TΛTΛ Securities

Institutional Research
TΛTΛ Securities

DLF
Buy
Initiating Cov

09 March 2011 1
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Financial summary
CMP: Rs 223
Year-end Sales YoY EBITDA Undisputed
YoY NP YoY heavyweight
EPS YoY PE EV/EBITDA PSR PBR RoE RoCE
March (Rs mn) (%) (Rs mn) (%) (Rs mn) (%) (x) (x) (x) (x) (%)
(%)
(%) (Rs)
Target
FY2010
Price:
78,509 Rs
(24.7)255
39,396 Rising 17,198
(34.2) interest rates10.1
(61.5) are likely
(61.4) to impact
29.6 sales 6.49
19.7 and increase
2.16 6.3 interest
7.1
91,915 17.1 39,931 cost
1.4 burden
16,541 for
(3.8)DLF;
9.7however we believe
(3.8) 30.8 19.0 the 5.54
current
1.95 price
5.3 factors
6.5
Potential
FY2011E
Upside: 14%
103,739 12.9 44,546
FY2012E these concerns
11.6 20,085 21%more11.8
than 21.4
adequately.
25.3 We
17.0also 4.91
believe the 6.1
1.81 improving
7.0
FY2013E 105,676 1.9 46,504 cash
4.4 flows
21,688from8%operations
12.8 could
8.0 lower 14.6
23.6 the company’s
4.83 1.41debt,6.2 thereby
7.1

Key Statistics reducing the net debt/equity significantly to 0.5x in FY13. Thus, we
M cap (INR bn/USD mn) : initiate coverage on DLF with a Buy rating and a target price of
378/8,392 Rs255, 1x its FY12 NAV.
Avg 3m daily volume : 6,353,126
Avg 3m daily value : Key highlights
US$35.7mn
Shares O/S (mn) : 1,698 Net debt/equity to improve going forward: We expect the
Reuters : DLF.BO improving cash flow from operations will reduce the net debt/equity of
Bloomberg : DLFU IN the company from 1.13x in FY10 to 0.88x in FY12 and 0.47x in FY13.
Sensex : 18,440 Though the sale of non-core assets is likely to reduce this further, we
Nifty : 5,521 have not factored it in our estimates.
52-Wk High/Low : 398/209
Rental revenues set to increase: We estimate DLF’s rental
revenues could post a CAGR of 19% between FY11-13, as against 7%
Shareholding Pattern (Dec10)
(%) for the consolidated revenues of the company. The share of revenues
from rentals is expected to increase from 15.4% in FY10 to 17.6% in
7Pro
FY13.
8mo
1FII’ Margins to remain stable: Though DLF’s EBITDA margins are
. ter
5s
0
6MF unlikely to return to the historic high of above 50% due to the change
.
. s,
5
7Ot
5FIs in product mix, we expect margins will be stable at 43%, going
. he
& forward.
2rs
Ba
Analysts:
nk
s
Ashish Aggarwal Aggressive sales target: The company has guided for sales of
Email: ashish.aggarwal@tatacapital.com 12mn sq ft in FY11, despite selling only 6.46mn sq ft in 9MFY11. We
Tel: +91 22 6745 9166 believe the target is aggressive and hence have factored sales of 9mn
Dhruva Sabharwal, CFA® sq ft in FY11.
Email: dhruva.sabharwal@tatacapital.com
Tel: +91 22 6745 9177 Financials: We estimate DLF could report revenues of Rs104bn and
Rs106bn in FY12 and FY13 respectively. We further expect it to report
an EPS of Rs12 and Rs13 respectively during the same period.

Valuation: We have valued the leasing (Rent Co), development (Dev

Co), balance land bank and the hotel properties separately. DCF
method has been used to value the Dev Co and Rent Co, whereas
book value multiple has been used to value DLF’s remaining land
bank. Thus, we value the Dev Co at Rs90/share, Rent Co at
Rs64/share, balance land bank at Rs98/share, thereby implying 35%,
25% and 38% of our estimated NAV of Rs255/share.

