[T.S.R:16463] DLF-Land But No Finance (Sell says RBS)

DLF-No Execution, No Project Deliveries, But Cap Is Shifted From One Head To Another

DLF is finally launching some high value projects for which the demand is expected to be good. However we believe that DLF needs to launch and sell 
more such projects to generate higher cashflows and thus reduce its huge debt. We believe DLF is likely to miss its sales guidance of 12-15msf. We 
maintain Sell. 

*DLF - Finally showing some focus on asset churn* 
�� Channel checks suggest that DLF is close to getting approvals and would be launching the much awaited Gurgaon plot sales (Phase-1) in couple of days (Sector 73, near NH8) - 350 units (with 3 options - 540, 740, 1000sq yard @ Rs 55k-60k/sq yard, i.e. about 2msf @ Rs 6,000/sf+ under down payment (offering 10% discount) or subvention (via bank finance) to generate upfront cashflows of Rs 10bn-12bn which otherwise would have been collected over 18months. 

�� Has launched about 1msf of luxury residential project (Commanders Court) in Chennai (city centre) - 350 units (1,576-3,957sf) @Rs 11,500/sf would 
generate Rs 10bn of cashflow over a period of 36months 

*But not sufficient, in our view* 

�� We believe there would be good demand in the market for the Gurgaon plots at sector 73 as Gurgaon plots at DLF Phase-1 and 2 trading at Rs 125,000/+ sq yard. However, the attractiveness have been lowered due to the Ansal's Gurgaon plot sale (in Sector 67, near Golf course extension) available for re-sale at attractive prices @Rs 40,000-45,000/ sq yard (which was launched and sold by Ansal @ Rs 30-35,000/sq yard in April). Also, Chennai residential sales would be softer due to higher ticket size of Rs 20-55m/ apartment. Mumbai residential launch would see further delay (now expected in 4QFY11/1QFY12) due to delay in approval. 

�� On the cashflow front, we believe that DLF would continue to be under pressure as despite factoring in robust sales guidance (premium launches and asset sale) debt would remain high and could be headed for potential equity dilution. Until then it would continue to be under pressure due to high debt as even after assuming 2H operating cashflows (best case scenario in terms of launches and asset sale, see table) of Rs39bn (Rs27.5bn post interest) including asset sale, it gross debt would remain high 205bn. 

This would again mean an interest expense (cash outflow) of Rs20bn-22bn for FY12F. We believe it should continue to aggressively launch and monetise from higher value plots in Gurgaon and Chandigarh (Mallanpur) to address weak cashflow and high debt issues. 

*Likely to miss its FY11F guidance* 
�� Management maintains its optimistic FY11 sales guidance of 12m-15 m sq ft (earlier 15-18msf) of which 4m sq ft booked in 1H, implying high 
expectations in 2H. We see substantial scope for disappointment, given that absorption volumes have slackened due to rising property prices and their adverse impact on affordability. DLF's net debt has grown more than 50% to Rs208.3bn over the past year (largely due to consolidation of Caraf-DAL, a promoter owned entity). If we assume the cost of debt of 11%, annual interest outflow amounts to Rs23bn, or 54% and 48% of our FY11 and FY12 EBITDA forecasts, respectively. Net cash from operations was Rs 14.7bn in 1HFY11, while interest outflow was Rs11.8bn, leaving limited funds for investment or debt repayment. 

�� While management retains its FY11 net gearing target of 50% (78% in 1HFY11), we believe it is unlikely to be met due to slow monetisation of 
non-core assets (only Rs25bn of assets realised over 18 months, vs an initial target of Rs45bn). Although DLF has lined up a few high-value 
projects, such as the Gurgaon plots and Mumbai NTC mill project, and has guided for Rs20bn from monetisation of non-core assets over 12-18 months, we believe these are not enough for the company to reduce its net debt. 

*Maintain Sell with Target Price of Rs 280* 

�� While DLF continues to have the largest rent-yielding commercial asset portfolio (enjoying traction in leasing as well) and relatively good 
execution skills compared with its peers, slow asset churn and high debt compel us to attribute 10% discount to its gross asset value (GAV) leading 
to SOTP-based target price of Rs280, based on an end-FY12F DCF value of Rs234/share for its land bank and Rs46/share for completed leased assets 
(60% share). We maintain Sell rating on the stock.

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