>DLF LIMITED (UBS)

Fair value conundrum

■ Promoter stake sale could sustain DLF’s premium valuation
A revival in overall confidence that could lead to higher-than-estimated volumes and ultimately a price recovery, recent steps by promoters to restore investor confidence and technical factors may ensure that DLF trades at a premium to its fair value based on cash flow and ROE trends. We increase our price to NAV to 1.2x, raise near-term launches/EPS/NAV, and upgrade our rating from Sell to Neutral. We remove our short-term Sell rating.

■ What do alternate valuation models suggest?
We looked at the residual income model and three-stage DCF to derive possible valuation scenarios and derived valuations between Rs260-300. At Rs300, the stock would trade at 2.2x FY10E book vs. the five-year average ROE of 11.5%. We think it not worthwhile to look at ROE over 2007-09 (average of 90%) to derive cycle ROE, as it was based on sales to DAL and “nil” cost land (both unsustainable).

■ Raise earnings estimates on better visibility and balance sheet
We increase our launch volume estimates for FY10/11 from 5.8msf/18.8msf to 20.6/27.9msf and introduce FY12 of 28.9msf. We expect pricing to improve from FY11 onwards at c10% pa. We estimate net debt-to-equity to improve from 76% in FY09 to 30% by FY11, on cash inflow from DAL and sales of non-core assets. We increase FY10E/11E EPS from Rs11.1/10.1 to Rs13.7/14.1 and introduce FY12E EPS of Rs16.0.

■ Valuation: raise 12-month price target from Rs160 to Rs270
Our price target is based on 1.2x NAV. Our main NAV assumptions are: 1) a property price increase of 10% pa from FY11-15E; 2) a WACC of 12.1%; and 3) value of projects for five years of launches + 1.2x land cost.


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