Buy DLF; target of Rs 250: Emkay

Emkay Global Financial Services is bullish on DLF and has recommended buy rating on the stock with a target of Rs 250 in its November 15, 2012 research report.

“DLF reports topline of Rs 20.4bn, 7.2% down QoQ and 5% below our estimates. EBITDA stood at Rs 7.5bn, down 30% QoQ and 28% below our estimates. High construction cost coming from cost escalations of nearing completion projects let to significant fall in EBITDA margins (1196bps QoQ). PAT stood at 1.4bn, down 53% QoQ and 48% below our and consensus estimates. PAT is significantly below estimates despite of higher interest cost capitalization and lower tax rate QoQ. Company sold 1.6msf in the quarter for Rs 6.6bn and net leased 0.24msf in the quarter.”

“DLF was able to reduce net debt by merely Rs 14.6bn from the cash inflow of Rs 27.3bn from NTC land sale to Lodha. The balance Rs 12.7bn was utilized towards payments towards project approvals, operational cash flow deficit and also for interest cost outflow. DLF gives high certainty towards Aman Resorts sale stating that documentation of same will be done by Q3FY13 and financial closure by FY13. Outlook for wind energy business sale, expected in Q4FY13, is bleak considering the mgmt undertone and conditions of PPA to be in place before sale. Company also gives high visibility towards new launches of ~9-10msf valued at ~Rs 110bn for H2FY13. Company has incurred Rs 3.5bn towards approvals of the same in Q2FY13 which adds to the certainty of the launches. Considering DLF will launch in Phase V of Gurgaon after long time, the absorption will be quite strong. We go with management’s estimate of Rs 30bn of sales booking from same in H2FY13. Promoters currently hold 78.6% equity stake in DLF which has to be brought down to 75% as per SEBI norms by mid-2013. DLF plans to dilute the equity by ~5% to do the same, which should generate cash of ~Rs 20bn to be utilize for debt reduction in FY14. We see net debt at Rs 195bn by FY13 and Rs 160bn by FY14 from all these events and by assigning our doubts towards wind energy business sale in FY13 and launch momentum in FY14.”

“DLF has underperformed real estate index and NIFTY significantly mainly due to rising debt and underperformance on core operations. With both these issues addressed to a certain extent, we see upgradation in our valuations. We don’t see significant upside as there is overhang on the following issues; DLF owns only 60% stake in DCCDL, which owns all the key rent generating assets of the company. The debt, post the land sale of Rs 27.3bn which is part of DCCDL, would have been reduced in DCCDL. Hence, with decrease in debt at consolidated level by Rs 14.6bn would mean that debt at DLF (ex. DCCDL) would have increased by 12.7bn while at DCCDL level would have decrease by Rs 27.3bn keeping all other things constant.”

“The company also has outstanding disputes of Rs 30bn pertaining to income tax on the SEZ monetisation to DLF Assets Ltd. (DAL). The Income Tax Authorities have demanded tax of Rs 13.9bn for FY09 and Rs 16.4bn for FY08. The dispute is under tax appellate tribunal. Outcome of the appeal disfavoring DLF can result into substantial cash outflow for the company. Gurgaon housing market, as per various channel checks, is highly speculated wherein the demand is more driven by investors than end users. The speculation, after a point, may lead lower appetite for absorption creating a oversupply scenario and thus affecting the market price. Marginal fall in the real estate price could trigger domino effect of secondary sales which may affect DLF’s business over 2-3 years,” says Emkay Global Financial Services research report. 

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