>DLF: Deleveraging hinges on launch of high-value residential projects

Non-core Asset Sales Right Move, But Not Enough 
DLF has sought its shareholders’ approval for divestment of its wind power business. As per media reports, the deal is likely to be closed in the next four-six weeks and might fetch Rs10bn. Further, DLF last week reported it has divested its entire stake in Adone Hotels and Hospitality for Rs5.7bn. Such non-core asset sales are in line with our expectation, helping its overall debt reduction strategy to some extent. We have factored in Rs35bn of non-core asset sales and expect the gearing level to decline marginally to 0.76x in FY13E from 0.83x in FY12. For any meaningful debt reduction, it has to be supported by strong pre-sales or higher non-core asset sales than expected. We remain sceptical on the pace of DLF’s non-core asset sales in the current environment and the deleveraging hinges on improvement in the launch of high-value residential apartments. Any delay in the launch of such high-value residential apartments would lead to equity dilution. We retain our Sell rating on DLF. 


Negative cash flow remains a concern: At the post 4QFY12 results conference call, DLF’s management had given a target of Rs30-40bn of non-core asset sales by the end of 1HFY13, which includes likely disinvestment of Aman Resorts, NTC mill land (Lower Parel, Mumbai) and wind power business. It also increased the overall target for asset divestment from Rs45bn to Rs100bn. Despite non-core asset sales of Rs30.5bn over FY10-12, cash flow after accounting for interest costs and capex remained negative at Rs16bn, indicating worsening cash flow situation from core operations. This was on account of cost escalation and shift in the product mix towards low-value plot sales, thereby impacting margins and pre-sales in FY12. 


Deleveraging hinges on launch of high-value residential projects: FY12 pre-sales were skewed towards low-value plot sales, resulting in an 18% YoY fall in pre-sales, despite a 32% YoY volume growth. We expect a similar trend to continue as the company intends to defer project execution risk apart from the risk of delay in approvals in the current environment. However, the management has given guidance regarding the launch of 2mn sq ft of high-end residential flats in Gurgaon Phase V (Magnolias) project in 2HFY13. We are factoring 30% of Magnolias launch in our pre-sales estimates in FY13E as absorption of such high end residential under current environment will be challenging in our view. 


Valuation: At the current market price, DLF trades at a 9% discount to our one-year forward NAV (Rs 204/share). We retain our Sell rating on the stock with a target price of Rs174 (15% discount to our NAV).
RISH TRADER