DLF - Debt reduction now a reality; initiating with a Buy - Anand Rathi

We believe that DLF, India's largest real estate company has crossed the critical junctures of interest rate overhang, adverse inflation and delayed executions. On the positive side, it should benefit from 1) Reduction in net debt (Rs.190bn by Mar'13 from Rs.235bn a year back) due to sale of non-core assets with prospects of further reduction by FY14e; 2) Increased sales volumes and deliveries resulting in improved cash flows; 3) higher annuity income from increase in leasing and lease renewals; 4) stable margins at 40-45%. Accordingly, we initiate coverage with a Buy rating and a price target of Rs.290.

- Further debt reduction on cards. Sale of non-core assets is as per expectations. DLF has inked deals for NTC mills, Mumbai, and Aman Resorts (ex Delhi Hotel) for Rs.27bn and $300m respectively. These would de-leverage its balance sheet and reduce debt to Rs.190bn by Mar'13 (from Rs.235bn in FY12). It aims to reduce debt by a further Rs.40bn next year from the sale of its wind turbines, issue of shares (to comply with publicshareholding norms) and other small-ticket sales.

- Operational improvement. After no launches in H1FY13, DLF has aimed at launches of 9-10m sq.ft in H2FY13, with ~8.5m sq.ft. likely to be in Gurgaon, msf in Lucknow and Bangalore each. This should improve cash flow through increased sales bookings. Delivery of 12-15m sq.ft. in H2FY13 is also likely to reduce costs and boost margin.

- Annuity income leading to stability. Annuity income in FY13 is expected to be Rs.19.6bn, against Rs.18bn in FY12. Going ahead, we believe leasing momentum should improve. The expected annuity income (Rs.22bn in FY14e) should be able to easily service the accompanying debt.

- Valuation. Attributing a 10% discount to the NAV of the company, we arrive at a fair value of Rs.290 for the stock, implying an upside of 29%from the current levels. Hence, we recommend a buy.

Source : Equity Bulls

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