J P Morgan rates DLF a 'buy', keeps target at Rs 300

Moneycontrol Bureau

Passing through a rough weather real estate major DLF, finally has some reasons to cheer and so are its shareholders. Following an analyst call with the company management, the international brokerage firm - J P Morgan has given an "overweight (buy)" call on the stock setting a target price of Rs 300 from the current level.

"Following a period of restriction, we are moving DLF from 'Not Rated' designation to an OW recommendation and Mar-14 PT of Rs300/share. Over the last 3 months, we note that progress on two of the most sensitive business parameters has been positive i.e. Debt reduction and successful sell out in launch of luxury phase 5 project," Saurabh Kumar and Gunjan Prithyani, two research analysts from J P Morgan (Asia Pacific Equity Research) said in a research note.

India's largest real estate developer, reported its first ever quarterly net loss of around Rs 4.2 crore during the January-March quarter, driven by slowing home sales. Moreover, the company ran into trouble when the capital market regulator Securities Exchange Board of India (SEBI) was directed by the Delhi High Court to carry out an investigation into the quality of disclosure made by DLF at the time of its initial public offer (IPO) in 2007.

"Recent stay order on Crest construction in our view whilst worrying has knocked off more than the entire cash flow of the project and reduced valuation on Aman resorts to zero. This in our view presents an upside and a favorable risk reward opportunity. Near term stock catalyst will be progress on Aman closure, launch of Camellia (strong soft sale demand) and any resolution on stay order of Crest," they said.

Here’s what the report said:

Crest sold out... but stay order will need to be resolved- Crest launched in May received a strong demand with co selling out 0.85 msf at approx Rs 17K psf. However, in an ex parte order the high court has recently stayed construction pending clarity on project FSI. Given the onset of monsoons construction work would have been subdued and we note that the co. has 3- 4 months to clarify its position (Next hearing slated for Jul-13).

Net Debt target of Rs 170B by F14 - Post recent issuance DLF's net debt has come down to cRs 200B (Mar-Q Rs 217B). Target net debt for Mar-14 is Rs 170B contingent on mostly concluded asset sales of Rs 28B. Of this Aman (Rs 16B) has been delayed over the last 4 months given the buyer (MBO transaction) has not yet raised financing. Current expectation is for closure till June-13 else the asset chain may be re sold to other parties.

Headline earnings to disappoint given roll down of old projects and shift to new revenue recognition policy. DLF’s Q4 earnings disappointed given a shift to new revenue recognition policy (25% completion & sales). As we had noted in Q3 analyst meet, earnings will likely be subdued for 4-6 Qs till new project launches start reaching revenue recognition thresholds (Camellia is possibly the only exception). Operating cash (cash EBITDA) generation was Rs 36B for F13 vs. Rs42B in F12.

Operating cash flow - Guidance for breakeven in F14 and return to positive territory in F15: On a cash flow basis, the Q was business as usual with negative cash flow of Rs 3B (last few Qs run rate) given land /rent capex. Guidance is for breakeven in F14 and return to positive territory in F15. As of now we are modeling in net negative CFO (ex asset sales, equity raise) in F14.

Steady state EBITDA to double in 3 years

DLF re-iterated its target to double EBITDA in the next 3 years. The co is guiding to Rs 80B+ of cash EBITDA on steady state basis with Rs55B coming from Dev co and Rs27B from Rent co. The growth would essentially be driven by:

a) New launches in Phase 5 Gurgaon. Overall co is looking at 1.5msf pa of luxury sales from Phase 5 Gurgaon; while contribution from other markets would largely be stable at current levels. For New Gurgaon, co is looking at 3msf of pre-sales and additional 3msf from rest of India.

b) Growth in rental income to Rs27.5 in next 3 years from ~Rs18B currently. This will essentially be driven by new completions (primarily 1.8msf mall of Noida), rent escalations (15% pa in 3 years) and incremental leasing run rate of 1.5msf pa (5msf in 3 years)