[T.S.R:16814] RBS Downgrades DLF Limited To SELL With A Target Price Of Rs 195

RBS

DLF Limited-Cannot Deliver, Cannot Sell

Downgrade stock to Sell with a target of Rs 195

We cut our earnings forecasts 9-20% and target price c30%; maintain Sell

We cut our FY11-13F earnings 9-20% on account of lower launch and sale assumptions. This, coupled with an increase in our discount to gross asset value (GAV) from 10% to 15% (on account of increasing headwinds . tightening liquidity and increasing interest rates) and lower-than-expected debt reduction, resulted in a 30% reduction in our SOTP-based target price to Rs195/share (see Table 9), based on an end-FY12F DCF value of Rs149/share for its land bank and Rs46/share for completed leased assets (60% share). We maintain a Sell. 

Weak cash flows (due to low asset churn) and high debt remain key concerns 

DLF.s cash flows remain weak due to 1) lower/inadequate asset churn (net cash flow from operations at Rs6.4bn vs interest repayment of Rs6.7bn in 3Q; see Table 4); 2) significant outflows (land purchase, capex and dividend payment in 3Q); and 3) slow non-core asset monetisation . Rs29.1bn (Rs4bn in 3Q) realised since 1QFY10 vs a target of Rs45bn. We reiterate that high debt remains the biggest overhang on the stock, and it increased 6% to Rs220bn in 3Q11 with net gearing at 83% (see Table 3) largely on account of repayment of preference shares (including premium) of Rs4.5bn.

 

3Q EBITDA growth offset by interest costs; improvement in operations not enough 

While 3QFY11 revenues grew 22% yoy to Rs24.8bn and EBITDA grew 40% to Rs11.8bn, an increase in depreciation (101% yoy) and interest expense (up 67%) resulted in flat yoy PAT of Rs 4.6bn (19% below our expectations). At 47.5%, the EBITDA margin . 587bp higher yoy . was a positive (see Table 1).  

DLF.s operational performance was better sequentially:

2.5msf of sales booked (6.5msf in 9MFY11) and 1.7msf of leasing (4.2msf in 9MFY11) in 3Q (see Table 2). Despite DLF.s disclosure of 8.4msf of project pipeline under various stages of approval/launch for 4Q (see Table 7), we believe it is likely to miss its sales guidance of 12-15msf for FY11, due to sector headwinds (weakening affordability due to a spike in property prices and mortgage rates, and tightening liquidity) coupled with weak equity markets (restricting the flow of gains from investments in equity markets to real estate).

 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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