Sell DLF; target of Rs 174: Nirmal Bang

Nirmal Bang is bearish on DLF and has recommended sell rating on the stock with a target of Rs 174 in its August 14, 2012 research report.

“DLF has entered into a binding agreement with Lodha Developers to sell its 17- acre plot in Lower Parel, Mumbai, for an enterprise value of Rs27bn (11% of current gross debt). DLF will receive Rs5bn with immediate effect as part payment which is non-refundable and expects the entire transaction to conclude by October 2012, in line with its strategy to reduce debt. The sale transaction is at a 35% discount when compared to Oberoi Realty’s land deal in Worli, Mumbai, (October 2011) and at a 15% discount to Indiabulls Real Estate (IBREL) land deal in Lower Parel (August 2010). We retain our Rs35bn of non-core asset sales and flat pre-sales YoY for FY13E as against the management’s guidance of Rs50bn and 25% YoY growth (please note that DLF reported Rs3.7bn of asset sales and 47% YoY decline in pre-sales for 1QFY13), respectively. We reiterate our view that asset sales have to be supported by strong pre-sales, which continue to remain lacklustre, in order to generate positive sustainable cash flow after accounting for interest costs and capex. We retain our Sell rating on DLF and view the current asset sale as a temporary relief.”

“DLF had bought the land in Lower Parel in 2005 for Rs 7.1bn from National Textile Corporation (NTC) with additional payment being made to avail extra FSI, which may be in the range of Rs 1,500-Rs2,000/sq ft. The acquisition by Lodha is for a consideration of Rs12bn, subscribing to equity as well as debentures of DLF, with the addition of Rs15bn of liabilities that Jawala (DLF’s 100% arm which owned the land at Lower Parel) incurred for development ever since it acquired the property. As per Lodha’s management, the project will have a saleable area of 5mn sq ft and it intends to go for mixed-use development with all approvals in place. The said transaction is at a 35% discount to Oberoi Realty’s land deal in Worli (October 2011) and at a15% discount to IBREL’s land deal in Lower Parel (August 2010). We believe such a discount is due to the prevailing higher vacancy of more than ~20% in office space and oversupply of residential apartments in Lower Parel.”

“At the current market price, DLF trades at a 7% premium to our one-year forward NAV (Rs 204/share) and 1.2x P/BV on FY14E earnings. We retain our Sell rating on the stock with a target price of Rs174 (15% discount to our NAV),” says Nirmal Bang research report. 

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