Wednesday, June 13, 2012

>DLF LIMITED: Rentco build-out is still subdued

Making the right moves; debt reduction and asset sales remain key rating triggers

We think DLF is taking the right strategic steps in terms of: 1) getting debt under control via asset sales; 2) consolidating land bank back into performing geographies; 3) resolving execution by completely outsourcing to reputed Indian contractors; 4) focusing on improving infrastructure in Gurgaon; and 5)continued investment into select high-value rental assets. Results of this will likely show themselves over a 12-month horizon. In the interim, we see two main catalysts: 1) asset sales of three big-ticket deals; and 2) launch of a highend golf course project in Gurgaon in 2H. Given the macro we would like to wait for gearing to come down before turning more positive. Maintain Neutral.

Asset sales program expanded to Rs100B from Rs60B: DLF has increased the scope of its asset divestiture target to Rs100B. To date it has achieved Rs48B in asset sales and has thus clawed back roughly half of the equity raised in 2007. Currently there are three large deals i.e. NTC, Aman and Wind power, which if crystallize over the course of FY13 could raise additional Rs30-40B thus clearing gearing overhang.

Devco’s FY13 pre-sales target at Rs65B with 10-12msf of bookings: Overall the company is looking to continue with its focus on plotted and high-end launches to mitigate the impact of steep input price increases. This should then help maintain EBITDA margins in the range of 45%-50%. Presales in FY13 will be driven by launch of golf course project (Rs15B), residential launches in Gurgaon/Chennai and plotted developments in rest of the country. Prices in the core markets of Gurgaon/ New Gurgaon region have surpassed our bull-case assumptions despite the macro, in part driven by corporate movement out of Delhi.

Rentco build-out is still subdued given uncertain leasing environment; Cybercity in our view holds potential to show long-term rent growth: Target leasing for FY13 stands at a meager 2 msf (vs. peak levels of 8-10 msf). An uncertain macro and the company’s gearing have constrained growth here. However even at a subdued level we think a 15-20% growth in rentco is still achievable over 2-3 years.

To read report in detail: DLF LIMITED