of capital. The company will now focus on liquidating inventory in the high-end Gurgaon residential market apart from scaling up its fairly well balanced commercial/retail portfolio. Sales pick-up in Devco along with ramp-up in leasing portfolio will boost cash flow generation, in our view. Pending clarity on proposed deconsolidation of DCCDL, we maintain our estimates and Buy recommendation with a target price of Rs 273.

Leverage metrics improve

Post Rs 90 bn fund infusion by promoters, Devco’s net debt has declined to Rs 55 bn; post balance fund infusion by promoters/QIP, management expects Devco to become net debt free by FY19 end. This will reduce the cost of capital and cash burn (from Rs 9-10 bn currently to Rs 6-7 bn over next couple of quarters). Lowering of interest costs and pick-up in sales can materially improve cash flows by FY19 end since almost the entire debt then will pertain only to the rental portfolio, which is performing well.

Focus on NCR residential segment

DLF reopened its sales from November 2017 and garnered net sales of Rs 4.8 bn during Q3FY18. Balance sheet improvement will provide significant operational flexibility to DLF in its future plans since it can focus on the high-end residential segment in NCR and on liquidating its `150 bn inventory over next couple of years. While the current demand environment in NCR remains weak, any demand recovery will act as a catalyst for the stock, in our view.

Outlook and valuations: On an improving trajectory

We anticipate gradual uptick in DLF’s operations in coming quarters. We expect the company to be a key beneficiary of ongoing consolidation in the sector and believe that its attractive rental portfolio and improving balance sheet will hold it in good stead going ahead. Maintain Buy with target price of Rs 273.

Management call highlights

Q3 performance: DLF had halted sales beginning May 2017 (citing RERA compliance), which it restarted since November 2017. Gross sales during the quarter stood at `6.7 bn, while net sales stood at `4.8 bn. However, with these sales not meeting collection threshold (expected in Q4FY18), they didn’t translate into revenues during Q3FY18. Notional pre-tax gain of `86 bn on account of stake sale in DCCDL boosted profitability.

Q3FY18 revenue of `16.9 bn (down 18% y-o-y, up 7% q-o-q) was driven by POCM-based revenue recognition in ongoing projects. Ebitda margin, at 41.4% fell 510bps y-o-y and 820bps q-o-q.
DLF promoters have received `89 bn towards the secondary sale of CCPS to GIC and Rs 16 bn from buyback of CCPS by DCCDL. DLF has allotted CCDs/warrants aggregating to ~`113 bn to promoters. The promoters have already infused

`90 bn by subscribing to CCDs/warrants; balance consideration will be received over next 18 months.

Net debt: To date, the company has repaid `71 bn loans from promoter funds. Consequently, overall net debt has declined to ~`216 bn (`268 bn in Q2FY18). Of this, Devco has `55 bn net debt with the balance pertaining to DCCDL. By FY19 end, management expects Devco to be net debt free, while DCCDL’s net debt will remain at more or less same levels.

Rs 93 bn inter-company loan will be payable by the DLF Group to DCCDL; this will be via sale of certain rental assets

(Rs 3-3.5 bn annual rentals) and land parcels earmarked for commercial use.

Management expects cash losses to decline going ahead, driven by lower interest costs. Assuming no improvement in sales, it expects cash losses at Rs 6-7 bn per quarter over next couple of quarters.
Ongoing projects: DLF expects to complete most of its ongoing residential projects over in next one year. The company estimates unsold inventory worth

Rs 150 bn in these projects (Rs 87 bn in Phase V) and expects to incur Rs 20-21 bn towards pending construction cost. It has Rs 25 bn of pending receivables from sales already done in these projects.
DCCDL will be treated as a joint venture (JV) post the deal, and hence DLF will only account for its share of earnings; DCCDL’s P&L statement and balance sheet will be de-consolidated from DLF.
No immediate new launches are planned, except the 7msf Midtown project (Central Delhi, JV with GIC). The company will launch the project only after significant level of completion has been achieved.