>DLF (HSBC)

Upgrade to Neutral (V): Change in strategy is positive

• Q4 FY09 results disappoint, but the decision to pull out of long gestation projects is positive, in our view

• Cut-back in development pipeline is encouraging, as it should avoid strain on cash flow and strengthen the balance sheet

• Reduce NAV discount to factor in improved strategy; raise target to INR233 (INR140), upgrade to Neutral (V) from UW (V)

Disappointing results. DLF reported a 93% y-o-y drop in net profit to INR1.6bn, sharper than our estimate of 78% drop and consensus estimate of an c83% decline. The main reasons for the decline were the repricing of some projects (PBT impact of INR302m) and lower DLF Assets Ltd (DAL) revenues (85% y-o-y drop).

Pulling out from long gestation projects should improve business focus. DLF has pulled out of large township projects like Dankuni and Bidadi, which should improve its business focus on more profitable projects. Earlier, we had estimated that c50% of this development could materialise. We expect the market to view this as an acceptance of the difficulties in developing mega townships.

Moving away from such ambitious development plans is positive. DLF has further curtailed its development pipeline in commercial and retail segments, with its projects under construction coming down from c47m sq ft in Q3 FY09 to c21m sq ft in Q4 FY09. This should help DLF prioritise, and avoid strain on cash flows. We have cut our earnings forecast by c26% each in FY10e and FY11e to factor in a slower rate of development and lower prices.

Upgrade to Neutral (V) from UW (V); raise target price to INR233 (from INR140). We view the change in DLF’s development strategy as a positive move, which should help to cut balance sheet stress and improve business focus. While receivables from DAL are still an issue, improved market liquidity means an increased probability of DAL being able to source funding and repay DLF. This, we believe, should ease price/NAV compression for DLF. We hence lower our NAV discount to 10% from 50% previously. We have also rolled forward our NAV to FY10e after factoring in revised land estimates.

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