Dlf Inc2
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Table of Contents
Rpt. 13252330 17-Mar-2008
DLF LTD BNP PARIBAS SECURITIES (ASIA) - MATHEW, SANDEEP, ET AL
2 - 37
Rpt. 13098313 01-Feb-2008
DLF LTD EDELWEISS CAPITAL LIMITED - SHAH, AKSHIT, ET AL
38 - 45
These reports were compiled using a product of Thomson Financial.
www.thomson.com/financial
1
DLF Ltd
DLFU IN
Sandeep Mathew (91 22) 6650 1665 S O
W H A T ?
T H E
India Financials/Real Estate B N P
DLF is at an inflection point in earnings growth. As the market matures, the Street will begin to shift attention to performance over assets. Shift to middle-income segment will drive volumes.
P A R I B A S
Initiation 17 March 2008 A N G L E
Net Profit 09 ...... INR97.6b
Target Price INR1,010.00
Diff from Consensus..(1.4%) Consensus (mean) ........INR98.9b Consensus (momentum) .......... Ï
Diff from Consensus..(3.8%) Consensus (median) INR1,050.00 Consensus (momentum) ..........Ï
Premium valuations warranted due to its ability to set new benchmarks.
BUY Recs in the Market Positive.....................................11 Neutral........................................3 Negative .....................................1 Consensus (momentum) ......... Ï
Current Price.... INR606.25 Upside/(Downside)............. 66.6%
Sources: Thomson One Analytics; Bloomberg; BNP Paribas estimates
Initiate with a BUY and TP of INR1,010 on India’s largest real-estate developer. It is at an inflection point in terms of execution and is positioned to deliver earnings growth. We are impressed with its ability to set new benchmarks, which is likely to yield premium valuations. High-quality land bank and asset mix will limit potential downside risk.
Follow the leader Market to see cycles; performance will provide upside Flow of institutional investment into India has set the stage for introduction of real-estate asset cycles, in our view. We believe performance (earnings) will be the catalyst for stocks in the sector while higher quality asset base will provide support to valuations.
Sandeep Mathew (91 22) 6650 1665 BNP Paribas India Solutions Pvt Ltd [email protected]
Avneesh Sukhija (91 22) 6650 1667 BNP Paribas India Solutions Pvt Ltd [email protected] Earnings Estimates And Valuation Ratios YE Mar (INR m)
Company at an inflection point; mid-income segment will be key growth driver to FY10 earnings We anticipate the residential segment will contribute approximately 50% to top-line growth by FY10, primarily driven by the middle-income segment. The recent success of its middle-income launches boosts our confidence in the company’s execution ability and we are confident about the its ability to deliver growth in excess of 20% annually. DLF’s differentiation warrants premium valuation DLF is setting new benchmarks in the real-estate industry in India, such as monetisation of assets through stake sales, high disclosure standards and ability to penetrate new markets. We believe these measures will enhance shareholder valuations.
2007
Revenue
2008E
19,336
72,071
97,612 115,125
Recurring net profit
19,336
72,071
97,612 115,125
Recurring EPS (INR)
12.64
42.17
57.11
67.36
Rec EPS growth (%)
370.4
233.5
35.4
17.9
48.0
14.4
10.6
9.0
—
—
—
—
EV/EBITDA (x)
18.7
11.5
8.8
7.5
Price/book (x)
26.1
5.3
3.5
2.5
ROE (%)
84.8
62.8
40.2
33.0
267.0
34.2
28.7
17.4
Recurring P/E (x) Dividend yield (%)
Net debt/equity (%)
Sources: DLF Ltd; BNP Paribas estimates
Share Price Daily vs MSCI
DLF Ltd Rel to MSCI India
(INR) 1,400
40
800
20
600 400 Jul-07
(%) 80 60
1,000
Sep-07
Next results/event Market cap (USD m)
Quality land bank and asset mix limits DLF downside risk We initiate coverage on DLF Ltd with a BUY and target price of INR1,010 implying 66.6% upside to the current market price. We have valued the company on 15x FY10E EPS at a premium to large China developers currently trading at 11x FY09E EPS. We believe Indian developers will trade at a premium to China peers due to a more conducive regulatory environment. Our projected FY08-10E EPS CAGR for DLF is 26.4%.
2010E
Reported net profit
1,200
DLF is a likely beneficiary of industry consolidation We believe the company’s aggressive pricing strategy to garner market share in new middle-income residential markets is beginning to strain smaller developers. A credit crunch due to lending restrictions in the sector could force some of the smaller players to exit. DLF with its wellcapitalised balance sheet is well-positioned to tap such opportunities.
2009E
40,533 132,960 194,374 230,302
12m avg daily turnover (USD m)
Dec-07
0 Mar-08 April 2008 25,563 91.0
Free float (%)
12
Major shareholder
Promoters (88%)
12m high/low (INR)
1,207.50/555.20
ADR (USD)
Nil
Avg daily turnover (USD m)
Nil
Discount/premium (%)
Nil
Disc/premium vs 52-wk avg (%)
Nil
Source: Datastream
Please see the important notice on the inside back cover.
2
SANDEEP
MATHEW
DLF
LTD
DLFU
IN
17
MARCH
2008
Contents Flow of institutional capital to accentuate real estate cycles in India............................. 3 Introduction of Foreign Direct Investments has set the stage rolling for accentuated real estate cycles in India. We encourage investors to look at real-estate stocks with good quality land bank, execution track record, strong balance sheet and most importantly ability to deliver consistent earnings growth.
Residential segment will be the focus ........................................................................... 5 Middle income segment is poised for rapid growth in India. DLF will launch almost one-third of its new projects targeting this segment over the next few years.
DLF warrants premium valuation................................................................................... 8 We like DLF’s ability to set new benchmarks in the industry such as monetisation of residential assets, improved disclosure standards, and ability to penetrate new regional markets which will likely yield it premium valuations.
Likely beneficiary of industry consolidation.................................................................. 10 DLF’s aggressive pricing strategy is beginning to strain smaller local developers. We believe DLF can benefit from potential acquisitions in new regional markets as availability of credit to the sector dries up due to stringent lending norms.
Quality land bank limits downside risks ....................................................................... 11 DLF has sufficient land banks to last it another 15 years. Exposure to various asset classes (residential, commercial and retail) limits its exposure to one particular asset cycle.
Strong execution capability.......................................................................................... 13 Joint venture with Laing O’Rourke Group in UK provides DLF a strong execution platform. Centralised procurement of raw materials provides DLF with economies of scale and protects it from a cyclical supply chain.
We prefer to value earnings rather than assets........................................................... 18 We believe the company has reached an inflection point with earnings becoming the more crucial component rather than land bank acquisition. So we believe the most appropriate way to value DLF will be on an earnings basis and use total NAV as a directional guideline.
Appendices .................................................................................................................. 21 1. Devil’s advocate: Risks to our investment case
21
2. DLF Projects list
22
3. Key company information
23
4. Corporate governance
24
5. Regulatory environment in India
25
Financial statements – P&L, Balance sheet and Cash flow ........................................ 27
Please see India Research Team list on page 29.
2
BNP
PARIBAS
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SANDEEP
MATHEW
INDUSTRY
DLF
LTD
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2008
OVERVIEW
Flow of institutional capital to accentuate real estate cycles in India 2005 signaled the introduction of Foreign Direct Investment (FDI) into the real estate sector in India. We believe FDI inflow increases the likelihood of deep and accentuated real-estate cycles since these investments are made with a fixed time horizon. The real-estate industry in India is a sunrise industry and has gained prominence following the public issuances by several real-estate companies in 2007. The sector is yet to witness a major cycle partly because investments made were proprietary and also because markets were not deep enough.
Has India witnessed a major real-estate asset cycle? Institutional money will introduce ‘deep and accentuated cycles’. Dealing with asset cycles – picking winners.
Exhibit 1: Flow Of FDI In Real Estate
(USD m) 1,513
1,600 1,400 1,200 1,000 800 600
467
400 200
38
0 2005-06
2006-07
2007-08*
*2007-08 figure is as of Dec’07 Sources: Finance Ministry; BNP Paribas estimates
Has India witnessed a major real-estate asset cycle? Investments in real estate in India were traditionally considered a ‘safe’ investment since there have been few instances of real-estate prices declining across India. The primary reason was a significant proportion of the investments in the sector until 2005 were proprietary investments (synonymous to real demand), meant for end use or where the investment horizon was not necessarily fixed. Hence, investors had the option of holding on to investments in anticipation of higher returns and the markets consequently never saw a deep real-estate asset cycle.
Proprietary investments do not accentuate real estate cycles
Institutional money will introduce ‘deep and accentuated’ cycles The increasing flow of institutional investment into the real-estate sector will introduce deep and accentuated real-estate cycles since these investments are made with a fixed time horizon. We believe the common myth of real-estate prices holding up forever is a thing of the past as investors now try to match returns over a specified time frame.
3
Institutional investments are made with a fixed time horizon in place
BNP
PARIBAS
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2008
Dealing with asset cycles Property prices in major cities in India have been steadily rising since 2000. The tightening of credit to real-estate companies and higher interest rates are beginning to stem property prices in overheated markets such as Bangalore. While we do not believe there will be a severe correction in property prices, we would advise investors to choose real-estate stocks selectively. We prefer real-estate stocks with good quality land banks, execution track records, strong balance sheets and, most importantly, an ability to deliver consistent earnings growth.
4
We prefer real-estate stocks with good quality land banks, execution track records, strong balance sheet and ability to deliver consistent earnings growth
BNP
PARIBAS
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INVESTMENT
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THESIS
Residential segment will be the focus We anticipate the residential segment will contribute approximately 50% to FY10 earnings from less than 20% in FY08. We believe the main growth engine for residential sales will be the middle-income residential segment.
Middle-income segment will be the key growth driver The middle-income residential segment in India is a key target market for most realestate developers. We define the middle-income segment as households with annual income between INR0.2m and INR1.0m, and low-income as households with annual income less than INR0.2m. According to the National Housing Board, the middle- and low-income segments constitute the largest proportion of housing shortage in India.
Middle-income housing shortage in India is projected at 0.25m households
Exhibit 2: Housing Shortages
(m households)
LIG
MIG and HIG
25.0
0.25
20.0 15.0 24.45 10.0 5.0 0.0 10th plan Sources: National Housing Board; BNP Paribas estimates
According to National Council for Applied and Economic Research (NCAER), the addition to middle-income households during the period FY05-10E will be approximately 12m households, showing the most growth among the three income groups. Exhibit 3: Growing Middle Income Segment (Number of
Additions
households ‘000)
Annual income
1995-96
2001-02
2005-06
2009-10E
Low income group Mid income group
(06-10E)
<5,000
160,077
176,640
185,525
189,698
4,173
5,000-25,000
4,532
10,746
16,395
28,441
12,046
>25,000
268
807
1,731
3,806
2,075
(USD)
High income group Sources: NCAER; BNP Paribas estimates
Key growth drivers for the increasing demand for middle-income housing include rising disposable income, increasing nuclearisation of families, increasing proportion of dualincome families, and a lower dependency ratio. DLF derives most of its revenues now from the commercial segment through sales to DLF Assets. For the nine months ended December 2007, sales to DLF Assets amounted to approximately INR5b, or 50% of total sales. In the residential segment, premium residential properties sold in Gurgaon (part of the National Capital region) have been the major contributor thus far. But, in future, we estimate that at least onethird of total launches will come from the middle-income residential segment.
5
One-third of future launches (of total area) likely to happen in middle-income residential segment
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2008
Exhibit 4: Current Middle-Income Residential Projects Project
Saleable area (m sqft)
Garden City – OMR Chennai
6.11
New Gurgaon
3.50
Indore Township
1.04
Sources: DLF Ltd; BNP Paribas estimates
Driving volumes through aggressive pricing DLF recently launched a number of new middle-income projects in Chennai, Indore, Kolkata and Gurgaon. The prices of these projects were at 10-20% discount to the prevailing market prices in a bid to gain market share. Consequently, competitors were forced to lower prices and/or offer discounts and special offers. Exhibit 5: DLF Sale Prices vs Competitors
(INR/sqft)
(INR/sqft)
Current DLF
4,000
Competition
Expected
3,500
DLF
Competition
3,000 3,000
2,500 2,000
2,000
1,500 1,000
1,000 500
0 Chennai
New Gurgaon
Indore
0
Kolkata
Bangalore
Cochin
Sources: DLF Ltd; BNP Paribas estimates
With steady margin gains Further to the launches, the company continues to look towards a sustainable pricing model targeting the actual home buyer rather than the investor. DLF still retains a healthy 40% gross margin on these projects due to lower cost of land bank and construction costs. DLF has launched its new middle-income residential projects on the peripheries of the cities, thus reducing land bank costs. Also, through partial presales the company is able to estimate demand for its projects and records bookings in a phased manner to maximise revenues. For instance, the Chennai project was launched at a base price of INR2,800 per sqft. in November 2007 and the current rate is approximately INR3,200 per sqft.
DLF is able to retain 40% margins in the middleincome projects
Pricing in line with affordability rates of middle-income groups We believe DLF’s pricing strategy for the middle-income residential segment is sustainable, since at these price levels home purchases are within the affordability levels of the large middle-income group in India. With interest rates likely to drop, we believe there is significant pent-up demand within the segment to absorb higher volumes. Furthermore, the recent moderation of personal income taxes have marginally improved affordability levels.
6
Softening of interest rates could be a key catalyst for the middle-income segment
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Exhibit 6: Affordability Levels Across Middle-Income Segment
(%)
Pre budget
Post budget
70 59.5 60
54.7
53.6
50.3
49.7
46.0
50 40 30 20 10 0 2008
2009
2010
Note: Pre – Tax Income: INR 0.5mn, Tax slabs as of Pre and Post Budget 2008. Debt/Equity Ratio – 0.7, Interest rate 11%, y/y Income Growth – 10%, Monthly EMI : INR .02m, Loan Tenure : 15 years Source: BNP Paribas estimates
IT/ITES slowdown will have a minimal impact on this segment Maximum contribution of IT/ITES industry to middleincome household growth (FY06-10E) is less than 18%
We believe end-user demand for middle-income housing projects is more broad-based and not concentrated across the IT and IT-enabled services (IT/ITES) industries alone. Matching NASSCOM’s projected IT/ITES employment figures to the projected middleincome household growth from NCAER data on Indian middle-class households suggest that the maximum contribution from the IT/ITES industry during FY05-10E will be only 17.8%. While a major portion of the current home buyers include IT/ITES professionals, rising income levels in other industry segments should favour a rise in middle-income housing demand. Exhibit 7: IT/ITES Contribution To Middle-income Growth Year-end 31 Mar
2005
2010E
Growth
Middle income population (households)
16,395,000
28,441,000
12,046,000
IT/ITES employment (No. of employees)
1,057,000
3,206,091
2,149,091
Max. contribution of IT to middle-income growth (%)
17.8
Sources: NASSCOM; NCAER; BNP Paribas estimates
Exhibit 8: Salary Increase Survey Top 5 industries indicating the highest salary increases
(y-y %)
2007
16
Industry
15
Real estate
2008E (%) 25.2
Industry
(%)
Real estate
25.0
14
(infrastructure)
13
Energy (oil/gas/coal)
19.0
Telecommunications
17.6
Retail (incl. Wholesale &
17.6
Energy (oil/gas/coal)
17.5
Telecommunications
17.2
Hospitality/restaurants
17.1
Banking/finance
16.4
Banking/finance
16.9
12
(infrastructure)
distribution)
11 10 9 8 2002
2003
2004
2005
2006
2007
2008E
Source: Hewitt Salary Increase Survey (2007-08)
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BNP
PARIBAS
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SANDEEP
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INVESTMENT
DLF
LTD
DLFU
IN
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MARCH
2008
THESIS
DLF warrants premium valuation DLF has set the benchmark in the real-estate industry for efficient cash-flow generation, and catering to demands of equity investors, which we believe enhances shareholder value. These will provide DLF with premium valuations over its peers.
