DLF has restructured its business model and balance sheet to become a more focused development and rental company. From here, the spot-light will shift towards monetisation of its `100 bn in unsold completed inventory, leading to positive free cash flow generation (~ `5-6 bn p.a.) and, potentially, further deleveraging.
The rental business (DCCDL) has gained scale, with prospects of low-/mid-teens growth from current high base (`32 bn in F20e rentals). The company is starting a new asset creation cycle for both its development and rental businesses. All this, along with reasonable valuation (40% discount to our March 2021 NAV estimate) drive our rating upgrade to ‘Overweight’.
Our new price target of `269 (target discount to NAV of 25%, narrowed from 30%) implies ~25% total return potential. The company is starting construction on 12-13msf of new projects in its Devco, including the luxury residential project in Phase-V and prime central Delhi projects. We estimate sales potential of `323 bn in these projects with high margins.
DCCDL has 9.1msf of new office projects (including Phase-I of a prime downtown Gurgaon project) in early stages of construction, which can generate `9.5 bn in rental income. We believe these two together give future growth visibility, and timely execution should help narrow the NAV discount. We believe that DLF’s NAV quality has risen in the last few years, driven by significantly higher contribution from rent-yielding asset portfolio (~34%, `121 per share), large concentrated land bank in the Devco now has a more developed neighbourhood, giving visibility to monetisation; a few recent land transactions in New Gurgaon/Phase-V provide a pricing benchmark; and REIT listing has helped benchmark valuation for DCCDL’s large portfolio. We have revised our model for updated project details. We have raised our March 2021 NAV estimate to `359 per share.