>DLF LIMITED (AMBIT CAPITAL)

Optimism Overplayed; maintain 'Sell'

The recent rally in DLF's stock price suggests that markets are factoring in a 'V' shaped recovery. However, we expect the recovery to be 'U' shaped, given the weak margins in affordable housing and the continued slowdown in commercial and retail demand; this will maintain pressure on NAV. We maintain 'Sell' on DLF with a revised TP of Rs157 (earlier Rs 80), a 56% downside from current levels.

Mkts pricing in 45% rise in property price-unsustainable
As per our sensitivity analysis, DLF's CMP (Rs354) is factoring in a 45% rise in property prices in FY10E, which, in our view is unsustainable. Our recent visits to Delhi and Bangalore suggest that the buyer continues to be price conscious due to fear of job losses.

Higher sales not to be margin accretive
Focus on affordable housing is likely to generate higher sales for DLF,but compress its EBITDA margins, from 55% in FY09 to 36 in FY10E. Moreover, with a price conscious buyer at one end and an oversupply situation on the other, DLF would find it extremely difficult to increase prices.

Sensitivity analysis to property price.
Our sensitivity analysis indicates that if property prices were to be increased by 50%, the NAV is 378. If the prices were to be increased by 100%, the NAV would rise to Rs 600. If we assume a price rise in FY12 and FY13 of 30% each, then the NAV would stand at Rs258.

Two-pronged strategy - maintain sales & lower debt
To ensure sales, DLF is pricing its residential projects lower than the existing prices in the vicinity. This strategy has already ensured success for DLF in Delhi and Bangalore. DLF is also selling its non-core assets and land to lower debt.

Valuation
We maintain 'Sell' on DLF with new TP of Rs 157 (earlier Rs80) that is based on 1x NAV. Our NAV factors in teh expected sale of non-core assets/land and reduction in debtor. We have also lowered the discount to NAV to nil due to the aggressive steps taken by DLF to improve its balance sheet. Currently, the stock trades at 42x FY10E earnings and 41x FY11E earnings

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