DLF’s Q2FY19 results underline the transformation across its business verticals since FY18 with the residential business seeing renewed sales traction, the rental portfolio continuing to exhibit strong performance and the company being on track to bring down its debt significantly in its residential business in H2FY19. We retain our Buy rating with a revised target price of Rs 280/share based on 1x FY19E NAV (earlier Rs 306/share), factoring in a higher cap rate of 9% for rental assets vs. 8% earlier, in line with our assumptions for our coverage universe. As we have highlighted earlier, with the shift to the project completion method under INDAS 115 from Q1FY19, DLF is rebooking revenues and profits as projects complete and hence the income statement analysis is irrelevant and investors should focus on underlying cash flows of the different business verticals.
Sales momentum picking up, debt levels to come down further
After DLF reopened its sales bookings in November, 2017, sales momentum has been strong with Q4FY18 seeing fresh gross sales bookings of `9.5 bn and net bookings of `7.5 bn. This momentum sustained in Q1FY19 with gross bookings of Rs 6.7 bn (net bookings of `6.0 bn). Q2FY19 was another strong quarter with gross bookings of Rs7.8 bn and net sales bookings of Rs6.3 bn. The company has maintained guidance for Rs 20-23 bn of net sales bookings in FY19e.
Residential debt levels to come down further in H2FY19
With a QIP fund raise of `35-40 bn and balance promoter fund infusion of `22.5 bn on the cards along with completed inventory worth `129 bn (net of costs) up for sale, we expect DLF’s balance sheet (ex-DCCDL) to become debt free in H2FY19e and enable the company to refocus on its residential business. In Q2FY19, DLF (ex-DCCDL) generated post interest operating cash surplus of Rs 1.4 bn after achieving cash flow breakeven in the previous quarter.
Rental business set to scale up further
Under its rental arm DCCDL, DLF has ~27msf of operational rental assets with another 4.2msf under construction. Apart from this, DCCDL also has potential to develop another 24msf of assets, which should enable it to grow its annuity income pool at a CAGR of at least 10% from `30 bn in FY19e over next 4-5 years.
Cash flows turn surplus in Q2FY19
DLF’s Q2FY19 consolidated net debt (ex-DCCDL and accounting adjustments) reduced marginally by Rs 0.7 bn in Q2FY19. The company aims to bring down these debt levels through QIP route (`35-40 bn) and residual promoter fund infusion of Rs 22.5 bn. Apart from capital infusion, DLF has completed inventory worth `129 bn (net of costs) which the company intends to monetise over the next 3-4 years to generate cash surplus in DLF’s development business. DLF has also taken steps towards settling the Rs 87 bn dues to DCCDL. DLF has also signed a non-binding term sheet with Hines for a 51:49 JV to develop a strata sales office project in Gurugram which has 2.5msf of potential FSI.
Under DCCDL, DLF currently has 26.9msf of operational rental assets with another 4.2msf of under construction assets. Apart from this, DCCDL has potential to develop another 24msf of assets, which should enable it to grow its annuity income pool at a CAGR of at least 10% from ~`30 bn in FY19e over the next 4-5 years.
Valuations
While DLF has been reeling from having high debt levels in its development business over the past 4 years, post the sale of promoter stake in its rental arm DCCDL to GIC Singapore, promoters have infused `90 bn in DLF which has helped to significantly bring down debt levels. With sustainable debt levels at the DCCDL level and development business debt set to reduce further by `55-60 bn in H2FY19, DLF is well poised to grow both its rental and residential business without having to worry about ballooning debt levels. We reiterate our Buy rating with a revised target price of `280/share.