DLF - CMP: Rs.224.90, Target: Rs.263 - Consortium

DLF Ltd (DLFLTD) incorporated in 1963, is one of the largest real estate development companies in India, with a focus on residential, retail and commercial construction activities.

The company is promoted by Mr. K. P. Singh who has four decades of experience in the Indian real estate industry. DLF is one of the oldest and largest real estate developers in the country. It boasts a land bank of 348 msf and 50 msf of ongoing projects. It has a strong rental portfolio generating Rs. 16 bn of annualised cash flows. The company has an established presence across property development verticals, with a balanced project portfolio.

We believe that DLF's strategy of focusing on luxury residential projects and plotted developments backed by execution by best-in-class third party contractors as against in-house execution will result into stronger execution and superior cash flows.

After successive quarters of weak cash flows and a deteriorating balance sheet, DLF has reported improved cash flows and a reduction in debt, albeit marginal and backed by asset sales. Additionally, the management is guiding asset sales of Rs. 35-40 bn for FY13E, which will ease the debt burden and act as stock trigger.

Recent inflation numbers have surprised on the positive side, and recent commentary by RBI suggests interest rate cuts will resume soon. FDI in retail coupled with new land acquisition will benefit land owners. Real estate stocks are currently trading at attractive valuations, discounts to their NAVs. We believe it is the right time to buy the real estate stocks to capitalize on the same.

While DLF consummated asset sales of Rs. 31bn in H1FY13, management has guided for further asset sales of Aman Resorts and wind power business in H2FY13, leading to debt reduction, a key trigger for the stock. New project launches will bolster cash inflow going into FY14/FY15, boosting the company's operating cash flow. We value the company on SOTP basis at Rs. 263/share, implying that the stock is trading at 16% discount to fair value. Given these attractive valuations and its growth prospects, we believe the stock offers upside potential in the near term.

Source : Equity Bulls

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