Cash is king The real-estate business has long development cycles, which necessitates the injection of equity at different stages. DLF has sold 49% stake in eight residential projects to Merrill Lynch and Brahma Investments. We view the move as a safe derisking strategy while ensuring healthy cash flows to fund project requirements. Retaining a majority stake ensures project deadlines are met and also the company’s participation in potential upside.
Injection of private equity releases cash and reduces demand risk
Monetisation of stake: More is not necessarily better Unlike developed markets, where real-estate developers are looking to play the entire value chain (from land bank acquisition to finished product), we believe we will see a growing trend of developers focusing only on certain parts of the value chain in India. As the figure below indicates, the most attractive phase is land bank acquisition and approval, which provides high margins to a developer due to the cumbersome approvals process and requirement for local knowledge. The developer also bears execution and demand risks in this phase, and hence the higher margins should they choose to monetise the stake. Developers usually employ their own equity to purchase land banks for new projects. We believe we will see a growing trend of developers monetising stakes early in the project to release cash. This is a sustainable model for larger companies with significant development potential like DLF.
Emerging markets provide significant development potential. Developers can benefit by monetising stakes in projects early.
The construction phase is normally subcontracted to smaller regional construction companies on a cost + markup basis (usually 7-20% markup in India). Developers utilise debt and customer advances in this phase. The delivery phase encompasses the demand risk and returns tend to amplify based on end-user demand. As a developer plays the entire value chain, returns begin to contract over time.
Returns contract over time as a developer plays the entire value chain
Value addition (margins)
Exhibit 9: Early Monetisation Of Stake Enhances Return
Delivery Construction Approvals
Duration Approval risk Execution risk Demand risk Source: BNP Paribas estimates
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Catering to demands of investors – increasing disclosures provide better visibility The real-estate industry in India has been plagued with a lack of visibility due to its fragmented nature and lack of disclosure. The financial results of all the developers, with the exception of DLF, typically include only a quarterly income statement, which provides very little clarity on operations. DLF has begun to provide data on construction activity, bookings and average realisation rates on a quarterly basis across the residential, commercial and retail segments. We believe these data points help provide investors with a better understanding of results. We would also like to point out that part of the reason for DLF not providing full disclosure (such as detailed land bank) is due to the potential sensitivity of the information. Exhaustive disclosure of land bank acquisition details could erode the company’s competitive positioning in regional markets.
Additional disclosures including NAV can positively impact the stock
Exhibit 10: Quarterly Disclosures By DLF Increase Visibility Commercial segment (m sqft)
Super metros
Metros
Others
Total
Opening balance
8.45
1.11
1.91
11.48
Add : Lease booked during quarter
0.35
0.00
0.59
0.93
Add : Sales booked during quarter
1.15
0.70
0.49
2.35
Sales/leased booked
Less : Handed over
1.35
0.00
0.00
1.35
Closing balance
8.60
1.82
2.99
13.41
Under construction Opening balance
14.49
9.10
10.84
34.42
New launched
6.63
0.00
0.13
6.76
Handed over
1.35
0.00
0.00
1.35
19.77
9.10
10.97
39.83
11,392
6,289
6,174
8,769
Closing balance
Bookings provide a sense for end-user activity
Information on construction starts and completions
For sale business Wtd average rate sale price (INR/sqft) Wtd average land + const. cost + overheads (INR/sqft)
1,814
1,499
1,668
1,689
Margin
9,578
4,790
4,506
7,080
65
na
30
43
2,222
na
1,391
1,702
For lease business Wtd average rate lease price (INR/sqft) Wtd average land + const. cost (INR/sqft) Sources: DLF LTd; BNP Paribas estimates
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INVESTMENT
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2008
THESIS
Likely beneficiary of industry consolidation Aggressive pricing and tightening credit are beginning to affect smaller developers. DLF has a strong balance sheet, which will help it consolidate its position within the industry when the opportunity arises.
Tight bank lending norms to the sector causing a credit crunch DLF is well-positioned in the industry with relatively low gearing Price wars to impact smaller developers more
Tightening of credit within the segment The Reserve Bank of India (RBI) has tightened lending norms to real-estate developers causing a credit crunch in the real estate sector. Also, the US subprime-led global credit slowdown coupled with soaring residential property prices in India have forced banks to be more wary of funding real-estate developers.
RBI has been proactively tightening lending norms to the realty sector
Some measures introduced by RBI in the past include blocking lending by banks for purchases of land, and ensuring credit disbursal for funding ‘productive construction activity’ only. RBI has also raised the risk weights for capital allocation to 150 basis points on banks' exposure to commercial real-estate and home loans above INR2m.
DLF’s low leverage positions it strongly in the industry DLF has one of the lowest leverages (net debt/equity of 0.48x as of 3QFY08) within the real-estate sector in India, making it a potential beneficiary of consolidation within the sector. We believe DLF is likely to target acquisitions in some of its new regional markets so as to strengthen its positioning within those markets.
Acquisitions can strengthen DLF’s presence in new regional markets
Exhibit 11: Peer Group Comparison Company
Total land bank
Net debt
Equity
(m sqft)
(INR m)
(INR m)
Ansal's
170.5
(1,563)
9,090
(0.17)
DLF
748.0
84,643
176,858
0.48
Emaar MGF
567.3
40,888
17,910
2.28
HDIL
125.0
8,385
30,042
0.28
56.6
3,135
814
3.85
Omaxe
140.9
4,119
3,177
1.29
Parsvnath
191.1
1,286
18,093
0.07
Puravankara
124.8
3,069
11,869
0.26
Sobha Developers
174.8
8,799
8,563
1.03
Unitech
822.9
43,260
28,460
1.52
IVR PRIME
Net debt/equity
Sources: DLF Ltd; company data; BNP Paribas estimates
Price wars hurting smaller developers Our channel checks reveal that DLF’s aggressive pricing strategy is putting pressure on smaller developers in adjoining areas to lower prices. End-user demand is beginning to move towards DLF properties due to a higher perceived quality. Smaller developers’ margins are also under strain since their average cost of land acquisition is higher than that of DLF and price wars are beginning to affect their cash flows forcing them to introduce discounts and/or offer special incentives. We believe with real-estate sector in India being a highly fragmented market with smaller players having a strong regional focus, DLF should soon have good consolidation opportunities to tap into.
10
DLF has been able to attract ‘end-user’ demand in its new markets
BNP
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THESIS
Quality land bank limits downside risks With a current land bank of approximately 748m sqft and annualised run rate of 50m sqft, which DLF intends to achieve in a steady state, DLF’s land reserves will last for at least another 15 years. DLF’s high exposure to major cities, where rapid urbanisation is anticipated, is likely to help it navigate turbulent real-estate markets more effectively.
Sufficient land banks to last for another 15 years DLF has approximately 748m sqft of land, which should support its development plans for at least 15 years without further land bank additions. So the company has reached an inflection point in terms of growth with focus shifting from land bank acquisitions to development and successful completion of projects. Absence of any land-holding taxes in India (unlike China) increases the attractiveness of its current land bank.
Absence of land-holding tax in India provides developers with large land banks a headstart
Assessing land bank quality We believe DLF has a higher quality land bank in comparison to peers, with the highest pan-India exposure, a higher proportion of owned land bank, and lower land acquisition costs. Exposure to various asset classes enables DLF to realise higher margins while reducing significant exposure to one particular asset class. Exhibit 12: Ownership Status
JDA/JV 7%
Owned Land 93% Sources: DLF Ltd; BNP Paribas estimates
Land acquisition strategy Land-acquisition strategy is a key differentiator of developers in India. The average cost of land acquisition for DLF is only approximately INR324 per sqft despite high exposure to metropolitan cities. The three most common ways to acquire the land are through open auctions, purchase from farmers, and through pre-qualification of government tenders. DLF acquires land through all the three methods with the highest proportion of land being acquired through farmers. Hence, DLF’s average cost of land acquisition is cheaper in comparison to peers.
11
Average land bank cost is only INR324 per sqft despite high exposure to metropolitan cities
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Exhibit 13: Methods Of Land Acquisition Method
Description
Auction
Open auctions (private and government) High
Through farmers
Competition
Margins
Time frame to develop land
Low
Medium – Since the land is
award the highest bidder with the land
acquired from the private players
parcel
and approvals are still pending
Developers acquire agricultural land from Medium
High
Highest – Since agricultural land
farmers and convert it for a specific
needs can be used for commercial
purpose by paying the change of land
purpose only after obtaining
use (CLU) fee
approvals
Pre-qualification of
Government invites tenders from
tenders
qualified bidders for specific initiatives
Low
Medium
Lowest – Since land comes with most approvals
(low-cost housing, etc) Source: BNP Paribas estimates
Asset allocation not under developer’s discretion Allocation of asset class (residential, commercial and retail) in India is a function of the bylaws of state governments rather than the developer’s discretion. Hence, a vast majority of larger Indian developers will have higher exposure to the residential segment (approximately 70%). The remaining space is allocated to commercial and retail segments. The strategy that Indian developers, including DLF, employ is to acquire agricultural land from farmers on the outskirts of the city at cheaper prices and develop townships by paying a change of land use (CLU) fees. This is, however, applicable only if the land is within the master plan of the city. Master plans are revised usually only once in 15-20 years.
Asset allocation is a function of government bylaws and not the developer’s discretion
Pan-India exposure with strong presence in major metros We believe a key strength of DLF is its exposure to high-growth cities in India especially major cities. Approximately 81% of its current land bank is spread across the National Capital Region (Delhi, Gurgaon and Noida), Mumbai, Chennai, Bangalore and Kolkata. Approximately 85% of DLF’s current developments are focused in these high growth cities.
Around 85% of DLF’s current developments are focused in high-growth cities
Exhibit 14: Land Bank Comparison
Company
——— Super metro* ———
————— Metro** —————
Area % of total land bank
Area % of total land bank
–—— Tier-1 & Tier-2 –—— Area % of total land bank Total area
(m sqft)
(%)
(m sqft)
(%)
(m sqft)
(%)
DLF
265.0
35.4
346.0
46.3
137.0
18.3
748.0
Unitech
144.6
17.6
405.4
49.3
272.9
33.2
822.9
Emaar MGF
179.5
31.6
14.4
2.5
373.4
65.8
567.3 191.1
Parsvnath
(m sqft)
68.8
36.0
1.0
0.5
121.3
63.5
Puravankara
0.0
0.0
102.9
82.5
21.8
17.5
124.7
Sobha Developers
0.0
0.0
95.1
54.4
71.3
40.8
174.8
107.0
86.4
0.0
0.0
16.8
13.6
123.9
37.1
26.4
0.0
0.0
103.7
73.6
140.9
BNP
PARIBAS
HDIL Omaxe
* Super metro = National Capital Region and Mumbai Metropolitan Region, ** Metro = Kolkata, Chennai and Bangalore Sources: DLF Ltd; BNP Paribas estimates
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THESIS
Strong execution capability Given the aggressive expansion plans of DLF, a key question is the ability to execute. We believe DLF has the necessary resources and relationships in place to successfully execute on its ambitious targets. DLF-Laing O’Rourke is a key execution enabler
DLF has delivered approximately 11m sqft of constructed properties (residential, commercial and retail) in FY07. The company currently has 59m sqft under construction and aims to deliver 16m sqft in FY08 and 20-25m sqft in FY09. We believe DLF is well positioned to execute because:
The DLF-Laing O’Rourke venture, which constructs its larger projects, will aid execution
Its centralised supply chain provides economies of scale
Execution enabler – joint venture with Laing O’Rourke Laing O’Rourke is the largest privately-owned construction firm in the UK and has more than 100 years experience in the construction business. The group has expertise in developing properties and also in constructing roads, bridges, tunnels, pipelines, harbours, runways and power plants. It is present across Europe, Middle East and Asia. Major clients include Railtrack, Stanhope, Thames Water and Grosvenor Estates.
DLF Laing O’Rourke is working across asset classes
DLF currently has a 50:50 joint venture (JV) with Laing O’Rourke. The DLF-LoR JV is currently executing approximately 39m sqft of projects across India, which is approximately 68% of projects under construction. More importantly, the JV is working across different segments including residential (premium and middle-income), commercial and retail, and also hotels. We believe the JV provides DLF a strong execution platform to achieve its aggressive delivery plans in the coming years. Exhibit 15: DLF-Laing O’Rourke Projects Projects
Area
Status
Segment Residential
(m sqft) Magnolias, Gurgaon
2.50
In progress
Park Place, Gurgaon
4.25
In progress
Residential
Garden City - OMR Chennai
6.11
Launched
Residential
DLF Towers, Jasola
1.03
In progress
Commercial
DLF Technopolis, Bangalore
0.53
In progress
IT Parks/SEZ
IT Park, Bhubaneshwar
4.50
In progress
IT Parks/SEZ
Infocity, Chennai
4.50
In progress
IT Parks/SEZ
7B, Gurgaon
0.18
In progress
IT Parks/SEZ
IT Park Gachi Bowli Hyderabad
1.90
In progress
IT Parks/SEZ
IT Park , Kolkata
3.20
In progress
IT Parks/SEZ
3C Galaxy, Noida
1.75
In progress
IT Parks/SEZ
IT Park Rai
2.50
In progress
IT Parks/SEZ
IT Park, Silokhera
6.20
In progress
IT Parks/SEZ
Mall of India, Gurgaon
5.00
In progress
Retail
DLF Times Square, Noida
2.15
In progress
Retail
NTC Mall, Mumbai
2.69
In progress
Retail
Sources: DLF Ltd; BNP Paribas estimates
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Centralised supply chain ensures economies of scale A centralised supply chain ensures that major construction materials (steel, cement and concrete) are directly purchased by DLF, thus resulting in economies of scale. Furthermore, given the high volume of development, the company has entered into long-term contracts with its major supply-chain partners thus reducing its exposure to a cyclical supply chain.
Long-term agreements reduces pricing risks for key construction material
Asset mix will limit company’s exposure to one particular asset cycle Residential plot sales can accelerate sales and amplify margins DLF plans to sell an increasing proportion of plots in major cities, and Tier 1 and Tier 2 cities such as Gurgaon, Indore and Mohali in FY09 and FY10. This will help it to meet delivery targets, since plotted developments have smaller development timeframes. The major cost of plotted developments is land acquisition. Given DLF’s low-cost land bank, the company should be able to realise margins in excess of 80% through sale of plots. The sale of plots will also accelerate the cash flows. So we would not be entirely surprised to see larger-than-anticipated sale of plots over the next two years.
Plotted development could yield margins in excess of 80%
Exhibit 16: Region Wise Break Up Of Planned Plot Sales
Tier - II 3% Super Metros 29%
Tier - I 15%
Metros 53% Sources: DLF Ltd; BNP Paribas estimates
Brand value and track record are key differentiators that will help DLF among luxury/super luxury apartment seekers DLF has an established track record in the luxury and super luxury segment where it has already sold 17m sqft properties (to date). Thus, it has built itself a strong reputation among the prospective higher-income segment buyer. DLF is planning a super-luxury project in Mumbai (Tulsiwadi) and New Delhi (Chankyapuri). We believe the average realisation rates could well be in excess of INR30,000 per sqft given that both projects are located in prime locations within the major Central Business Districts. These projects are likely to benefit from supply inelasticity in these regions.
Super-luxury projects in prime locations in Mumbai and Delhi likely to see good demand
However, we remain cautious about projects in the luxury segment in other regions due to higher levels of speculative activity and we believe there is a stronger possibility of price moderation in this segment.
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Commercial properties likely to face some headwinds Commercial sales is currently DLF’s largest revenue stream with approximately 50% of sales being realised from one major customer – DLF Assets. But we anticipate the contribution to decrease to 30% by 2010 as sales from residential segment increase.
Major IT hubs could put a strain on development Roughly 20% of the land bank to be developed over the next two years is dedicated to the commercial segment. More than 80% of the commercial demand is generated by the IT/ITES industry. Hence, a slowdown in the sector can negatively impact volumes and we could potentially see delays in major IT hubs including Gurgaon, Bangalore, Chennai and Kolkata. DLF plans to develop approximately 7.6m sqft of commercial properties in these regions in FY09 and 10.6m sqft in FY10.