09 March 2011 2
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Chart 1: Sales Volume

Source: Tata Securities Research.

Expect sales of 9mn sq ft in FY11 as against guidance of 12mn

sq ft: We believe DLF would not meet its FY11 guidance of 12mn sq ft
of sales as it has sold only 6.46mn sq ft in 9MFY11. Though the
company indicated this is due to the delay in approvals in certain
projects, we expect DLF to report sales of 9mn sq ft in FY11 and 12mn
sq ft in FY12 and FY13.

Rental revenues to increase going forward: We expect leasing

revenues to clock a CAGR of 19% in the next two years, as against the
company’s consolidated revenue CAGR of 7%. DLF has leased 5.15mn
sq ft in 9MFY11 and we expect the company to lease a total of 6mn sq
ft in FY11. For FY12-13, we estimate the company will lease 5mn sq ft,
thereby resulting in the share of leasing revenues increasing from 14%
of total revenues in FY11 to 18% in FY13. We also believe the growth in
the economy and a robust growth witnessed by the IT/ITES sector are
likely to result in strong leasing revenues.

Chart 2: EBITDA margins

Source: Tata Securities Research.

Margins expected to be stable: We expect the company’s EBITDA

margins to stabilise at 43%, despite rising input costs, due to a higher
share of revenues from rentals. However, margins are unlikely to be
above 50%, as was the case till FY10, due to the change in product
mix. DLF has also shifted from constructing super luxury/luxury
apartments to mid income apartments.

Chart 3: Net debt/equity

Source: Tata Securities Research.

Leverage to reduce going forward: We expect the company to

reduce its leverage going forward in line with it’s target of 0.5x. The
net debt/equity is expected to reduce from 1.13x in FY10 to 0.88x in
FY12 and 0.47x in FY13 on the back of improving operating cash flows.
Though DLF has plans to monetise its non-core assets, we have not
taken it in our estimates.

Chart 4: OCF vs interest outflow

Source: Tata Securities Research.

Increasing OCF and reducing interest outflow: We believe the

company will generate Operating Cash flow of Rs22.2bn and Rs38.8bn

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in FY12 and FY13 respectively and an interest outflow of Rs16bn and

Rs15.1bn in the same period.

Remains a land bank story: We have arrived at a per share price of

Rs255 for DLF using the NAV method. However, 38% of this share price
value pertains to its land bank, which we have valued using the
Multiple BV method. We believe the valuation of land bank is much
more subjective as the end use or project details are not ascertained
and thus the risk attributed to the land bank is higher vis-à-vis an
ongoing or future project.

Valuation
Rent Co
DLF’s leased assets: DLF at 3QFY11 end had 23.69mn sq ft of leased
assets which earned a rental income of Rs9.4bn. Also, around 15.7mn
sq ft is under construction, which is expected to be leased out in the
next few years. As the macro economic situation has improved and
IT/ITES sector is showing robust growth, we expect the entire 15.7mn
sq ft under construction would be leased out in the next four years. We
have valued the company’s leased assets using the DCF method at
Rs168bn or Rs64/share, with WACC of 13.5% and capitalisation rate of
11%.

Table 1: Rent Co valuation

Rent Co: Already leased 23.69 mn sq ft

Valuation Malls C Complexes Total
Area leased (mn sq ft) till 3QFY11 1.30 22.39 23.69
Rent Company: Lease payments received (Rs mn) 1,300 8,140 9,440
Total annualised revenues (Rs mn) 12,587
FY11E FY12E FY13E FY14E
Presently leased (mn sq ft) 23.69
Incremental area leased (mn sq ft) 0.85 5.00 5.00 4.08
Total area leased (mn sq ft) 24.54 29.54 35 39
Rental received from current leasing of 23.69 mn sq ft (Rs mn) 12,587 12,587 12,587 12,587
Incremental lease rental in Rs mn (15.8 mn sq ft) 468 3,222 5,976 8,641
Total lease rental (Rs mn) 13,055 15,809 18,562 21,228
Terminal year (Capitalisation rate: 11%) 192,982
Less: Construction cost to be incurred on incremental construction 9,694 11,680 11,680 11,306
Less: Maintenance charges (5% of gross rentals) 653 790 928 1,061
Discount factor 1.00 1.00 0.88 0.78
PV of cash flows 2,708 3,338 5,244 156,566
Total PV of cash flows (Rs mn) 167,857
Source: Tata Securities Research.

