>DLF (CLSA)

With no sign of a real recovery in the property market in 2009, DLF’s debt will remain high due to weak project-development cashflow. With stock down 85% from its January-2008 peak, the question is: when to buy? Factoring in lingering risks but also recognising the sizeable value of the firm’s assets, we see Rs104 as an attractive entry point, which implies 41% downside. However, on a 12-month view, we project 26% downsideas the PB multiple adjusts to reflect low ROE.

Safe entry point still 41% away
A Rs104 valuation only gives credit to DLF’s landbank and cashflow from projects under execution; it fully discounts the weak outlook for new-project launches. Using history as a guide, a sustainable upturn in property stocks appears to be another one-to-two years away. In the interim, we expect DLF to derate as the market recognises its severe ROE deterioration. We base our 12-month target price of Rs130 on a blend of NAV and PB multiples.

Residential not as lucrative
DLF’s strategy of leading price cuts in the residential segment has helped revive volumes, but we believe the initial positive response will peter out as buyers look for further price cuts. The double-whammy of narrower margins and elongated working-capital cycles will translate into an 82% fall in housing profits in 2008-10.

Steep fall in non-residential earnings
Representing about 75% of FY08 earnings, non-residential sales will fall 43% in FY09CL and a further 94% in FY10CL, given the severe slowdown in office and retail space. DLF has already stopped the sale of office assets to group company DLF Asset (DAL) given weak demand for leased space in special economic zones (SEZs). Rental income will provide support but, here too,
renegotiation risks exist. Consensus has built in a 32% earnings recovery from 3QFY09 forecasts which we believe is too optimistic.

Extended-balance-sheet stress
DLF’s balance sheet has geared up substantially due to large land payments and capital-intensive developments. Debt has risen 16x since June 2007 to Rs148bn. While the company has no major debt repayments until end-FY11 thanks to its recent refinancing, the squeeze on profit means that operating cashflow largely will be spent meeting annual interest payments of Rs18bn. Potential financial restructuring of DAL will further aggravate the cashflow issue as one of its investors needs to exit.

To see full report: DLF