DLF plans to develop approximately 7.6m sqft of commercial properties in major IT hubs in FY09 and 10.6m sqft in FY10
Exhibit 17: DLF’s Planned Commercial Development
(mn sq ft)
Super Metros
Metros
Tier 1
8 7
7.5
Tier 2
6.9 5.6
6 5 4 3
2.7
3.1
3.2
2.5 2.0
2 1
1.7
1.5
1.4
0.3
0 2007-08
2008-09E
2009-10E
Sources: DLF Ltd; BNP Paribas estimates
However, DLF mitigates some of the risks well … Pre-sales/pre-lease mitigates occupancy risk to an extent DLF ties in approximately 60% of its developments with pre-lease/pre-sales, which provides it minimal occupancy risk while also providing it pricing leverage over the remaining 40% once the property is nearing completion. Corporate relationships DLF works in tandem with many large corporates and relies on the proposed business plans to choose development locales. Although pre-sales/pre-lease is a non-binding agreement, it provides DLF with visibility and a sense for prevailing market demand.
DLF plans new projects in conjunction with expansion plans of major corporates
Introduction of REITs in India could be a potential catalyst Introduction of REITs should lead to increased interest for Grade A office space in India. DLF has an established presence in the category, having delivered approximately 9m sqft of commercial office space over the past few years.
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2008
Too many malls spoiling the fun – we are cautious on retail growth Theme-based malls and partnerships minimises DLF’s retail risks DLF is beginning to build more theme-based and luxury malls across the country focused on jewellery, fashion, luxury, etc. The company has entered into strategic long-term partnerships with luxury brands such as Armani and Dolce & Gabbana for retail space. DLF also has a good in-house anchor tenant in DT Cinemas. DT Cinemas is DLF’s chain of multiplexes, which are located in most of DLF’s upcoming retail malls.
DLF has a good in-house anchor tenant in DT Cinemas
Exhibit 18: Retail Tie – Ups Company
DLF's stake Business segment
Relationship
(%) Armani
49 Retail – luxury
Armani, an Italian luxury fashion brand will set up its first store in New Delhi. The
Dolce&Gabbana
49 Retail – luxury
Dolce&Gabbana (D&G) is a high end fashion house. DLF will provide real estate
JV plans to supply the branded products to other retailers as well. and help D&G to scale up operations in India Sources: DLF Ltd; BNP Paribas estimates
Hospitality, asset management and Bidadi Township could provide additional upside DLF’s foray into the hospitality sector will result in the development of 20,000 rooms by 2013. DLF has recently acquired 50% stake in Aman Resorts, an international luxury resort chain (annual revenues of approximately USD50m), and has agreements with Hilton and Four Seasons to manage DLF’s hotel properties. DLF has signed a 39:61 JV agreement with Prudential Financial Inc to provide asset management services in India. The asset management venture is expected to make a total investment of INR2b with DLF contributing approximately 40%, with an expected ROI of 20%. DLF also has a 74:26 JV with Prudential Financial for life insurance services.
We have not factored any upside from hospitality, asset management and Bidadi township in our FY09 and FY10 estimates
DLF has entered into a 50:50 JV with Limitless Group, Dubai – a sister concern of Nakheel Group – to develop Bidadi Township near Bangalore. DLF’s share of development is approximately 125m sqft. The project is scheduled to begin in 2H08.
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Exhibit 19: DLF Partnerships JV/ Company
acquisition
DLF's Business stake segment
Relationship
(%) Laing O' Rourke
JV
50 Construction
(LOR)
LOR is a leading construction company in UK. LOR will provide DLF with construction expertise and the JV is currently developing 68% of DLF's projects. The JV is open to work for other clients as well.
WSP
JV
50 Construction
WSP brings engineering and design expertise and project management services. The specialist staff required to support the local contractors will be provided by WSP.
Aman Resorts
Acquisition
50 Luxury hotels
Aman Resorts owns 18 boutique resorts worldwide.The JV plans to develop 5,000 luxury hotel rooms in next five years.
Prudential
JV
Financial Inc
74 & 39 Life insurance & Asset mgmt services
Hilton Group
JV
74 Business hotels
DLF has tied up with Prudential Financial to provide life insurance and asset management services in India. The venture is part of DLF’s strategy to make optimum utilisation of its cash flows. The JV plans to develop 20,000 rooms in next five years. The first JV hotel (Hilton Garden Inn) is set to open in New Delhi by 2008.
Four Seasons
LoI
NA DLF Golf links
Four Seasons will manage DLF Golf Links, a proposed luxury hotel in
Limitless Group,
JV
50 Townships
The JV is setup to develop two mega township of almost 40,000 acres with an
Gurgaon. The hotel will have 230 rooms and will be open by end of 2010. Dubai Gayatri Projects
initial investment of USD10b. LoI
NA Infrastructure
The JV plans to bid for and develop infrastructure projects worth INR10b every year with DLF-LOR as the contractor for the projects.
Fraport AG
JV
NA Airport
Fraport AG is the owner and manager of Frankfurt airport. They plan to set up DLF Fraport SPV which will explore opportunities in airport development in India.
Sources: DLF Ltd; BNP Paribas estimates
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2008
VALUATION
We prefer to value earnings rather than assets We believe the company has reached an inflection point with earnings becoming the more crucial component rather than land bank acquisition. So we believe the most appropriate way to value DLF will be on an earnings basis and use total NAV as a directional guideline.
Price-earnings is a more accurate metric in our view We believe the future stock-price appreciation of larger developers in India such as DLF is going to be driven by earnings growth and not land bank acquisitions. The company has reached a steady state in land bank acquisitions in our view and future earnings will be used to replenish land bank addition.
What is an appropriate multiple to use? We have valued the company by using one-year forward P/E multiple of 15x on our FY10E EPS estimate of INR67.36. DLF currently trades at 10.7x FY09 EPS in comparison to peers at 15.9x FY09 EPS. We believe it is more appropriate to use a conservative P/E multiple since we anticipate EBITDA margins falling to around 65% as growth is driven by volumes in the middle-income residential segment. We anticipate EPS to grow at 26.4% CAGR over FY08-10, which we view as sustainable given its low-cost land bank. Peers indicate higher growth due to a lower base. Potential upside to our multiple exists because of DLF’s: 1) pan-India presence; 2) execution ability; and 3) higher proportion of investment properties, which will benefit from cap rate compressions.
We have used a conservative 15x P/E multiple to value DLF. Multiple expansion due to higher growth (excess of 20%) is likely
In comparison to international peers, especially the China developers, larger China developers are currently trading at 11.2x FY09E EPS. Furthermore, DLF also has a significantly larger land bank (approximately 748m sqft.) in comparison to its Chinese counterparts (highest being approximately 323m sqft. for China Vanke), which will support higher valuations.
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2008
Exhibit 20: Comparable Valuation Share Security
price (USD)
–——— Revenue –——— –———— EPS ————–
EPS growth
–———— P/E ————–
—— Mkt cap— 07-08E 08-09E 09-10E 07-08E 08-09E 09-10E 08-09E 09-10E 09-10E 08-09E 09-10E (LC m) (USD m) (USD m) (USD m) (USD m)
(USD)
(USD)
(USD)
(%)
(%)
India DLF* Unitech* Akruti City Anant Raj Industries
15.17 1,034,407
25,642
3,296
4,818
5,709
1.05
1.42
1.67
35.4
17.9
14.5
10.7
9.1
6.65
431,061
10,686
1,072
1,747
2,427
0.27
0.38
0.52
39.8
38.4
24.6
17.6
12.7
22.35
59,640
1,478
117
233
779
0.75
2.14
6.26
186.6
192.9
30.0
10.5
3.6
5.72
62,950
1,560
225
350
736
0.31
0.73
1.25
133.1
72.3
18.4
7.9
4.6
HDIL
15.41
132,077
3,274
559
892
1,357
1.29
1.96
2.83
51.5
44.4
11.9
7.9
5.5
Indiabulls Real Estate
12.35
119,009
2,950
150
177
724
0.36
0.36
1.20
0.0
230.6
34.0
34.0
10.3
5.14
35,651
884
624
960
1,247
0.66
1.00
1.72
52.5
71.5
7.8
5.1
3.0
Omaxe Parsvnath Developers Phoenix Mills Puravankara Sobha Developers
5.19
38,324
950
580
988
1,192
0.65
1.11
1.82
70.4
63.3
7.9
4.7
2.9
10.05
54,523
1,352
54
91
121
0.16
0.20
0.29
24.2
41.5
61.4
49.4
34.9
7.18
61,285
1,519
185
353
568
0.28
0.57
0.89
106.2
56.7
26.1
12.7
8.1
16.85
49,129
1,218
403
583
867
0.80
1.17
1.94
46.1
65.4
21.0
14.3
8.7
188,914
4,683
660
1,017
1,430
0.60
1.00
1.85
67.8
81.4
23.4
15.9
9.4
Average
China Large and regional developers China Overseas
1.58
95,113
12,194
2,181
3,353
4,467
0.07
0.10
0.13
48.2
32.4
23.6
15.9
12.0
CR Land
1.49
46,860
6,008
783
1,499
2,530
0.04
0.08
0.13
107.6
61.6
38.2
18.4
11.4
Country Garden
0.84
107,322
13,759
2,341
3,666
5,718
0.03
0.05
0.08
60.3
42.2
25.5
15.9
11.2
Agile
1.00
29,254
3,750
1,365
2,043
2,632
0.07
0.10
0.13
56.2
30.2
15.3
9.8
7.5
Guangzhou R&F
2.38
18,803
2,411
2,920
4,354
5,964
0.23
0.30
0.33
31.6
12.0
10.5
8.0
7.1
Hopson
1.35
15,430
1,978
1,345
1,683
2,106
0.18
0.27
0.35
53.0
29.9
7.6
5.0
3.8
New World China
0.61
18,208
2,334
447
864
2,865
0.04
0.05
0.10
32.6
104.3
15.9
12.0
5.9
Shimao
1.66
38,981
5,490
1,451
2,567
3,599
0.14
0.18
0.25
26.3
40.1
11.8
9.3
6.7
Greentown
1.02
11,117
1,566
961
1,199
1,849
0.11
0.17
0.24
57.4
44.1
9.6
6.1
4.2
42,343
5,499
1,254
1,930
2,885
0.08
0.12
0.16
52.6
44.1
17.6
11.2
7.8
Average
Small and city developers Guangzhou Inv
0.24
11,965
1,534
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
Beijing Capital Land
0.53
3,093
436
1,034
1,454
2,051
0.07
0.09
0.11
30.2
17.9
6.2
4.7
4.0
Shanghai Forte
0.47
3,325
468
880
1,105
1,964
0.06
0.07
0.08
27.3
11.5
7.7
6.0
5.4
Beijing North Star
0.55
2,369
334
767
1,001
NA
0.03
0.04
NA
34.4
NA
14.8
11.0
NA
CC Land
1.02
14,753
1,891
141
328
896
0.00
0.02
0.14
385.3
545.5
200.3
41.3
6.4
Shanghai Real Estate
0.21
3,751
481
507
486
675
0.03
0.03
0.04
18.2
9.6
6.2
5.3
4.8
6,542
857
666
875
1,397
0.04
0.05
0.09
99.1
146.1
47.0
13.7
5.2
Average
Note: Local currency for Indian developers is INR, and for Chinese developers is CNY and HKD Sources: DLF Ltd; company data; Bloomberg; BNP Paribas estimates
Our NAV estimate for DLF is INR804 per share Our net asset value (NAV) for DLF’s core business (residential, commercial, retail and hospitality) is INR804 per share. Our NAV calculation excludes the Bidadi Township, asset management business and infrastructure venture. The key assumptions used in arriving at our NAV calculation are shown below.
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Exhibit 21: NAV Assumptions WACC (%)
15
Issued shares (m)
1,705
Tax rate (%)
20
Price growth (y-y %)
5
Cost growth (y-y %)
5
Cap rate (%)
9
Bookings (%)
100
Sources: DLF Ltd; BNP Paribas estimates
Exhibit 22: NAV – Highly Sensitive To Price Increase, Project Delays And Bookings
14.0%
15.0%
16.0%
17.0%
1,028
986
946
909
875
5.0%
870
836
804
775
746
2.0%
733
706
680
656
634
(%)
8.0%
———————— WACC ————————
13.0%
Booking
Price
increase
———————— WACC ————————
13.0%
14.0%
15.0%
16.0%
17.0%
90%
764
734
705
679
654
95%
817
785
755
727
700
100%
870
836
804
775
746
delays
Project
———————— WACC ———————— 13.0%
14.0%
15.0%
16.0%
17.0%
1
767
730
695
663
633
0
870
836
804
775
746
(1)
987
958
930
904
879
Sources: Company reports; BNP Paribas estimates
Quarterly results likely to be lumpy DLF recognises revenues on a percentage of completion method, and hence quarterly results are likely to be lumpy. So, we prefer to look at the annual impact of results. But since DLF discloses bookings and construction details, we encourage investors to monitor the same on a quarterly basis. Due to the sale of a 49% stake in certain residential projects, the top-line will include the 100% consolidated revenue number with the 49% stake to be allocated from the minority interest line. Hence, it is necessary to focus on EPS rather than top-line growth.
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APPENDIX
DLF
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2008
1
Devil’s advocate: Risks to our investment case The property boom in India has led to growing concerns over unsustainable propertyprice appreciation. Volumes in the premium segment have slowed down though pricing has remained intact. Flow of institutional money (private equity and IPOs) has eased the pressure on developers who have thus far maintained pricing. A prolonged weakness in the market will impact volumes and pricing going forward. Other key risks to the DLF story include:
DLF Assets listing in the Singapore REITs market Delays in construction can negatively impact earnings Slowdown in demand for residential real estate in India Low float (approximately 12% of shares outstanding) increases stock volatility Political and regulatory risks Macro-economic risks including slowdown of GDP growth, higher interest rates, higher taxation, credit slowdown
DAL listing remains a question market DLF Assets (DAL) is a promoter-owned company that buys commercial properties from DLF at a predetermined cap rate (9%). DLF has thus far sold approximately10m sqft of commercial property to DAL. Approximately 30% (INR20b) of receivables of DLF is from DAL. DAL proposes to pay DLF by listing its assets in a REIT-like structure in Singapore. But given the recent weakness in the Singapore REIT markets, we believe DAL may find it difficult to list at an attractive yield. Hence the possibility of DLF shareholders benefiting from cap rate compression seems unlikely. If the DAL listing does not go through, the company will look at obtaining funding from privateequity investors. We believe the longer-term implication is that DLF will have to scout for new buyers for its commercial properties. We estimate commercial sales will contribute approximately INR93.4b (49% of total) to FY09E sales.
DAL currently accounts for 50% of total sales (9 months ended Dec 07)
Delays can hit earnings Our channel checks indicate that DLF is facing three to six months delays in some of its residential projects including Summit, Icon and Pinnacle in Gurgaon. Though we do not currently see the construction delays affecting results significantly, any further construction delays are expected to push back earnings since the company recognises revenues on the percentage of completion of total costs. The company also anticipates launching several new projects in FY09. Delays in new launches in excess of six months will likely impact earnings.
