Friday, May 8, 2009


Below expectations: Cash generation will be key; maintain Sell

What surprised us
DLF reported FY2009 net income of Rs46.3 bn, which was down 41% yoy, and 7% below our estimate. EBITDA margin for FY2009 was down to 60% from 69% in FY08. reflecting a fall in DLF Assets Limited (DAL) margins. Profit-before-tax margin for DAL stood at 57% for FY09 compared with 72% in FY08. In 4QFY2009, DLF took a one time charge of Rs3 bn on account of price resets and various customer schemes. DLF has withdrawn from 326mn sq ft of land resources, which includes Dankuni and Bidadi townships. It also deferred construction of some 26mn sq ft in FY2009.

What to do with the stock
We maintain our Sell rating and our 12-month target price of Rs124. DLF stock is up 31% in the past month vs. the Sensex up 15%, while results indicate that the backdrop remains challenging. DLF has indicated that it will focus on affordable housing, which we believe is the right strategy in the current difficult environment. Management has also refinanced debt and is looking to raise Rs55 bn from asset disposals. We believe the stock may remain on the sidelines until management is able to lower obligations to DAL-related debtors (DAL owes about Rs49 bn to DLF as at March 31 2009). Although the response to some middle income housing launches
has been encouraging, margins are lower and commercial lease volumes remain negligible. Risks include a significant pick up in sale/lease volume, cash flow from asset disposals and a favorable resolution on DAL debtors.

To see full report: DLF