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Development Co
Of the 40.69mn sq ft which DLF is currently constructing, 35.7mn sq ft
consist of homes and the rest around 5mn sq ft are commercial
complexes. Till 3QFY11, it has sold 6.46mn sq ft of under construction
projects, totaling Rs48bn. In order to value the development part of the
business, we have assumed 12mn sq ft shall be sold by the company in
FY12 and FY13.

We have valued the development company using the DCF method at

Rs238bn or Rs90/share and taking WACC at 13.5%.

Table 2: Dev Co valuation

Sale price Avg cost

(Rs/sq ft) (Rs/sq ft)

Homes 6,062 2,212

C Complexes 12,871 3,380
% Under construction 78% 22%
Margin (Rs) 3,850 9,491

FY15 FY16
FY11E FY12E FY13E FY14E E E
Homes -mn sq ft - Sold & cash received 11.15 11.85 11.45 11.12 8.10 4.80
Commercial - mn sq ft - sold & cash received 0.88 1.25 1.38 1.50
31,18 18,48
Consolidated cash flows (Rs mn) 51,240 57,494 57,140 57,041 8 2
Discount factor 1.00 1.00 0.88 0.78 0.68 0.60
21,30 11,12
PV of cash flows (Rs mn) 51,240 57,494 50,325 44,246 6 0
Total PV of cash flows (Rs mn) 238,180
Source: Tata Securities Research.

Land bank
For valuing land, where the company has not yet commenced
construction, we have used the book value multiple depending on the
location of the land parcel. Of the 301mn sq ft, 56% of the land bank is
in Super Metro, 14% is in Tier I cities and the rest in Tier II and Tier III
cities. We also note around 75% of the land bank the company
currently has was acquired in the past five years; thus, we have valued
DLF’s land bank at Rs258bn or Rs98/share.

Table 3: Land bank valuation

Dev Co Rent Co Total

Land bank: mn sq ft 302 86 388
Less: Under construction (mn sq ft) 40 16 56
Less: Assumed to be Launched till FY15 (mn sq ft) 24
Less: Projects disposed off (net) 7
Balance B.V method (mn sq ft) 231 70 301

Land bank by location % of land Area Land cost B.V FMV

bank (mn sq ft) (Rs per sq multiple (Rs mn)
ft)
168,56
Super Metro 56% 168.56 400 2.50 0
55,38
Metro 23% 69.23 400 2.00 4
09 March 2011 5
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25,28
Tier I 14% 42.14 400 1.50 4
8,42
Tier II 7% 21.07 400 1.00 8
257,65
Total 301 6
Source: Tata Securities Research.

Hotel
DLF earned Rs2,270mn in FY10 from its hotel business. We have
valued the hotel business using EV/EBITDA of 10x and have arrived at
a valuation of Rs7,945mn, or Rs3/share.

Table 4: Hotel valuation

Hotel business revenue (FY10) (Rs mn) 2,270

EBITDA margin assumed at 35% 35%
EBITDA (Rs mn) 795
Enterprise value in Rs mn: using EV/Multiple (10x) 7,945
Source: Tata Securities Research.

Valuation summary
Using the SOTP valuation method, we have arrived at a per share price
of Rs255 for DLF with 38% of the value accruing from the land bank,
35% from Dev Co, 25% from Rent Co and 1% from the hotel business.

Chart 5: Contribution to NAV

Source: Tata Securities Research.

Sensitivity analysis
Our sensitivity analysis vis-à-vis construction cost and selling price
suggests that for every 1% increase in selling price, the NAV/share
increases by 1.16% and for every 100bps change in WACC impacts the
Rs/share by around Rs3.