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APPENDIX
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2
Exhibit 2.1: Ongoing & Expected DLF Projects – Residential Project
City
Type Saleable area Scheduled launch (m sqft)
Bannerghatta road
Bangalore
Garden City - OMR
Residential
9.00
FY09E
Chennai
Residential
6.11
FY08
DLF Riverside
Cochin
Residential
0.52
FY08
Garden City, New Indore
Indore
Residential
1.04
FY08
Goa
Residential
2.49
FY08 FY09E
Goa Hyderabad
Hyderabad
Residential
11.41
Tulsiwadi
Mumbai
Residential
0.89
FY09E
Kakkanad
Cochin
Residential
5.39
FY09E
New Town Heights
Kolkata
Residential
1.37
FY08
Chanakyapuri
NCR - Delhi
Residential
1.84
FY09E
DLF Park Place
NCR – Gurgaon
Residential
2.20
FY07
Magnolias
NCR – Gurgaon
Residential
2.50
FY06
The Belaire
NCR – Gurgaon
Residential
1.30
FY07
The Summit
NCR – Gurgaon
Residential
0.70
FY03
The Icon
NCR – Gurgaon
Residential
1.00
FY04
The Pinnacle
NCR – Gurgaon
Residential
1.10
FY03
The Royalton towers
NCR – Gurgaon
Residential
0.20
FY04
Chandigarh
Residential
7.90
FY08
Panchkula Sources: DLF Ltd; BNP Paribas estimates
Exhibit 2.2: Ongoing And Expected Projects – Commercial Project
City
Type
Saleable area Scheduled launch
Bangalore
Commercial
1.35
DLF IT Park
Chandigarh
Commercial
0.65
FY08
DLF IT Park
Chennai
Commercial
6.64
FY08 FY08
(m sqft) DLF Technopolis
Gurgaon Hyderabad DLF IT Park 1 DLF Pune, Hingewadi
FY09E
Gurgaon
Commercial
20.35
Hyderabad
Commercial
6.95
FY08
Kolkata
Commercial
1.17
FY08
Pune
Commercial
3.36
FY09E
Sources: DLF Ltd; BNP Paribas estimates
Exhibit 2.3: Ongoing And Expected Projects – Retail Project
City
Type
Saleable area
Scheduled launch
(m sqft) Whitefield
Bangalore
Retail
0.72
FY09E
Gachibowli
Hyderabad
Retail
2.31
FY09E
Mumbai
Retail
1.69
FY08
NCR - Delhi
Retail
0.34
FY08
The Galleria, Mayur Vihar
NCR - Delhi
Retail
0.16
FY08
Courtyard, Saket
NCR – Delhi
Retail
0.25
FY08
Jasola Mall
NCR – Delhi
Retail
0.84
FY08
Emporio, Vasant Vihar
NCR – Delhi
Retail
0.33
FY08
NTC Mills South Court, Saket
Promenade, Vasant Vihar
NCR – Delhi
Retail
0.45
FY08
DT City Center, Shalimar Bagh
NCR – Delhi
Retail
0.26
FY08
Mall of India
NCR - Gurgaon
Retail
3.93
FY08
South Point
NCR – Gurgaon
Retail
0.17
FY08
Star Mall
NCR – Gurgaon
Retail
0.22
FY08
NCR – Noida
Retail
1.52
FY08
Townsquare Sources: DLF Ltd; BNP Paribas estimates
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Key company information Exhibit 3.1: Industry Data
Exhibit 3.2: Sales Breakdown – 9MFY08
Industry structure :
Fragmented
Customers :
DLF Assets account for 50% of sales currently
Competitors :
Unitech, Emaar MGF, Parsvnath and Omaxe
Markets :
Pan-India presence
Regulation :
Medium
DAL 50%
Non - DAL 50%
Source: BNP Paribas
Source: DLF Ltd; BNP Paribas estimates
Exhibit 3.3: Ownership Structure
Exhibit 3.4: Average Annual Cost Breakdown
Public shareholding 11.8%
Land cost 15.0%
Raw material 59.5%
Promoter and promoter group 88.2%
Wages 25.5%
DAL
Promoters
PE Investors
Sources: DLF Ltd; BNP Paribas estimates
Sources: DLF Ltd.; BNP Paribas estimates
Exhibit 3.5: Company Background
Exhibit 3.6: Major Institutional Holders
DLF Ltd is India's largest real-estate developer with a land bank of Holder name
% of outstanding shares
approximately 748m sqft. 81% of the company’s land bank is based in
(%)
Metropolitan regions in the country. The company is present across T Rowe Price
1.42
all three real estate verticals including residential, commercial and Federated Investment
0.42
retail. DLF’s business model is based on selling residential properties DWS Investments
0.46
and selling/ leasing its commercial/retail properties.
Sources: DLF Ltd; BNP Paribas
Aberdeen Investments
0.14
Capital International
0.08
Vanguard Group
0.08
SBI Fund Management
0.06
William Blair & Company
0.05
Nomura Asset Management
0.05
HSBC Investments
0.04
Sources: Bloomberg; BNP Paribas estimates
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Corporate governance Exhibit 4.1: Corporate Governance Matrix DLF
Benchmark
Size of the board
12
15
Percentage of independent directors on the board (%)
50
55
Director attendance at board meetings (%)
88
80
Board
Number of other directorships and committee memberships held by CEO CEO/MD and chairman role separation
1
3
Yes
Yes
Audit Frequency of audit committee meetings (%) Percentage of independent directors on the audit committee (%)
4
4
100
100
100
100
0
0
Compensation Percentage of independent directors on the board (%) Stock options being awarded to independent directors (%) Ownership Promoter group holding in company (%)
88
20
Cross holding across group companies (%)
Yes
No
Loan to subsidiaries
Yes
No
12
3
1
0
Number of sale/purchase transactions carried out by insiders Number of outstanding shareholder complaints Note: We have adjusted the data available for Infosys to create the benchmark Data taken from annual report 07 for Infosys All Data is as per the latest annual report available Sources: Company reports; BNP Paribas estimates
Exhibit 4.2: Key Management Personnel Key personnel
Designation
Description
Mr. K.P. Singh
Chairman
Mr. K.P. Singh has over 43 years of experience in the real estate industry. Prior to joining DLF Mr. Singh served in the Indian Army. Mr. Singh was the president of The Associated Chambers of Commerce and Industry in India (ASSOCHAM) in 1999.
Mr. Rajiv Singh
Vice Chairman
Mr. Rajiv Singh has over 25 years of experience in the real estate industry. He directs the strategy and oversees the various Business Segments of the company. He holds a degree in mechanical engineering from Massachusetts Institute of Technology, USA.
Mr. T.C. Goyal
Managing Director
Mr. Goyal has over 37 years of experience in finance and project counseling. He has been with DLF since 1981. Prior to joining DLF he was working with the Birla Group.
Ms. Pia Singh
Director
Ms. Pia Singh heads DT Cinemas and is also engaged in the retail operations of the company. Previously, she has worked with the risk undertaking department at GE Capital. She is a graduate from the Wharton School of Business.
Mr. Kameshwar Swarup Executive Director Legal
Mr.Swarup has over 44 years of management experience. He has worked as a senior member of the Delhi Stock Exchange of India and was also a member of various SEBI committees. He is a post graduate from the University of Lucknow and a qualified company secretary.
Mr. G.S. Talwar
Director
Mr. Talwar is founding Chairman and Managing Partner of Sabre Capital Worldwide, a private equity and investment company. Mr. Talwar is the first Asian to have become the Group Chief Executive of FTSE 25 company in the UK. He holds bachelor’s degree in economics from St. Stephen’s College, University of Delhi.
Sources: DLF Ltd; BNP Paribas
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Regulatory environment in India The legal structure of the real-estate industry in India is two-layered. The first layer consists of the laws developed by the central government and second is the state-level laws. Some of the important central government laws are stated below: Exhibit 5.1: Key Real-Estate Regulations Act
Overview
Impact
The Urban Land
The act limits the area that can be acquired by an entity in a
Introduced use of Special Purpose Vehicle (SPV) structures
Ceiling Act, 1976 region so that the government can use the land for social
to enable land aggregation.
and welfare schemes. The act has been repealed in most of the states. Maharashtra was the most recent one. Registration Act, The purpose of the act is to conserve evidence, assurances, In India clarity on the ownership of the land is a major 1908
title, publication of documents and prevention of fraud.
concern. The registration act helps to provide clarity on the ownership of the land.
The Indian
Stamp duty is to be paid on all documents that are
The high stamp duty encourages cash transactions in the
Stamp Act, 1899 registered, the percentage of stamp duty varies with each state (3% to 12%). Instruments that are not duly stamped
property market. Rationalization of stamp duties across states is an urgent issue that needs to be tackled.
are incapable of being admitted in court as evidence of the transaction contained. Source: Government of India
Special Economic Zones, Act, 2005 (SEZ): The SEZ act has been enacted for the establishment, development and management of the SEZs for the promotion of exports. An SEZ is specifically delineated duty-free enclave, deemed to be a foreign territory for the purposes of trade as well as duties and tariffs. A Board of Approval (BOA) has been set up by the Government to promote SEZs and ensure its orderly development.
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Exhibit 5.2: Procedure For Setting Up An SEZ By Developer
Procedure for setting up an SEZ
Application to the respective state government/BOA 45 days BOA communicates the decision to the Central Government 30 days
In-principal approval – valid for 1 year (if the land is not acquired)
Formal approval (if the land is acquired)
Developer gets back to the Gol, Moc and Doc with specific details of SEZ
If satisfied the Gol, Moc and Doc notifies the SEZ
Central Government appoint Development Commissioner to monitor the SEZ Note: BOA: Board of Approvals; GoI: Government of India; Moc: Ministry of Commerce; Doc: Department of Commerce Sources: Government of India; BNP Paribas estimates
FDI Regulations: As per Press note 2 of 2005, FDI of up to 100% under the automatic route is allowed in townships, housing, built-up infrastructure and construction development projects. FDI is subject to the following conditions Exhibit 5.3: Minimum Area To Be Developed Minimum area Development of serviced housing plots
10 hectares
Construction-development projects
Built up area of 50,000 sqm
Combination of the above two
Any of the above two
Source: Government of India
Exhibit 5.4: Minimum Capitalisation Requirement Minimum capital (USD m) Wholly owned subsidiaries
10
JV with Indian partners
5
Source: Government of India
Further, the funds are to be bought in within six months of the business. Original Investment is not to be repatriated before a period of three years from completion of minimum capitalisation. The investor is permitted to exit earlier with prior approval of the government through the Foreign Investment Promotion Board (FIPB). At least 50% of the project should be completed within five years. The investor would not be permitted to sell undeveloped plots.
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STATEMENTS
DLF Ltd Profit and Loss (INR m) Year Ending March
2006A
2007A
2008E
2009E
2010E
Revenue Cost of sales ex depreciation Gross profit ex depreciation Other operating income Operating costs Operating EBITDA Depreciation Goodwill amortisation Operating EBIT Net financing costs Associates Recurring non operating income Non recurring items Profit before tax Tax Profit after tax Minority interests Preferred dividends Other items Reported net profit Non recurring items & goodwill (net) Recurring net profit
19,602 (9,286) 10,317 (1,572) 8,745 (358) 8,387 (1,685) 6,702 (2,590) 4,112 (10) 8 4,110 4,110
40,533 (7,278) 33,255 (4,199) 29,056 (578) 28,478 (3,076) 25,402 (6,052) 19,350 (11) (2) 19,336 19,336
132,960 (33,057) 99,903 (7,527) 92,375 (593) 91,783 (2,825) 88,957 (16,875) 72,083 (63) 51 72,071 72,071
194,374 (59,844) 134,530 (8,093) 126,437 (726) 125,711 (3,696) 122,015 (24,403) 97,612 97,612 97,612
230,302 (70,923) 159,378 (10,015) 149,363 (837) 148,526 (4,620) 143,906 (28,781) 115,125 115,125 115,125
Per share (INR) Recurring EPS * Reported EPS DPS
2.69 2.69 -
12.64 12.64 -
42.17 42.27 -
57.11 57.26 -
67.36 67.53 -
-
106.8 232.3 239.6 370.4 370.4
228.0 217.9 222.3 233.5 234.4
46.2 36.9 37.0 35.4 35.4
18.5 18.1 18.1 17.9 17.9
Operating performance Gross margin inc depreciation (%) 50.8 Operating EBITDA margin (%) 44.6 Operating EBIT margin (%) 42.8 Net margin (%) 21.0 Effective tax rate (%) 38.7 Dividend payout on recurring profit (%) Interest cover (x) 5.0 Inventory days 346.1 Debtor days 122.5 Creditor days 574.7 Operating ROIC (%) 30.9 Operating ROIC - WACC (%) 14.0 ROIC (%) 21.2 ROIC - WACC (%) 4.3 ROE (%) 81.9 ROA (%) 15.1 * Pre exceptional, pre-goodwill and fully diluted
80.6 71.7 70.3 47.7 23.8 9.3 1645.1 97.4 1197.3 22.5 5.6 19.4 2.4 84.8 17.1
74.7 69.5 69.0 54.2 19.0 32.5 934.5 97.8 352.9 31.5 14.5 28.5 11.6 62.8 28.3
68.8 65.0 64.7 50.2 20.0 34.0 803.3 123.7 234.1 26.7 9.8 24.4 7.5 40.2 25.1
68.8 64.9 64.5 50.0 20.0 32.1 950.9 132.0 258.8 23.5 6.6 22.0 5.0 33.0 22.8
Key Assumptions (INR m)
2007A
2008E
2009E
2010E
5.00
5.00
20.00
20.00
20.00
20.00
Growth Revenue (%) Operating EBITDA (%) Operating EBIT (%) Recurring EPS (%) Reported EPS (%)
2006A
Annual price growth (%) Average const. cost (INR 1500 - 3000) Maintenance margins Estimated project duration (2-3 yrs) Tax rate
Revenue By Division (INR m) Residential - Sales Commercial - Sales Retail - Sales Lease and Maintenance Others
2006A
19,602
2007A
40,533
2008E
2009E
2010E
132,960
69,463 93,414 18,365 11,751 1,381
119,558 65,592 23,790 19,582 1,780
Residential sales will contribute approximately 50% to FY10 sales
EBITDA margins to decline to 65% by 2010 due to higher middleincome sales
Tax rates to remain at 20% due to SPV-based structure
Sources: DLF Ltd; BNP Paribas estimates
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Cash Flow (INR m) Year Ending March
2006A
2007A
2008E
2009E
2010E
Recurring net profit Depreciation Associates & minorities Other non-cash items Recurring cash flow Change in working capital Capex - maintenance Capex - new investment Free cash flow to equity Net acquisitions & disposals Dividends paid Non recurring cash flows Net cash flow Equity finance Debt finance Movement in cash
4,110 358 10 4,478 (6,467) (1,989) (16) (15,384) (17,388) 31,987 14,599
19,336 578 11 19,926 (79,504) (21,620) (81,199) (18) 15,908 (65,308) 5 67,509 2,205
72,071 593 63 72,726 (114,512) 1,738 (40,047) (7,978) (13,206) (61,231) 88,665 (6,925) 20,509
97,612 726 98,338 (86,361) (29,094) (17,117) (17,117) (17,117)
115,125 837 115,962 (94,708) (8,058) 13,196 13,196 13,196
2.93 (1.30)
13.03 (53.09)
42.66 (23.49)
57.68 (10.04)
Per share (INR) Recurring cash flow per share FCF to equity per share
2006A
2007A
2008E
2009E
2010E
Working capital assets Working capital liabilities Net working capital Tangible fixed assets Operating invested capital Goodwill Other intangible assets Investments Other assets Invested capital
26,182 (14,621) 11,561 24,799 36,359 8,500 8,149 3 53,011
124,188 (33,124) 91,065 41,851 132,916 8,935 2,107 143,958
236,373 (30,796) 205,577 52,027 257,604 16,223 13,489 287,316
337,914 (45,976) 291,938 80,395 372,333 16,223 13,489 402,045
441,242 (54,596) 386,646 87,616 474,262 16,223 13,489 503,974
Cash & equivalents (1,950) (4,155) (24,664) Short term debt Long term debt * 41,320 99,327 92,403 Net debt 39,371 95,172 67,739 Deferred tax 183 197 463 Other liabilities 3,364 12,948 21,139 Total equity 10,038 35,549 194,132 Minority interests 54 92 3,843 Invested capital 53,011 143,958 287,316 * Includes convertibles and preferred stock which is being treated as debt
(7,547) 92,403 84,856 463 21,139 291,744 3,843 402,045
(20,743) 92,403 71,660 463 21,139 406,869 3,843 503,974
171.13 161.61
238.65 229.14
28.7 18.6 7.5 4.2
17.4 12.4 8.5 5.6
2008E
2009E
2010E
Recurring P/E (x) * 225.6 48.0 14.4 Recurring P/E @ target price (x) * 375.8 79.9 24.0 Reported P/E (x) 225.6 48.0 14.3 Dividend yield (%) P/CF (x) 207.1 46.5 14.2 P/FCF (x) neg neg neg Price/book (x) 2.3 26.1 5.3 Price/tangible book (x) 14.9 34.8 5.8 EV/EBITDA (x) ** 7.1 18.7 11.5 EV/EBITDA @ target price (x) ** 8.9 29.6 18.6 EV/invested capital (x) 1.2 7.1 3.8 * Pre exceptional, pre-goodwill and fully diluted ** EBITDA includes associate income and recurring non-operating income
10.6 17.7 10.6 10.5 neg 3.5 3.8 8.8 14.3 2.8
9.0 15.0 9.0 8.9 78.3 2.5 2.6 7.5 12.1 2.2
Financial strength Net debt/equity (%) Net debt/total assets (%) Current ratio (x) CF interest cover (x)
Valuation
265.02 40.62
23.24 17.40
390.1 56.6 1.9 3.7
267.0 52.5 3.9 (18.4)
2006A
2007A
113.87 104.35 34.2 19.8 8.5 (13.8)
2008
68.02 7.74
Balance Sheet (INR m) Year Ending March
Per share (INR) Book value per share Tangible book value per share
MARCH
DLF has one of the lowest debt/equity ratios amongst Indian real estate companies
