DLF - Hysteria creates new buying opportunity - Karvy

Over the last twelve months the share price of DLF has underperformed the Sensex by 20% and the stock is trading close to its 52-week low. The risks over deleveraging roadmap, margins recovery and pick up in new sales & cashflows seems overpriced as we derive comfort from (i) strong annuity asset mix (ii) successful high value Gurgaon Phase-V launches (iii) concrete non-core assets sale and; (iv) strong competitive positioning. Hysteria around stock price correction has created a new buying opportunity we initiate coverage with BUY stance and 42% upside.

High rank on competitive positioning - Top down & Bottoms up

We rate DLF highly on our competitive mapping of real estate developers in Northern India. Ability to acquire high quality lands, superior brand recall, robust business model mix and relatively healthy access to finance are the key contributing factors. DLF enjoys huge competitive advantage on low historical land cost in an unfavorable regulatory environment.

Annuity assets cashflows to add to incremental EBIDTA

DLF has guided for 7.5mn sqft of pre-sales for FY14E with an average realization of Rs8,000/sqft and sales value of Rs60bn. Sustainability of these premium launches is key deleveraging driver besides ramp up in annuity business alone has a potential to service interest expense from FY16-17E.

Non-core assets sale healthy; deleveraging at the horizon

DLF's divestment program is likely to bear fruit in FY14E as we expect the cashflows from the asset sales to get realized over FY14E and in addition to this non-core land sales can add another Rs6,500mn to the deleveraging. Beyond this DLF will have to look at core operational cashflows to chip in for any further debt reduction.

Initiate coverage with BUY: Target price Rs248/share

We initiate on the company with a BUY stance and a SOTP-based target price of Rs248/share. Our valuation is based on 0.8x our end-FY14E NAV forecast. We believe that the near-term catalysts are: (i) success of new launch; (ii) balance sheet deleveraging & (iii) margins improvements.

Key risks

(i) Unaffordability may lead to a 8-10% real estate price correction; (ii) CAPEX persistence (iii) adverse ruling on tax demands

Source : Equity Bulls

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