DCF Sensitivity (share price in Rs)

WACC 11.5% 12.5% 13.5% 14.5% 15.5%

Share price (Rs) 261 258 255 252 249

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Financials

Profit & Loss (YE

(Rs Mn)
Net sales
YoY (% )

Total expenses
Cost of goods sold
Staff cost

09 March 2011 7
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Appendix
Delhi and Mumbai market: During the global meltdown, housing
prices in Delhi and Mumbai had corrected by about 25-30% but are
now, post recovery, at their 2008 peak level. We believe there is no
scope left to increase the housing prices in these two markets and the
extent of correction will mainly depend on the supply coming in these
areas.

Office space: The demand for office space was 19 mn sq ft in FY10

and we expect it would grow by about 25-40% in FY11, mainly due to
the higher absorption of property spaces by financial, pharmaceutical
and telecom sectors. The demand for office spaces is likely to stand
between 24-27 mn sq ft on the back of sustained IT industry activity,
impact of economic recovery on new economy sectors and global
optimism on corporate expansion.

Mumbai office market: This market witnessed a total demand of 6.8

mn sq ft in the three quarters of FY11 as compared to 3 mn sq ft for
FY10. Rentals in Mumbai have been stable due to high vacancy levels
and large supply anticipated at about 6 mn sq ft. We believe such large
supply coupled with high vacancy rates will put downward pressure on
some micro markets like Thane and Andheri.

Chart 1: Mumbai office market

Source: Cushman & Wakefield and Tata Securities Research.

Delhi office market: The total supply in CY10 decreased significantly

to 4.6 mn sq ft, which was 47% lower than CY09, while the total
demand for CY10 was 6.8 mn sq ft, which is more than double
compared to CY09. The leading absorption rates were seen in Gurgaon
at 59% and Noida at 36% during CY10.

While we expect buoyant demand for office space in the NCR region,
we do not expect much supply in this region. The uptick in demand
would be from corporates considering expansion or moving from CBD
prime (Connaught Place) to Gurgaon/Noida to cut their expenses.

Chart 2: Delhi office market

Source: Cushman & Wakefield and Tata Securities Research

Rentals remained stable during 2010 due to the excess supply and are
unlikely to rise in the next year. However, we expect certain locations
in Delhi and Mumbai to witness some upward movement of rental
values in 2011; the availability of office space stands at about 40 mn
sq ft across the country.

09 March 2011 8
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Tata Securities Limited

3rd Floor, One Forbes, Dr V.B. Gandhi Marg, Fort, Mumbai – 400 001
Tel: 91 22 6745 9000 Fax: 91 22 6610 6722
Web: www.tatasecurities.com

DISCLAIMER
Analyst Certification: We, Ashish Aggarwal and Dhruva Sabharwal, the research analyst and author
of this report, hereby certify that the views expressed in this research report accurately reflect our
personal views about the subject securities, issuers, products, sectors or industries. It is also certified
that no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to
the inclusion of specific recommendations or views in this research. The analyst(s), principally
responsible for the preparation of this research report, receives compensation based on overall
revenues of the company (Tata Securities Limited, hereinafter referred to as TSL) and has taken
reasonable care to achieve and maintain independence and objectivity in making any
recommendations.
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This report is for the personal information of the authorized recipient and does not construe to be any
investment, legal or taxation advice to you. TSL is not soliciting any action based upon it. Nothing in
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treated as endorsement of the views expressed in the report.

Disclosure of Interest Statement in DLF as on March 09, 2011

1. Name of the analyst: Ashish Aggarwal / Dhruva Sabharwal
2. Qualifications of the analyst: BE (Mechanical), PGPM / MSc, Fin,
CFA
3. Analysts’ ownership of any stock related to the information contained: NO
4. TSL ownership of any stock related to the information contained: NIL
5. Broking relationship with company covered: NO
6. Investment Banking relationship with company covered: NO

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09 March 2011 9
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TΛTΛ Securities

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09 March 2011 10