Sources: DLF Ltd; BNP Paribas estimates
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India Research Team Praveen Chakravarty
Preeti Dubey, CFA
Karan Gupta
Head of India Research BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1696 [email protected]
Metals & Mining BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1671 [email protected]
Metals & Mining (Associate) BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1662 [email protected]
Vishal Sharma
Shashank Abhisheik
Sandeep Mathew
Infrastructure - E&C BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1672 [email protected]
Infrastructure - E&C (Associate) BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1673 [email protected]
Real Estate BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1665 [email protected]
Avneesh Sukhija
Lakshminarayana Ganti
Charanjit Singh
Real Estate (Associate) BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1667 [email protected]
Capital Goods/Cement BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1676 [email protected]
Capital Goods/Cement (Associate) BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1686 [email protected]
Girish Nair
Sriram Somayajula
Amit Shah
Utilities BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1679 [email protected]
Utilities (Associate) BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1670 [email protected]
Oil & Gas BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1664 [email protected]
Alok Deshpande
Abhiram Eleswarapu
Avinash Singh
Oil & Gas (Associate) BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1663 [email protected]
Tech - IT BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1684 [email protected]
Tech - IT (Associate) BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1685 [email protected]
Sameer Naringrekar
Kunal Vora, CFA
Vijay Sarathi, CFA
Tech - Telecom BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1674 [email protected]
Tech - Telecom (Associate) BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1675 [email protected]
Financial Services BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1677 [email protected]
Abhishek Bhattacharya
Joseph George
Manish A Gupta
Financial Services (Associate) BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1678 [email protected]
Consumer BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1669 [email protected]
Consumer (Associate) BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1668 [email protected]
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DISCLAIMERS
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DISCLOSURES
This report was produced by a member company of the BNP Paribas Group (“Group”). This report is for the use of intended recipients only and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without our prior written consent. By accepting this report, the recipient agrees to be bound by the terms and limitations set out herein. The information contained in this report has been obtained from public sources believed to be reliable and the opinions contained herein are expressions of belief based on such information. No representation or warranty, express or implied, is made that such information or opinions is accurate, complete or verified and it should not be relied upon as such. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy or sell any securities or other investments. Information and opinions contained in this report are published for reference of the recipients and are not to be relied upon as authoritative or without the recipient’s own independent verification or taken in substitution for the exercise of judgement by the recipient. All opinions contained herein constitute the views of the analyst(s) named in this report, they are subject to change without notice and are not intended to provide the sole basis of any evaluation of the subject securities and companies mentioned in this report. Any reference to past performance should not be taken as an indication of future performance. No member company of the Group accepts any liability whatsoever for any direct or consequential loss arising from any use of the materials contained in this report. The analyst(s) named in this report certifies that (i) all views expressed in this report accurately reflect the personal views of the analyst(s) with regard to any and all of the subject securities and companies mentioned in this report and (ii) no part of the compensation of the analyst(s) was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed herein. This report is prepared for professional investors and is being distributed in Hong Kong by BNP Paribas Securities (Asia) Limited to persons whose business involves the acquisition, disposal or holding of securities, whether as principal or agent. BNP Paribas Securities (Asia) Limited, a subsidiary of BNP Paribas, is regulated by the Securities and Futures Commission for the conduct of dealing in securities and advising on securities. This report is being distributed in the United Kingdom by BNP Paribas London Branch to persons who are not private customers as defined under U.K. securities regulations. BNP Paribas London Branch, a branch of BNP Paribas, is regulated by the Financial Services Authority for the conduct of its designated investment business in the U.K. This report is being distributed in the United States by BNP Paribas Securities Corporation to U.S. Persons as defined under U.S. securities regulations or by a member of the Group that is not registered as a U.S. broker-dealer to major U.S. institutional investors. BNP Paribas Securities Corporation, a subsidiary of BNP Paribas, is a broker-dealer registered with the Securities and Exchange Commission. BNP Paribas Securities Corporation accepts responsibility for the contents of this report only where the report has been distributed by it to U.S. recipients. Distribution or publication of this report in any other places to persons which are not permitted under the applicable laws or regulations of such places is strictly prohibited. Recommendation structure
All share prices are as at market close on 13 March 2008 unless otherwise stated. Stock recommendations are based on absolute upside (downside), which we define as (target price* - current price) / current price. If the upside is 10% or more, the recommendation is BUY. If the downside is 10% or more, the recommendation is REDUCE. For stocks where the upside or downside is less than 10%, the recommendation is HOLD. In addition, we have key buy and key sell lists in each market, which are our most commercial and/or actionable BUY and REDUCE calls and are limited to at most five key buys and five key sells in each market at any point in time. Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on market price and the formal recommendation. *In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value. Sector recommendations are based on: OVERWEIGHT – Sector coverage universe fundamentals are improving. NEUTRAL – Sector coverage universe fundamentals are steady, neither improving nor deteriorating. UNDERWEIGHT – Sector coverage universe fundamentals are deteriorating. © 2008 BNP Paribas Group
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37
India Equity Research | Real Estate DLF
Result Update
DLF
INR 813
Growth intact; attractive valuation
BUY
DLF’s Q3FY08 results were in line with our expectations both in terms of revenues and EBITDA margins. However, net profit was higher than our expectations primarily due to
February 1, 2008
lower interest charges and tax rates. Revenue grew at 11% Q-o-Q to INR 36 bn against INR 32.5 bn and EBITDA margins grew at 10.5% Q-o-Q to INR 25 bn against INR 23 bn. Net profit was up 6% Q-o-Q at INR 21 bn against INR 20 bn. The company has invested in wind power and benefits from thereon have resulted in tax depreciation, which in turn has led to lower tax provision at 13% against 28% in Q1FY08.
Akshit Shah +91-22-4019 4714 [email protected] Sachin Sharma +91-22-4019 4510 [email protected]
Outlook and valuations: Attractive; upgrade to BUY We are reducing DLF’s tax rate to 20% against 30% earlier. This is due to the lower taxation rate attracted by the company in the past two quarters and the guidance from the management for the years to come. We continue to believe that being the industry leader with a huge quality land bank, DLF is among the best companies in the listed real estate space in India. We have valued its existing land bank at INR 843 per share. While valuing commercial and retail properties, we have capitalized lease rentals at a discounted cap rate of 9%, which takes into account part benefit from the listing of the REIT. Further benefit of cap rate compression could be higher, but to incorporate the additional benefit we would like to wait for the listing of its
Reuters
:
DLF.BO
Bloomberg
:
DLFU IN
52-week range (INR)
:
1,225 / 505
Shares in issue (mn)
:
1,704.8
M cap (INR bn/USD mn)
: 1,385 / 35,177
REIT. Also, we have applied 50% probability discount to its SEZ business due to lack of visibility on the land acquisition process. We have valued other businesses together at INR 148 per share. The company’s total NAV comes to INR 1,607 bn or INR 943 per share. At current market price of INR 813, the stock is trading at 14% discount to its current NAV. Its REIT launch plans in Singapore are on track and we expect it to be launched in the near future, which will help the company to reduce cap rates for its lease earning properties. The
Market Data
Avg. Daily Vol. BSE/NSE (‘000) :
5,737.9
stock has corrected by more than 17% since our last update and we believe this is a good buying level. Therefore, we are upgrading our recommendation to “BUY” from “ACCUMULATE”.
Share Holding Pattern (%) Promoters
:
88.2
MFs, FIs & Banks
:
0.5
FIIs
:
7.9
Others
:
3.4
Financials Year to March
Q3FY08
Q2FY08 % change
FY07
FY08E
FY09E
10.7 10.5 6.0 6.4
26,152
114,898
170,673
14,953
79,219
119,467
19,437
60,509
94,143
11.4
35.5
55.2
Net rev (INR mn)
35,984
32,499
EBITDA (INR mn)
25,014
22,637
Net profit (INR mn)
21,389
20,182
12.6
11.8
EPS (INR) P/E (x)
-
71.3
22.9
14.7
EV/EBITDA (x)
-
99.5
18.1
12.1
79.1
61.1
46.9
ROE (%)
Edelweiss research is also available on Bloomberg EDEL, Thomson First Call, Reuters and Factset.
1
38
DLF
Segmental snapshot
Residential business
Aggressive launch of mid income housing projects in second half of Q3FY08 with primary focus on Chennai, Indore, and Kolkata.
The New Town Heights in Rajarhat witnessed aggressive absorption; it was sold out with in four days of its launch.
Selling prices of the luxury housing category increased.
New tools like one house per family and one year lock in period were used to cut down speculative demand.
Commercial segment
Aggressive growth in area under construction; it increased by 16% and 35% over Q2FY08 and Q1FY08, respectively.
On track to achieve lease volume target of 12 mn sq ft per annum.
Average lease rates have dropped over the past quarter by more than 30%, primarily due to change in location.
Hotel segment
Management has identified 51 hotel sites compared to 39 in the previous quarter.
The first Hilton Garden Inn is set to open in Saket (New Delhi) by end 2008.
4,000 hotel rooms expected to be operational by FY10 end with a long term target of 25,000 hotel rooms in the next six-seven years.
International Convention Centre at Dwarka, New Delhi, is in advanced stage of design and development.
Acquisition of “Aman” gives a significant thrust to the hotels business unit, with a strong international footprint.
SEZ business
Five SEZs got notified, aggregating to 27 mn sq ft.
Six SEZs have been sent for final approval.
Land acquisition for both Manesar and Ambala SEZs is in progress.
For Goa, land acquisition process has just begun.
New land acquisition
DLF added 26 mn sq ft during the quarter, adding 748 mn sq ft compared to 738 mn sq ft in the previous quarter. The new acquisitions were as follows:
Hyderabad Raidurg: Acquired two parcels of 26 and 30 acres of and.
Adjoining site of Chennai IT Park: Acquired 1.73 acres site adjoining Chennai IT Park.
32 milestone : Executed collaboration agreement for 10.45 acres for new site at Village Silokhera Gurgaon.
2
39
DLF
Table 1: Total land reserve (mn.sq.ft) Super metros
Metros
Tier-I
Tier-II
Total % of total
Segment Office
53
71
21
6
151
Retail
31
35
13
9
88
Super luxury Luxury Mid income /Villas /Plots Hotel / Convention centre / Service apt. Grand total
% of total
4
0
0
0
4
40
6
1
0
47
129
230
67
14
440
7
4
4
2
17
265
346
106
31
748
35.4
46.3
14.2
4.1
20.2 11.8 0.5 6.3 58.8 2.3 -
Source: Company
During the quarter, DLF has injected money through private equity by selling 49% stake i.e., 37 mn sq ft. Table 2: Reconciliation of land bank with Q2FY08 (mn.sq.ft) Land reserves as per Q2 FY08
Super Metros
Metros
Tier-I
Tier-II
Total
257
333
105
43
738
-
-
Area developed & sold Area atributable to partners ( Merill & Brahma )
(4) -
(2) (30)
(5)
(6) (2)
(37) 26
Business preposition / product mix changed
8
39
(11)
(10)
New acquisitions- during Q3
4
5
17
-
265
346
106
Land reserves as per Q3 FY08
31
26 748
Source: Company
Sales to DAL Sales to DAL still remain a concern as sales as a percentage to total sales have gone up consistently. They have risen from 41% in Q1 to 56% in Q3. Management is confidant on the same and has set a target of bringing it below 20% by FY10E. Table 3: Sales break up (%) DAL
Non-DAL
Q1FY08
41.4
58.6
Q2FY08
53.0
47.0
Q3FY08
56.3
43.7
Source: Company
Outlook and valuations: Attractive; upgrade to ’BUY’ Our some-of-the-parts valuation of DLF is INR 1,606 bn or INR 943 per share. While valuing the commercial and retail properties, we have capitalized lease rentals at a discounted cap rate of 9%, which takes into account part benefit due to listing of the REIT. Further benefit of cap rate compression can be higher, but to incorporate the additional benefit we would wait for the listing of the REIT. Also, we have applied 50% probability discount to its SEZ business due to lack of visibility on the land acquisition process.
3
40
DLF
Table 4: SOTP valuations Existing business (INR mn)
1,436,568
Hotel business (INR mn)
57,859
Construction busines (INR mn)
18,464
SEZ business (INR mn)
176,173
Total NPV (INR mn)
1,689,064
Unpaid land cost (INR mn)
30,000
Discount years
2
NPV of unpaid land cost (INR mn)
23,574
Cash (INR mn)
84,915
Debt (INR mn)
143,032
Total NAV (INR mn)
1,607,373
No of shares (mn)
1,705
NAV per share
943
Source: Edelweiss research
At current market price of INR 813, the stock is trading at 14% discount to its current NAV. The REIT launch plans are on track and we expect it to be launched in the near future, which will help the company reduce the cap rate. The stock has corrected by more than 17% since our last update and we believe this is a good buying level. Therefore, we are upgrading our recommendation to “BUY” from “ACCUMULATE”.
Financials snapshot Year to March Income from operations Direct costs Employee costs Other expenses
(INR mn) Q3 FY08
Q2 FY08
35,984
32,499
9,512
8,326
609
606
850
930
Total operating expenses
10,970
9,863
EBITDA
25,014
22,637
148
110
24,866
22,527
Depreciation and amortisation EBIT Interest expenses
788
36
Other income
528
993
Profit before tax
24,606
23,484
Provision for tax
3,218
3,301
Reported profit
21,389
20,182
Adjusted net profit
21,389
20,182
Shares outstanding
1,705
1,705
% change 10.7 14.2 0.4 (8.6) 11.2 10.5 35.1 10.4 2,064.0 (46.8) 4.8 (2.5) 6.0 6.0 -
FY07
FY08E
FY09E
26,152
114,898
170,673
7,090
34,215
47,460
-
-
-
4,109
1,464
3,746
11,199
35,679
51,206
14,953
79,219
119,467
571
769
1,691
14,382
78,450
117,776 17,164
3,076
14,303
14,189
11,490
17,067
25,495
75,637
117,679
6,058
15,127
23,536
19,437
60,509
94,143
19,437
60,509
94,143
1,705
1,705
1,705
Dividend per share
-
3.5
5.5
Dividend payout (%)
-
10.0
10.0
4
41
DLF
Company Description DLF, incorporated in 1963, is one of the largest real estate development companies in India, with focus on residential, retail, and commercial construction activities. The company is promoted by Mr. K.P. Singh who has four decades of experience in the Indian real estate industry. DLF went public in 2007 with the issue of ~175 mn shares at INR 525 per share.
