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DLF (DLFU IN) Summary

Core Content and Key Information

• Share Price: INR217
• Target Price: INR300 (+39%)
• Market Cap (USD): 6.6B
• Average Daily Trading Volume (USD): 5M
• Sector: Real Estate
• Investment Recommendation: BUY (unchanged)
• Valuation Metrics:
  • P/BV (FY16F): 1.2x (below five-year historical average of 1.5x)
  • NAV (INR/sh): INR375 (stock is at 42% discount to NAV)
  • EV/EBITDA (FY16E): 12.7x
  • Net Debt/Equity (%): 52.3 (reduced from 85.8 in FY12A)

Main Views and Analysis

Macro Environment and Demand Recovery

• The improving macro environment is expected to lead to a recovery in property demand.
• With Narendra Modi's leadership, GDP and IIP growth are projected to rise to 6% in two years.
• This should boost property demand in metro areas, especially for DLF, which has a strong track record and asset/geographic mix.

Balance Sheet Strengthening

• DLF has reduced its debt from INR227b in FY11 to INR173b in FY14, with a target of INR140b by FY16.
• Debt-to-equity ratio has dropped to 0.6x from 0.9x in FY11.
• The company has sold non-core assets and land parcels worth INR65b, including Mumbai land, Aman Resorts, and insurance business.

Presales and Earnings Outlook

• DLF expects steady presales of INR90b in the next two years, up from INR42b in FY14.
• EBITDA is forecasted to increase from INR36b in FY14 to INR43.6b in FY16.
• Core net profit is expected to grow at 60% CAGR from FY14 to FY17, driven by better margins and higher presales.

Valuation and NAV

• DLF's NAV is estimated at INR375/sh, with EV at INR470/sh.
• The company's current valuation is at a 20% discount to NAV, which is considered unjustified.
• The stock is trading at a 42% discount to NAV, despite a 50% recovery from recent lows.

Political and Regulatory Concerns

• Political controversies involving Robert Vadra and CCI penalties are considered overblown.
• The company is challenging the CCI penalty in the Supreme Court, and the maximum penalty is expected to be INR500-600m, not INR6.3b.

Industry and Market Position

• DLF is the largest developer in India and is expected to command a premium over domestic peers.
• The company's valuation is considered cheap based on P/BV and NAV metrics.
• DLF is expected to outperform peers due to its strong brand, asset mix, and geographic presence.

Key Markets: Gurgaon and Delhi

• Gurgaon: Accounts for 48% of DLF's residential land bank and 47% of the development company NAV.
  • Prime Gurgaon (1/3 of land bank): Prices > INR15,000/sqft, EBITDA margin 45-60%.
  • New Gurgaon (2/3 of land bank): Prices < INR6,000/sqft, EBITDA margin 45%.
• Delhi: Has two significant land parcels with high profitability.
  • Capital Greens: Presold with 45% margin.
  • GK (South-Ex): Expected 60% margin.

EBITDA Recovery and Revenue Recognition

• DLF's EBITDA is expected to recover to previous levels (INR80b) from INR36b in FY14.
• Revenue recognition under new accounting norms will start when 25% of construction costs are incurred, delaying P&L improvements but improving cash flow.

Investment Highlights

• The company is well-positioned to benefit from economic recovery and rising property demand.
• DLF is expected to generate significant cash flows from its asset sales and existing inventory.
• The company has a strong balance sheet and is focused on high-margin projects in prime locations.

Conclusion

DLF is a strong real estate player with a solid balance sheet and a favorable asset mix. Despite past controversies and a period of declining profits, the company is expected to recover and deliver strong earnings growth over the next few years. The stock is currently undervalued, trading at a discount to NAV and P/BV, and is poised to benefit from macroeconomic recovery and improved demand in key markets like Gurgaon and Delhi. The investment recommendation remains BUY, with a target price of INR300, which reflects a 20% discount to NAV.