>DLF Limited (INDIABULLS)

Battling the slowdown: DLF’s net sales for Q3’09 plunged 62.0% yoy due to a slump in property demand and a correction in property prices. This coupled with increased interest cost burden impacted the net profit, which fell 68.7% yoy. Sales volume unlikely to pick up substantially in the near-term: We believe that the current slowdown in the real estate sector is yet to bottom out and the pricing pressure should further intensify in Q4’09. We expect the property demand to remain weak at least over the next 2-3 quarters as expectations of a further fall in prices, worsening economic environment, and low loan-to-value ratios, are keeping the potential buyers away from entering the property market. Despite a 15%–20% decline in realty prices across segments in the last few months (discounts offered are higher in certain new launches) and a cut in interest rates, the sales volume has failed to pick-up, indicating a wait-and-watch approach being followed by the potential buyers.

Slowdown to have an extended effect on profitability: We believe that the expected decline in property prices/rental rates will drag DLF’s margin considerably downwards even after considering a reduction in construction costs. Moreover, the shift in the Company’s strategy towards low-margined middle income segment should negatively affect margins over the longer term. DLF is also delaying certain projects and changing current debt profile of short-term loans to long-term, which would increase the carrying cost of capital and thus impact net margins negatively.

Valuation: Our revised NAV–based fair value estimate of Rs. 146 reflects a downside of 16% from the current market price. We have reduced our fair value estimate to reflect a higher than-expected decline in property demand and prices in this quarter. Thus, we downgrade our rating from Hold to Sell.

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