Investment Theme Default play on real estate in India DLF is the leader in the Indian real estate industry in terms of developable area. Its land bank of 748 mn sq. ft. of saleable area spread across the country. DLF’s land cost of INR 250 per sq. ft. is marginal compared to prevailing land prices. The company has an established presence across all property development verticals, with a balanced project portfolio.
Related businesses - to enhance value DLF has entered into tie-ups in related businesses with some of the best names in their respective industries. For its SEZ initiative, DLF has tied up with Nakheel, one of the leading property developers in the UAE; for hotels, it has a partnership with the Hilton Group; and for construction, it has tied up with the UK-based Laing O’Rourke Plc. We expect DLF’s SEZ and hotel businesses to start adding to its topline in the next 3–4 years; the value of these initiatives is, however, not captured in current valuations. Compressing cap rates – increasing valuations Retail and commercial properties in India are currently capitalised at 9–10%. DLF has filed with Singapore stock exchange for listing its REIT like structure which we feel will help the company to reduce the capitalization rate for its lease earning properties.
Key Risks We estimate DLF to complete its ongoing projects within 12-13 years, though the management expects to complete these projects in next 10 years. Till March 2007, DLF has developed and sold 224 mn sq. ft., representing 35-40% of company’s future plans. We believe that the company has the execution capabilities and will be able to deliver the same. However, timely completion of these projects will continue to remain a strong execution challenge for the company. Any delay in the execution of projects will put strain on cash flows and valuation, and will hamper the company’s growth prospects. DLF, for its SEZs, needs to acquire huge land bank, mainly in Gurgaon (20,000 acres). We have taken the complexity into account and taken 19-20 years to complete all four SEZs. We think this is sufficient time for such a big developer to acquire the land and complete the project. However, if the company does not get the land, then valuation of the business will suffer, as 13% of the valuation comes from SEZ only.
5
42
DLF
Financial Statements Income statement Year to March
FY05
FY06
FY07
FY08E
FY09E
Income from operations
6,081
11,536
26,152
114,898
170,673
Direct costs
3,165
5,243
7,090
34,215
47,460
Other expenses
1,234
1,536
4,109
1,464
3,746
Total operating expenses
4,399
6,779
11,199
35,679
51,206
EBITDA
1,682
4,757
14,953
79,219
119,467
Depreciation and amortisation
333
361
571
769
1,691
1,349
4,396
14,382
78,450
117,776
Interest expenses
390
1,685
3,076
14,303
17,164
Other income
179
884
14,189
11,490
17,067
Profit before tax
1,138
3,595
25,495
75,637
117,679
Provision for tax
259
1,668
6,058
15,127
23,536
Reported profit
879
1,927
19,437
60,509
94,143
1,704.8
1,704.8
1,704.8
1,704.8
1,704.8
EBIT
Shares outstanding Dividend per share
-
-
-
3.5
5.5
Dividend payout (%)
-
-
-
10.0
10.0
FY05
FY06
FY07
FY08E
FY09E
72.3
58.8
42.8
31.1
30.0
Depreciation
5.5
3.1
2.2
0.7
1.0
Interest expenditure
6.4
14.6
11.8
12.4
10.1
EBITDA margins
27.7
41.2
57.2
68.9
70.0
Net profit margins
14.5
16.7
74.3
52.7
55.2
FY06
FY07
FY08E
FY09E
89.7
126.7
339.3
48.5
EBITDA
182.8
214.3
429.8
50.8
PBT
215.9
609.2
196.7
55.6
Net profit
119.2
908.7
211.3
55.6
EPS
119.2
908.7
211.3
55.6
FY05
FY06
FY07
FY08E
FY09E
879
1,927
19,437
60,509
94,143
Common size metrics- as % of net revenues Year to March Operating expenses
Growth metrics (%) Year to March Revenues
Cash flow statement Year to March Net profit Add: depreciation Gross cash flow Less: Dividends
(INR mn)
333
361
571
769
1,691
1,212
2,288
20,008
61,278
95,834
-
-
-
6,051
9,414
(5,535)
8,589
67,025
57,748
32,055
Operating cash flow
6,747
(6,301)
(47,017)
(2,520)
54,364
Less: Capex
5,460
7,194
25,400
6,800
72,039
Free cash flow
1,287
(13,495)
(72,417)
(9,320)
(17,674)
Less: Changes in W. C.
6
43
DLF
Balance sheet As on 31st March
(INR mn) FY05
FY06
FY07
FY08E
FY09E
35
378
12,557
12,907
12,907
Reserves & surplus
7,436
9,123
27,115
145,460
230,189
Shareholders funds
7,471
9,501
39,672
158,367
243,096
Equity capital
Minority interest Borrowings Sources of funds
43
54
92
92
92
9,676
41,320
99,328
119,194
143,032
17,190
50,875
139,092
277,653
386,221
Gross block
8,253
13,023
17,787
36,995
60,554
Depreciation
1,549
1,891
2,412
3,181
4,871
Net block
6,704
11,132
15,375
33,815
55,683
Capital work in progress Total fixed assets
3,506
5,911
26,497
14,089
62,568
10,210
17,043
41,872
47,903
118,251
Goodwill
522
8,489
8,935
8,935
8,935
Investments
400
8,300
2,107
2,107
2,107
Inventories
7,049
16,409
57,006
109,621
157,087
Sundry debtors
2,852
6,580
15,195
0
0
Cash and equivalents
424
1,950
4,155
78,750
84,915
Loans and advances
6,039
10,665
52,438
55,060
57,813
Total current assets
16,364
35,604
128,794
243,431
299,815
8,383
15,095
33,450
3,545
9,937
961
3,374
8,979
21,178
32,950
Sundry creditors and others Provisions Total CL & provisions
9,344
18,469
42,429
24,723
42,887
Net current assets
7,020
17,135
86,365
218,708
256,928
Net deferred tax
(962)
(92)
(187)
0
0
17,190
50,875
139,092
277,653
386,221
4
6
23
93
143
FY05
FY06
FY07
FY08E
FY09E
11.8
22.7
79.1
61.1
46.9
ROCE (%)
8.9
15.5
30.1
43.2
40.6
Current ratio
1.8
1.9
3.0
9.8
7.0
Debtors (days)
171
208
212
-
-
Fixed assets t/o (x)
0.6
0.8
0.9
2.6
2.1
Debt/Equity
1.2
4.1
2.4
0.3
0.2
Uses of funds Book value per share (BV) (INR) Ratios Year to March ROE (%)
Valuations parameters Year to March
FY05
FY06
FY07
FY08E
FY09E
EPS (INR)
0.5
1.1
11.4
35.5
55.2
Y-o-Y growth (%)
-
119.2
908.7
211.3
55.6
346.3
60.5
15.9
47.5
74.2
1,576.8
719.3
71.3
22.9
14.7
185.5
145.9
34.9
8.8
5.7
EV/Sales (x)
229.4
122.8
56.9
12.5
8.5
EV/EBITDA (x)
829.3
297.9
99.5
18.1
12.1
CEPS (INR) P/E (x) Price/BV (x)
7
44
DLF
Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021, Board: (91-22) 2286 4400, Email: [email protected] Naresh Kothari
Co-Head Institutional Equities
[email protected]
+91 22 2286 4246
Vikas Khemani
Co-Head Institutional Equities
[email protected]
+91 22 2286 4206
Shriram Iyer
Head Research
[email protected]
+91 22 2286 4256
Coverage group(s) of stocks by primary analyst(s): Real Estate: DLF and The Phoenix Mills
DLF
Recent Research Date
1325 1165
31-Jan-08
1005 (INR)
Company
Buy
685
31-Jan-08
Buy
14-Jan-08
Jan-08
Dec-07
Nov-07
Nov-07
Oct-07
Sep-07
Aug-07
Jul-07
Jul-07
525
09-Jan-08
2,023
Buy
The Phoenix Fundamental intact; Mills Result update
Rating
Buy
Accumulate
Reduce
110
43
15
Emaar MGF Land
Immense potential;
540-630
Subscribe
IPO Note
The Phoenix India consumption Mills boom play; Initiating
2,290
Buy
Ganesh Hsg. Spreading tentacles; Corporation Visit Note
712
Not Rated
Rating Interpretation
Edelweiss Research Coverage Universe Sell 2
Total
Expected to
Buy
appreciate more than 20% over a 12-month period
Accumulate
appreciate up to 20% over a 12-month period
Reduce
depreciate up to 10% over a 12-month period
Sell
depreciate more than 10% over a 12-month period
188
* 12 stocks under review / 6 rating withheld
Market Cap (INR)
Recos
Coverage
Distribution of Ratings / Market Cap
Rating Distribution*
Price (INR)
Accm
Buy
845
Title
> 50bn
Between 10bn and 50 bn
< 10bn
88
74
26
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8
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45
Rpt. 13252330 17-Mar-2008
DLF LTD BNP PARIBAS SECURITIES (ASIA) - MATHEW, SANDEEP, ET AL
2 - 37
Rpt. 13098313 01-Feb-2008
DLF LTD EDELWEISS CAPITAL LIMITED - SHAH, AKSHIT, ET AL
38 - 45
These reports were compiled using a product of Thomson Financial.
www.thomson.com/financial
1
DLF Ltd
DLFU IN
Sandeep Mathew (91 22) 6650 1665 S O
W H A T ?
T H E
India Financials/Real Estate B N P
DLF is at an inflection point in earnings growth. As the market matures, the Street will begin to shift attention to performance over assets. Shift to middle-income segment will drive volumes.
P A R I B A S
Initiation 17 March 2008 A N G L E
Net Profit 09 ...... INR97.6b
Target Price INR1,010.00
Diff from Consensus..(1.4%) Consensus (mean) ........INR98.9b Consensus (momentum) .......... Ï
Diff from Consensus..(3.8%) Consensus (median) INR1,050.00 Consensus (momentum) ..........Ï
Premium valuations warranted due to its ability to set new benchmarks.
BUY Recs in the Market Positive.....................................11 Neutral........................................3 Negative .....................................1 Consensus (momentum) ......... Ï
Current Price.... INR606.25 Upside/(Downside)............. 66.6%
Sources: Thomson One Analytics; Bloomberg; BNP Paribas estimates
Initiate with a BUY and TP of INR1,010 on India’s largest real-estate developer. It is at an inflection point in terms of execution and is positioned to deliver earnings growth. We are impressed with its ability to set new benchmarks, which is likely to yield premium valuations. High-quality land bank and asset mix will limit potential downside risk.
Follow the leader Market to see cycles; performance will provide upside Flow of institutional investment into India has set the stage for introduction of real-estate asset cycles, in our view. We believe performance (earnings) will be the catalyst for stocks in the sector while higher quality asset base will provide support to valuations.
Sandeep Mathew (91 22) 6650 1665 BNP Paribas India Solutions Pvt Ltd [email protected]
Avneesh Sukhija (91 22) 6650 1667 BNP Paribas India Solutions Pvt Ltd [email protected] Earnings Estimates And Valuation Ratios YE Mar (INR m)
Company at an inflection point; mid-income segment will be key growth driver to FY10 earnings We anticipate the residential segment will contribute approximately 50% to top-line growth by FY10, primarily driven by the middle-income segment. The recent success of its middle-income launches boosts our confidence in the company’s execution ability and we are confident about the its ability to deliver growth in excess of 20% annually. DLF’s differentiation warrants premium valuation DLF is setting new benchmarks in the real-estate industry in India, such as monetisation of assets through stake sales, high disclosure standards and ability to penetrate new markets. We believe these measures will enhance shareholder valuations.
2007
Revenue
2008E
19,336
72,071
97,612 115,125
Recurring net profit
19,336
72,071
97,612 115,125
Recurring EPS (INR)
12.64
42.17
57.11
67.36
Rec EPS growth (%)
370.4
233.5
35.4
17.9
48.0
14.4
10.6
9.0
—
—
—
—
EV/EBITDA (x)
18.7
11.5
8.8
7.5
Price/book (x)
26.1
5.3
3.5
2.5
ROE (%)
84.8
62.8
40.2
33.0
267.0
34.2
28.7
17.4
Recurring P/E (x) Dividend yield (%)
Net debt/equity (%)
Sources: DLF Ltd; BNP Paribas estimates
Share Price Daily vs MSCI
DLF Ltd Rel to MSCI India
(INR) 1,400
40
800
20
600 400 Jul-07
(%) 80 60
1,000
Sep-07
Next results/event Market cap (USD m)
Quality land bank and asset mix limits DLF downside risk We initiate coverage on DLF Ltd with a BUY and target price of INR1,010 implying 66.6% upside to the current market price. We have valued the company on 15x FY10E EPS at a premium to large China developers currently trading at 11x FY09E EPS. We believe Indian developers will trade at a premium to China peers due to a more conducive regulatory environment. Our projected FY08-10E EPS CAGR for DLF is 26.4%.
2010E
Reported net profit
1,200
DLF is a likely beneficiary of industry consolidation We believe the company’s aggressive pricing strategy to garner market share in new middle-income residential markets is beginning to strain smaller developers. A credit crunch due to lending restrictions in the sector could force some of the smaller players to exit. DLF with its wellcapitalised balance sheet is well-positioned to tap such opportunities.
2009E
40,533 132,960 194,374 230,302
12m avg daily turnover (USD m)
Dec-07
0 Mar-08 April 2008 25,563 91.0
Free float (%)
12
Major shareholder
Promoters (88%)
12m high/low (INR)
1,207.50/555.20
ADR (USD)
Nil
Avg daily turnover (USD m)
Nil
Discount/premium (%)
Nil
Disc/premium vs 52-wk avg (%)
Nil
Source: Datastream
Please see the important notice on the inside back cover.
2
SANDEEP
MATHEW
DLF
LTD
DLFU
IN
17
MARCH
2008
Contents Flow of institutional capital to accentuate real estate cycles in India............................. 3 Introduction of Foreign Direct Investments has set the stage rolling for accentuated real estate cycles in India. We encourage investors to look at real-estate stocks with good quality land bank, execution track record, strong balance sheet and most importantly ability to deliver consistent earnings growth.
Residential segment will be the focus ........................................................................... 5 Middle income segment is poised for rapid growth in India. DLF will launch almost one-third of its new projects targeting this segment over the next few years.
DLF warrants premium valuation................................................................................... 8 We like DLF’s ability to set new benchmarks in the industry such as monetisation of residential assets, improved disclosure standards, and ability to penetrate new regional markets which will likely yield it premium valuations.
Likely beneficiary of industry consolidation.................................................................. 10 DLF’s aggressive pricing strategy is beginning to strain smaller local developers. We believe DLF can benefit from potential acquisitions in new regional markets as availability of credit to the sector dries up due to stringent lending norms.
Quality land bank limits downside risks ....................................................................... 11 DLF has sufficient land banks to last it another 15 years. Exposure to various asset classes (residential, commercial and retail) limits its exposure to one particular asset cycle.
Strong execution capability.......................................................................................... 13 Joint venture with Laing O’Rourke Group in UK provides DLF a strong execution platform. Centralised procurement of raw materials provides DLF with economies of scale and protects it from a cyclical supply chain.
We prefer to value earnings rather than assets........................................................... 18 We believe the company has reached an inflection point with earnings becoming the more crucial component rather than land bank acquisition. So we believe the most appropriate way to value DLF will be on an earnings basis and use total NAV as a directional guideline.
Appendices .................................................................................................................. 21 1. Devil’s advocate: Risks to our investment case
21
2. DLF Projects list
22
3. Key company information
23
4. Corporate governance
24
5. Regulatory environment in India
25
Financial statements – P&L, Balance sheet and Cash flow ........................................ 27
Please see India Research Team list on page 29.
