Analyst Corner — DLF: Maintain ‘hold’, increase TP to Rs 280

Residential sales momentum has returned and company is more positive on future: DLF has achieved Rs 10billion of quarterly sales momentum for two consecutive quarters, which puts it firmly on track to achieve its target of Rs 40billion for FY22. The company even indicated that it has now started taking price increases for its products. With Rs 80 billion of inventory to be launched and another Rs 60billion already launched but yet to be sold, Rs 40billion is not an ambitious target. With new launches planned again, we will need to monitor positive cash flow generation. However, the elevation of the Group CFO to the CEO role gives us more confidence on the cash flow focus.

Commercial is still weak but we expect recovery in FY23: Like other commercial office spaces, DLF’s commercial office entity DCCDL has also been losing some occupancy and it is now (as of Q4 FY21) down to below 87% levels vs 90% in Q3. DLF has c4msf of office area under construction (over its base of 30.3msf) which will be ready over the next 18 months. We expect this to be a medium-term drag on the stock as new net leasing will likely be slow in the medium term.
Investment view: We believe DLF will continue to dominate the NCR residential market given its brand, availability of land bank and strong balance sheet. However, momentum in sales will have to be driven by new launches, which often drive up debt as well. We believe the last two quarters have revived some small- to mid-sized developers and they are now looking to launch new projects. This can potentially slow down market share gains for the large branded developers. However, valuations are pricing in a rapid increase in market share and often share price performance of the stock is driven by the movement of debt. Hence, we maintain our ‘hold’ rating.

Maintain ‘hold’ but increase target price to Rs 280: We tweak our earnings estimates by 0.3%-3% for FY22/23e to account for changes in launches. We introduce our FY24 estimates. We value the company on a DCF model of project cash flows. We assume a WACC of 12%, based on a risk-free rate of 5%, including country inflation premium of 2.5%, equity risk premium of 5.5%, in line with our global strategy team’s forecast; and a beta of 1.6 (all unchanged). We calculate our Mar’22 fair value by applying a discount of 11% (unchanged) at 1 standard deviation above mean (unchanged) discount to our NAV estimate of Rs 347 (earlier Rs 335). We discount it back by nine months (earlier one year) to arrive at our current fair value target price of Rs 280 (earlier Rs 270). Our TP implies 9.7% downside.