Maintain buy on DLF as risk-reward attractive

We maintain our ‘buy’ rating on DLF with a 12-month price target of R280,which is based on a 30% discount to our NAV of R400.

Published: October 12, 2012 2:36:23 am

We maintain our ‘buy’ rating on DLF with a 12-month price target of R280,which is based on a 30% discount to our NAV of R400. The discount factors in delays in efforts to cut debt and slower-than-expected execution ramp-up. That said,we still believe DLF has a superior business model,good asset-geographic mix and strong growing rental income of R1,800 crore per annum,which differentiates it from peers.

We believe the negative sentiment on back of recent news of political links is largely priced in with the stock down 11% over the last week. DLF has denied and clarified the allegations,highlighting the company has not given any unsecured loan or sold any properties at below market rates for undue favours in land allocation.

Lack of clarity on whether increased media headlines on DLF’s political linkages could lead to an investigation by the authorities remains an overhang. We believe it will be difficult to investigate these allegations,given the issues are more politically motivated (a similar controversy on the Vadra–DLF link was raised in March 2011 but nothing materialised).

Also 3-4-year-old transactions (2008-09) and low levels of disclosure in the sector make it tough. Further,linkage of politicians with real estate developers has been a common concern in real estate development. Factoring all such instances,we do not expect any major negative impact for DLF.

We believe potential rate cuts and early debt reduction following more asset sale closures over next few months will revive stock sentiment we see this weakness as an attractive risk-reward opportunity. In our view,the de-leveraging seems to progressing well. We expect asset sale closures of R2,400-2,900 crore (Aman resorts,windpower) over the next 2–3 months as informal channel checks suggest Aman sale is in advanced stages of closure.

Further,with receipt of Mumbai land sale cash flow of R2,700 crore,we believe and early debt reduction of R2,000-3,000 crore by January 2013 (versus DLF R5,000-crore management guidance by March 2013) will help offset current negative sentiment.

We believe likely interest rate cuts of 100 bps followed by encouraging pre-sales in the second half of FY13 (Magnolias-II planned for launch) and scale-up in construction would be other positives.

UBS

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