2
BNP
PARIBAS
3
SANDEEP
MATHEW
INDUSTRY
DLF
LTD
DLFU
IN
17
MARCH
2008
OVERVIEW
Flow of institutional capital to accentuate real estate cycles in India 2005 signaled the introduction of Foreign Direct Investment (FDI) into the real estate sector in India. We believe FDI inflow increases the likelihood of deep and accentuated real-estate cycles since these investments are made with a fixed time horizon. The real-estate industry in India is a sunrise industry and has gained prominence following the public issuances by several real-estate companies in 2007. The sector is yet to witness a major cycle partly because investments made were proprietary and also because markets were not deep enough.
Has India witnessed a major real-estate asset cycle? Institutional money will introduce ‘deep and accentuated cycles’. Dealing with asset cycles – picking winners.
Exhibit 1: Flow Of FDI In Real Estate
(USD m) 1,513
1,600 1,400 1,200 1,000 800 600
467
400 200
38
0 2005-06
2006-07
2007-08*
*2007-08 figure is as of Dec’07 Sources: Finance Ministry; BNP Paribas estimates
Has India witnessed a major real-estate asset cycle? Investments in real estate in India were traditionally considered a ‘safe’ investment since there have been few instances of real-estate prices declining across India. The primary reason was a significant proportion of the investments in the sector until 2005 were proprietary investments (synonymous to real demand), meant for end use or where the investment horizon was not necessarily fixed. Hence, investors had the option of holding on to investments in anticipation of higher returns and the markets consequently never saw a deep real-estate asset cycle.
Proprietary investments do not accentuate real estate cycles
Institutional money will introduce ‘deep and accentuated’ cycles The increasing flow of institutional investment into the real-estate sector will introduce deep and accentuated real-estate cycles since these investments are made with a fixed time horizon. We believe the common myth of real-estate prices holding up forever is a thing of the past as investors now try to match returns over a specified time frame.
3
Institutional investments are made with a fixed time horizon in place
BNP
PARIBAS
4
SANDEEP
MATHEW
DLF
LTD
DLFU
IN
17
MARCH
2008
Dealing with asset cycles Property prices in major cities in India have been steadily rising since 2000. The tightening of credit to real-estate companies and higher interest rates are beginning to stem property prices in overheated markets such as Bangalore. While we do not believe there will be a severe correction in property prices, we would advise investors to choose real-estate stocks selectively. We prefer real-estate stocks with good quality land banks, execution track records, strong balance sheets and, most importantly, an ability to deliver consistent earnings growth.
4
We prefer real-estate stocks with good quality land banks, execution track records, strong balance sheet and ability to deliver consistent earnings growth
BNP
PARIBAS
5
SANDEEP
MATHEW
INVESTMENT
DLF
LTD
DLFU
IN
17
MARCH
2008
THESIS
Residential segment will be the focus We anticipate the residential segment will contribute approximately 50% to FY10 earnings from less than 20% in FY08. We believe the main growth engine for residential sales will be the middle-income residential segment.
Middle-income segment will be the key growth driver The middle-income residential segment in India is a key target market for most realestate developers. We define the middle-income segment as households with annual income between INR0.2m and INR1.0m, and low-income as households with annual income less than INR0.2m. According to the National Housing Board, the middle- and low-income segments constitute the largest proportion of housing shortage in India.
Middle-income housing shortage in India is projected at 0.25m households
Exhibit 2: Housing Shortages
(m households)
LIG
MIG and HIG
25.0
0.25
20.0 15.0 24.45 10.0 5.0 0.0 10th plan Sources: National Housing Board; BNP Paribas estimates
According to National Council for Applied and Economic Research (NCAER), the addition to middle-income households during the period FY05-10E will be approximately 12m households, showing the most growth among the three income groups. Exhibit 3: Growing Middle Income Segment (Number of
Additions
households ‘000)
Annual income
1995-96
2001-02
2005-06
2009-10E
Low income group Mid income group
(06-10E)
<5,000
160,077
176,640
185,525
189,698
4,173
5,000-25,000
4,532
10,746
16,395
28,441
12,046
>25,000
268
807
1,731
3,806
2,075
(USD)
High income group Sources: NCAER; BNP Paribas estimates
Key growth drivers for the increasing demand for middle-income housing include rising disposable income, increasing nuclearisation of families, increasing proportion of dualincome families, and a lower dependency ratio. DLF derives most of its revenues now from the commercial segment through sales to DLF Assets. For the nine months ended December 2007, sales to DLF Assets amounted to approximately INR5b, or 50% of total sales. In the residential segment, premium residential properties sold in Gurgaon (part of the National Capital region) have been the major contributor thus far. But, in future, we estimate that at least onethird of total launches will come from the middle-income residential segment.
5
One-third of future launches (of total area) likely to happen in middle-income residential segment
BNP
PARIBAS
6
SANDEEP
MATHEW
DLF
LTD
DLFU
IN
17
MARCH
2008
Exhibit 4: Current Middle-Income Residential Projects Project
Saleable area (m sqft)
Garden City – OMR Chennai
6.11
New Gurgaon
3.50
Indore Township
1.04
Sources: DLF Ltd; BNP Paribas estimates
Driving volumes through aggressive pricing DLF recently launched a number of new middle-income projects in Chennai, Indore, Kolkata and Gurgaon. The prices of these projects were at 10-20% discount to the prevailing market prices in a bid to gain market share. Consequently, competitors were forced to lower prices and/or offer discounts and special offers. Exhibit 5: DLF Sale Prices vs Competitors
(INR/sqft)
(INR/sqft)
Current DLF
4,000
Competition
Expected
3,500
DLF
Competition
3,000 3,000
2,500 2,000
2,000
1,500 1,000
1,000 500
0 Chennai
New Gurgaon
Indore
0
Kolkata
Bangalore
Cochin
Sources: DLF Ltd; BNP Paribas estimates
With steady margin gains Further to the launches, the company continues to look towards a sustainable pricing model targeting the actual home buyer rather than the investor. DLF still retains a healthy 40% gross margin on these projects due to lower cost of land bank and construction costs. DLF has launched its new middle-income residential projects on the peripheries of the cities, thus reducing land bank costs. Also, through partial presales the company is able to estimate demand for its projects and records bookings in a phased manner to maximise revenues. For instance, the Chennai project was launched at a base price of INR2,800 per sqft. in November 2007 and the current rate is approximately INR3,200 per sqft.
DLF is able to retain 40% margins in the middleincome projects
Pricing in line with affordability rates of middle-income groups We believe DLF’s pricing strategy for the middle-income residential segment is sustainable, since at these price levels home purchases are within the affordability levels of the large middle-income group in India. With interest rates likely to drop, we believe there is significant pent-up demand within the segment to absorb higher volumes. Furthermore, the recent moderation of personal income taxes have marginally improved affordability levels.
6
Softening of interest rates could be a key catalyst for the middle-income segment
BNP
PARIBAS
7
SANDEEP
MATHEW
DLF
LTD
DLFU
IN
17
MARCH
2008
Exhibit 6: Affordability Levels Across Middle-Income Segment
(%)
Pre budget
Post budget
70 59.5 60
54.7
53.6
50.3
49.7
46.0
50 40 30 20 10 0 2008
2009
2010
Note: Pre – Tax Income: INR 0.5mn, Tax slabs as of Pre and Post Budget 2008. Debt/Equity Ratio – 0.7, Interest rate 11%, y/y Income Growth – 10%, Monthly EMI : INR .02m, Loan Tenure : 15 years Source: BNP Paribas estimates
IT/ITES slowdown will have a minimal impact on this segment Maximum contribution of IT/ITES industry to middleincome household growth (FY06-10E) is less than 18%
We believe end-user demand for middle-income housing projects is more broad-based and not concentrated across the IT and IT-enabled services (IT/ITES) industries alone. Matching NASSCOM’s projected IT/ITES employment figures to the projected middleincome household growth from NCAER data on Indian middle-class households suggest that the maximum contribution from the IT/ITES industry during FY05-10E will be only 17.8%. While a major portion of the current home buyers include IT/ITES professionals, rising income levels in other industry segments should favour a rise in middle-income housing demand. Exhibit 7: IT/ITES Contribution To Middle-income Growth Year-end 31 Mar
2005
2010E
Growth
Middle income population (households)
16,395,000
28,441,000
12,046,000
IT/ITES employment (No. of employees)
1,057,000
3,206,091
2,149,091
Max. contribution of IT to middle-income growth (%)
17.8
Sources: NASSCOM; NCAER; BNP Paribas estimates
Exhibit 8: Salary Increase Survey Top 5 industries indicating the highest salary increases
(y-y %)
2007
16
Industry
15
Real estate
2008E (%) 25.2
Industry
(%)
Real estate
25.0
14
(infrastructure)
13
Energy (oil/gas/coal)
19.0
Telecommunications
17.6
Retail (incl. Wholesale &
17.6
Energy (oil/gas/coal)
17.5
Telecommunications
17.2
Hospitality/restaurants
17.1
Banking/finance
16.4
Banking/finance
16.9
12
(infrastructure)
distribution)
11 10 9 8 2002
2003
2004
2005
2006
2007
2008E
Source: Hewitt Salary Increase Survey (2007-08)
7
BNP
PARIBAS
8
SANDEEP
MATHEW
INVESTMENT
DLF
LTD
DLFU
IN
17
MARCH
2008
THESIS
DLF warrants premium valuation DLF has set the benchmark in the real-estate industry for efficient cash-flow generation, and catering to demands of equity investors, which we believe enhances shareholder value. These will provide DLF with premium valuations over its peers.
Cash is king The real-estate business has long development cycles, which necessitates the injection of equity at different stages. DLF has sold 49% stake in eight residential projects to Merrill Lynch and Brahma Investments. We view the move as a safe derisking strategy while ensuring healthy cash flows to fund project requirements. Retaining a majority stake ensures project deadlines are met and also the company’s participation in potential upside.
Injection of private equity releases cash and reduces demand risk
Monetisation of stake: More is not necessarily better Unlike developed markets, where real-estate developers are looking to play the entire value chain (from land bank acquisition to finished product), we believe we will see a growing trend of developers focusing only on certain parts of the value chain in India. As the figure below indicates, the most attractive phase is land bank acquisition and approval, which provides high margins to a developer due to the cumbersome approvals process and requirement for local knowledge. The developer also bears execution and demand risks in this phase, and hence the higher margins should they choose to monetise the stake. Developers usually employ their own equity to purchase land banks for new projects. We believe we will see a growing trend of developers monetising stakes early in the project to release cash. This is a sustainable model for larger companies with significant development potential like DLF.
Emerging markets provide significant development potential. Developers can benefit by monetising stakes in projects early.
The construction phase is normally subcontracted to smaller regional construction companies on a cost + markup basis (usually 7-20% markup in India). Developers utilise debt and customer advances in this phase. The delivery phase encompasses the demand risk and returns tend to amplify based on end-user demand. As a developer plays the entire value chain, returns begin to contract over time.
Returns contract over time as a developer plays the entire value chain
Value addition (margins)
Exhibit 9: Early Monetisation Of Stake Enhances Return
Delivery Construction Approvals
Duration Approval risk Execution risk Demand risk Source: BNP Paribas estimates
8
BNP
PARIBAS
9
SANDEEP
MATHEW
DLF
LTD
DLFU
IN
17
MARCH
2008
Catering to demands of investors – increasing disclosures provide better visibility The real-estate industry in India has been plagued with a lack of visibility due to its fragmented nature and lack of disclosure. The financial results of all the developers, with the exception of DLF, typically include only a quarterly income statement, which provides very little clarity on operations. DLF has begun to provide data on construction activity, bookings and average realisation rates on a quarterly basis across the residential, commercial and retail segments. We believe these data points help provide investors with a better understanding of results. We would also like to point out that part of the reason for DLF not providing full disclosure (such as detailed land bank) is due to the potential sensitivity of the information. Exhaustive disclosure of land bank acquisition details could erode the company’s competitive positioning in regional markets.
Additional disclosures including NAV can positively impact the stock
Exhibit 10: Quarterly Disclosures By DLF Increase Visibility Commercial segment (m sqft)
Super metros
Metros
Others
Total
Opening balance
8.45
1.11
1.91
11.48
Add : Lease booked during quarter
0.35
0.00
0.59
0.93
Add : Sales booked during quarter
1.15
0.70
0.49
2.35
Sales/leased booked
Less : Handed over
1.35
0.00
0.00
1.35
Closing balance
8.60
1.82
2.99
13.41
Under construction Opening balance
14.49
9.10
10.84
34.42
New launched
6.63
0.00
0.13
6.76
Handed over
1.35
0.00
0.00
1.35
19.77
9.10
10.97
39.83
11,392
6,289
6,174
8,769
Closing balance
Bookings provide a sense for end-user activity
Information on construction starts and completions
For sale business Wtd average rate sale price (INR/sqft) Wtd average land + const. cost + overheads (INR/sqft)
1,814
1,499
1,668
1,689
Margin
9,578
4,790
4,506
7,080
65
na
30
43
2,222
na
1,391
1,702
For lease business Wtd average rate lease price (INR/sqft) Wtd average land + const. cost (INR/sqft) Sources: DLF LTd; BNP Paribas estimates
9
BNP
PARIBAS
10
SANDEEP
MATHEW
INVESTMENT
DLF
LTD
DLFU
IN
17
MARCH
2008
THESIS
Likely beneficiary of industry consolidation Aggressive pricing and tightening credit are beginning to affect smaller developers. DLF has a strong balance sheet, which will help it consolidate its position within the industry when the opportunity arises.
Tight bank lending norms to the sector causing a credit crunch DLF is well-positioned in the industry with relatively low gearing Price wars to impact smaller developers more
Tightening of credit within the segment The Reserve Bank of India (RBI) has tightened lending norms to real-estate developers causing a credit crunch in the real estate sector. Also, the US subprime-led global credit slowdown coupled with soaring residential property prices in India have forced banks to be more wary of funding real-estate developers.
RBI has been proactively tightening lending norms to the realty sector
Some measures introduced by RBI in the past include blocking lending by banks for purchases of land, and ensuring credit disbursal for funding ‘productive construction activity’ only. RBI has also raised the risk weights for capital allocation to 150 basis points on banks' exposure to commercial real-estate and home loans above INR2m.
DLF’s low leverage positions it strongly in the industry DLF has one of the lowest leverages (net debt/equity of 0.48x as of 3QFY08) within the real-estate sector in India, making it a potential beneficiary of consolidation within the sector. We believe DLF is likely to target acquisitions in some of its new regional markets so as to strengthen its positioning within those markets.
Acquisitions can strengthen DLF’s presence in new regional markets
Exhibit 11: Peer Group Comparison Company
Total land bank
Net debt
Equity
(m sqft)
(INR m)
(INR m)
Ansal's
170.5
(1,563)
9,090
(0.17)
DLF
748.0
84,643
176,858
0.48
Emaar MGF
567.3
40,888
17,910
2.28
HDIL
125.0
8,385
30,042
0.28
56.6
3,135
814
3.85
Omaxe
140.9
4,119
3,177
1.29
Parsvnath
191.1
1,286
18,093
0.07
Puravankara
124.8
3,069
11,869
0.26
Sobha Developers
174.8
8,799
8,563
1.03
Unitech
822.9
43,260
28,460
1.52
IVR PRIME
Net debt/equity
Sources: DLF Ltd; company data; BNP Paribas estimates
Price wars hurting smaller developers Our channel checks reveal that DLF’s aggressive pricing strategy is putting pressure on smaller developers in adjoining areas to lower prices. End-user demand is beginning to move towards DLF properties due to a higher perceived quality. Smaller developers’ margins are also under strain since their average cost of land acquisition is higher than that of DLF and price wars are beginning to affect their cash flows forcing them to introduce discounts and/or offer special incentives. We believe with real-estate sector in India being a highly fragmented market with smaller players having a strong regional focus, DLF should soon have good consolidation opportunities to tap into.
10
DLF has been able to attract ‘end-user’ demand in its new markets
BNP
PARIBAS
11
SANDEEP
MATHEW
INVESTMENT
DLF
LTD
DLFU
IN
17
MARCH
2008
THESIS
Quality land bank limits downside risks With a current land bank of approximately 748m sqft and annualised run rate of 50m sqft, which DLF intends to achieve in a steady state, DLF’s land reserves will last for at least another 15 years. DLF’s high exposure to major cities, where rapid urbanisation is anticipated, is likely to help it navigate turbulent real-estate markets more effectively.
Sufficient land banks to last for another 15 years DLF has approximately 748m sqft of land, which should support its development plans for at least 15 years without further land bank additions. So the company has reached an inflection point in terms of growth with focus shifting from land bank acquisitions to development and successful completion of projects. Absence of any land-holding taxes in India (unlike China) increases the attractiveness of its current land bank.
Absence of land-holding tax in India provides developers with large land banks a headstart
Assessing land bank quality We believe DLF has a higher quality land bank in comparison to peers, with the highest pan-India exposure, a higher proportion of owned land bank, and lower land acquisition costs. Exposure to various asset classes enables DLF to realise higher margins while reducing significant exposure to one particular asset class. Exhibit 12: Ownership Status
JDA/JV 7%
Owned Land 93% Sources: DLF Ltd; BNP Paribas estimates
Land acquisition strategy Land-acquisition strategy is a key differentiator of developers in India. The average cost of land acquisition for DLF is only approximately INR324 per sqft despite high exposure to metropolitan cities. The three most common ways to acquire the land are through open auctions, purchase from farmers, and through pre-qualification of government tenders. DLF acquires land through all the three methods with the highest proportion of land being acquired through farmers. Hence, DLF’s average cost of land acquisition is cheaper in comparison to peers.
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Average land bank cost is only INR324 per sqft despite high exposure to metropolitan cities
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Exhibit 13: Methods Of Land Acquisition Method
Description
Auction
Open auctions (private and government) High
Through farmers
Competition
Margins
Time frame to develop land
Low
Medium – Since the land is
award the highest bidder with the land
acquired from the private players
parcel
and approvals are still pending
Developers acquire agricultural land from Medium
High
Highest – Since agricultural land
farmers and convert it for a specific
needs can be used for commercial
purpose by paying the change of land
purpose only after obtaining
use (CLU) fee
approvals
Pre-qualification of
Government invites tenders from
tenders
qualified bidders for specific initiatives
Low
Medium
Lowest – Since land comes with most approvals
(low-cost housing, etc) Source: BNP Paribas estimates
Asset allocation not under developer’s discretion Allocation of asset class (residential, commercial and retail) in India is a function of the bylaws of state governments rather than the developer’s discretion. Hence, a vast majority of larger Indian developers will have higher exposure to the residential segment (approximately 70%). The remaining space is allocated to commercial and retail segments. The strategy that Indian developers, including DLF, employ is to acquire agricultural land from farmers on the outskirts of the city at cheaper prices and develop townships by paying a change of land use (CLU) fees. This is, however, applicable only if the land is within the master plan of the city. Master plans are revised usually only once in 15-20 years.
Asset allocation is a function of government bylaws and not the developer’s discretion
Pan-India exposure with strong presence in major metros We believe a key strength of DLF is its exposure to high-growth cities in India especially major cities. Approximately 81% of its current land bank is spread across the National Capital Region (Delhi, Gurgaon and Noida), Mumbai, Chennai, Bangalore and Kolkata. Approximately 85% of DLF’s current developments are focused in these high growth cities.
Around 85% of DLF’s current developments are focused in high-growth cities
Exhibit 14: Land Bank Comparison
Company
——— Super metro* ———
————— Metro** —————
Area % of total land bank
Area % of total land bank
–—— Tier-1 & Tier-2 –—— Area % of total land bank Total area
(m sqft)
(%)
(m sqft)
(%)
(m sqft)
(%)
DLF
265.0
35.4
346.0
46.3
137.0
18.3
748.0
Unitech
144.6
17.6
405.4
49.3
272.9
33.2
822.9
Emaar MGF
179.5
31.6
14.4
2.5
373.4
65.8
567.3 191.1
Parsvnath
(m sqft)
68.8
36.0
1.0
0.5
121.3
63.5
Puravankara
0.0
0.0
102.9
82.5
21.8
17.5
124.7
Sobha Developers
0.0
0.0
95.1
54.4
71.3
40.8
174.8
107.0
86.4
0.0
0.0
16.8
13.6
123.9
37.1
26.4
0.0
0.0
103.7
73.6
140.9
BNP
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HDIL Omaxe
* Super metro = National Capital Region and Mumbai Metropolitan Region, ** Metro = Kolkata, Chennai and Bangalore Sources: DLF Ltd; BNP Paribas estimates
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THESIS
Strong execution capability Given the aggressive expansion plans of DLF, a key question is the ability to execute. We believe DLF has the necessary resources and relationships in place to successfully execute on its ambitious targets. DLF-Laing O’Rourke is a key execution enabler
DLF has delivered approximately 11m sqft of constructed properties (residential, commercial and retail) in FY07. The company currently has 59m sqft under construction and aims to deliver 16m sqft in FY08 and 20-25m sqft in FY09. We believe DLF is well positioned to execute because:
The DLF-Laing O’Rourke venture, which constructs its larger projects, will aid execution
Its centralised supply chain provides economies of scale
Execution enabler – joint venture with Laing O’Rourke Laing O’Rourke is the largest privately-owned construction firm in the UK and has more than 100 years experience in the construction business. The group has expertise in developing properties and also in constructing roads, bridges, tunnels, pipelines, harbours, runways and power plants. It is present across Europe, Middle East and Asia. Major clients include Railtrack, Stanhope, Thames Water and Grosvenor Estates.
DLF Laing O’Rourke is working across asset classes
DLF currently has a 50:50 joint venture (JV) with Laing O’Rourke. The DLF-LoR JV is currently executing approximately 39m sqft of projects across India, which is approximately 68% of projects under construction. More importantly, the JV is working across different segments including residential (premium and middle-income), commercial and retail, and also hotels. We believe the JV provides DLF a strong execution platform to achieve its aggressive delivery plans in the coming years. Exhibit 15: DLF-Laing O’Rourke Projects Projects
Area
Status
Segment Residential
(m sqft) Magnolias, Gurgaon
2.50
In progress
Park Place, Gurgaon
4.25
In progress
Residential
Garden City - OMR Chennai
6.11
Launched
Residential
DLF Towers, Jasola
1.03
In progress
Commercial
DLF Technopolis, Bangalore
0.53
In progress
IT Parks/SEZ
IT Park, Bhubaneshwar
4.50
In progress
IT Parks/SEZ
Infocity, Chennai
4.50
In progress
IT Parks/SEZ
7B, Gurgaon
0.18
In progress
IT Parks/SEZ
IT Park Gachi Bowli Hyderabad
1.90
In progress
IT Parks/SEZ
IT Park , Kolkata
3.20
In progress
IT Parks/SEZ
3C Galaxy, Noida
1.75
In progress
IT Parks/SEZ
IT Park Rai
2.50
In progress
IT Parks/SEZ
IT Park, Silokhera
6.20
In progress
IT Parks/SEZ
Mall of India, Gurgaon
5.00
In progress
Retail
DLF Times Square, Noida
2.15
In progress
Retail
NTC Mall, Mumbai
2.69
In progress
Retail
Sources: DLF Ltd; BNP Paribas estimates
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Centralised supply chain ensures economies of scale A centralised supply chain ensures that major construction materials (steel, cement and concrete) are directly purchased by DLF, thus resulting in economies of scale. Furthermore, given the high volume of development, the company has entered into long-term contracts with its major supply-chain partners thus reducing its exposure to a cyclical supply chain.
Long-term agreements reduces pricing risks for key construction material
Asset mix will limit company’s exposure to one particular asset cycle Residential plot sales can accelerate sales and amplify margins DLF plans to sell an increasing proportion of plots in major cities, and Tier 1 and Tier 2 cities such as Gurgaon, Indore and Mohali in FY09 and FY10. This will help it to meet delivery targets, since plotted developments have smaller development timeframes. The major cost of plotted developments is land acquisition. Given DLF’s low-cost land bank, the company should be able to realise margins in excess of 80% through sale of plots. The sale of plots will also accelerate the cash flows. So we would not be entirely surprised to see larger-than-anticipated sale of plots over the next two years.
Plotted development could yield margins in excess of 80%
Exhibit 16: Region Wise Break Up Of Planned Plot Sales
Tier - II 3% Super Metros 29%
Tier - I 15%
Metros 53% Sources: DLF Ltd; BNP Paribas estimates
Brand value and track record are key differentiators that will help DLF among luxury/super luxury apartment seekers DLF has an established track record in the luxury and super luxury segment where it has already sold 17m sqft properties (to date). Thus, it has built itself a strong reputation among the prospective higher-income segment buyer. DLF is planning a super-luxury project in Mumbai (Tulsiwadi) and New Delhi (Chankyapuri). We believe the average realisation rates could well be in excess of INR30,000 per sqft given that both projects are located in prime locations within the major Central Business Districts. These projects are likely to benefit from supply inelasticity in these regions.
Super-luxury projects in prime locations in Mumbai and Delhi likely to see good demand
However, we remain cautious about projects in the luxury segment in other regions due to higher levels of speculative activity and we believe there is a stronger possibility of price moderation in this segment.
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Commercial properties likely to face some headwinds Commercial sales is currently DLF’s largest revenue stream with approximately 50% of sales being realised from one major customer – DLF Assets. But we anticipate the contribution to decrease to 30% by 2010 as sales from residential segment increase.
Major IT hubs could put a strain on development Roughly 20% of the land bank to be developed over the next two years is dedicated to the commercial segment. More than 80% of the commercial demand is generated by the IT/ITES industry. Hence, a slowdown in the sector can negatively impact volumes and we could potentially see delays in major IT hubs including Gurgaon, Bangalore, Chennai and Kolkata. DLF plans to develop approximately 7.6m sqft of commercial properties in these regions in FY09 and 10.6m sqft in FY10.
DLF plans to develop approximately 7.6m sqft of commercial properties in major IT hubs in FY09 and 10.6m sqft in FY10
Exhibit 17: DLF’s Planned Commercial Development
(mn sq ft)
Super Metros
Metros
Tier 1
8 7
7.5
Tier 2
6.9 5.6
6 5 4 3
2.7
3.1
3.2
2.5 2.0
2 1
1.7
1.5
1.4
0.3
0 2007-08
2008-09E
2009-10E
Sources: DLF Ltd; BNP Paribas estimates
However, DLF mitigates some of the risks well … Pre-sales/pre-lease mitigates occupancy risk to an extent DLF ties in approximately 60% of its developments with pre-lease/pre-sales, which provides it minimal occupancy risk while also providing it pricing leverage over the remaining 40% once the property is nearing completion. Corporate relationships DLF works in tandem with many large corporates and relies on the proposed business plans to choose development locales. Although pre-sales/pre-lease is a non-binding agreement, it provides DLF with visibility and a sense for prevailing market demand.
DLF plans new projects in conjunction with expansion plans of major corporates
Introduction of REITs in India could be a potential catalyst Introduction of REITs should lead to increased interest for Grade A office space in India. DLF has an established presence in the category, having delivered approximately 9m sqft of commercial office space over the past few years.
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Too many malls spoiling the fun – we are cautious on retail growth Theme-based malls and partnerships minimises DLF’s retail risks DLF is beginning to build more theme-based and luxury malls across the country focused on jewellery, fashion, luxury, etc. The company has entered into strategic long-term partnerships with luxury brands such as Armani and Dolce & Gabbana for retail space. DLF also has a good in-house anchor tenant in DT Cinemas. DT Cinemas is DLF’s chain of multiplexes, which are located in most of DLF’s upcoming retail malls.
DLF has a good in-house anchor tenant in DT Cinemas
Exhibit 18: Retail Tie – Ups Company
DLF's stake Business segment
Relationship
(%) Armani
49 Retail – luxury
Armani, an Italian luxury fashion brand will set up its first store in New Delhi. The
Dolce&Gabbana
49 Retail – luxury
Dolce&Gabbana (D&G) is a high end fashion house. DLF will provide real estate
JV plans to supply the branded products to other retailers as well. and help D&G to scale up operations in India Sources: DLF Ltd; BNP Paribas estimates
Hospitality, asset management and Bidadi Township could provide additional upside DLF’s foray into the hospitality sector will result in the development of 20,000 rooms by 2013. DLF has recently acquired 50% stake in Aman Resorts, an international luxury resort chain (annual revenues of approximately USD50m), and has agreements with Hilton and Four Seasons to manage DLF’s hotel properties. DLF has signed a 39:61 JV agreement with Prudential Financial Inc to provide asset management services in India. The asset management venture is expected to make a total investment of INR2b with DLF contributing approximately 40%, with an expected ROI of 20%. DLF also has a 74:26 JV with Prudential Financial for life insurance services.
We have not factored any upside from hospitality, asset management and Bidadi township in our FY09 and FY10 estimates
DLF has entered into a 50:50 JV with Limitless Group, Dubai – a sister concern of Nakheel Group – to develop Bidadi Township near Bangalore. DLF’s share of development is approximately 125m sqft. The project is scheduled to begin in 2H08.
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Exhibit 19: DLF Partnerships JV/ Company
acquisition
DLF's Business stake segment
Relationship
(%) Laing O' Rourke
JV
50 Construction
(LOR)
LOR is a leading construction company in UK. LOR will provide DLF with construction expertise and the JV is currently developing 68% of DLF's projects. The JV is open to work for other clients as well.
WSP
JV
50 Construction
WSP brings engineering and design expertise and project management services. The specialist staff required to support the local contractors will be provided by WSP.
Aman Resorts
Acquisition
50 Luxury hotels
Aman Resorts owns 18 boutique resorts worldwide.The JV plans to develop 5,000 luxury hotel rooms in next five years.
Prudential
JV
Financial Inc
74 & 39 Life insurance & Asset mgmt services
Hilton Group
JV
74 Business hotels
DLF has tied up with Prudential Financial to provide life insurance and asset management services in India. The venture is part of DLF’s strategy to make optimum utilisation of its cash flows. The JV plans to develop 20,000 rooms in next five years. The first JV hotel (Hilton Garden Inn) is set to open in New Delhi by 2008.
Four Seasons
LoI
NA DLF Golf links
Four Seasons will manage DLF Golf Links, a proposed luxury hotel in
Limitless Group,
JV
50 Townships
The JV is setup to develop two mega township of almost 40,000 acres with an
Gurgaon. The hotel will have 230 rooms and will be open by end of 2010. Dubai Gayatri Projects
initial investment of USD10b. LoI
NA Infrastructure
The JV plans to bid for and develop infrastructure projects worth INR10b every year with DLF-LOR as the contractor for the projects.
Fraport AG
JV
NA Airport
Fraport AG is the owner and manager of Frankfurt airport. They plan to set up DLF Fraport SPV which will explore opportunities in airport development in India.
Sources: DLF Ltd; BNP Paribas estimates
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VALUATION
We prefer to value earnings rather than assets We believe the company has reached an inflection point with earnings becoming the more crucial component rather than land bank acquisition. So we believe the most appropriate way to value DLF will be on an earnings basis and use total NAV as a directional guideline.
Price-earnings is a more accurate metric in our view We believe the future stock-price appreciation of larger developers in India such as DLF is going to be driven by earnings growth and not land bank acquisitions. The company has reached a steady state in land bank acquisitions in our view and future earnings will be used to replenish land bank addition.
What is an appropriate multiple to use? We have valued the company by using one-year forward P/E multiple of 15x on our FY10E EPS estimate of INR67.36. DLF currently trades at 10.7x FY09 EPS in comparison to peers at 15.9x FY09 EPS. We believe it is more appropriate to use a conservative P/E multiple since we anticipate EBITDA margins falling to around 65% as growth is driven by volumes in the middle-income residential segment. We anticipate EPS to grow at 26.4% CAGR over FY08-10, which we view as sustainable given its low-cost land bank. Peers indicate higher growth due to a lower base. Potential upside to our multiple exists because of DLF’s: 1) pan-India presence; 2) execution ability; and 3) higher proportion of investment properties, which will benefit from cap rate compressions.
We have used a conservative 15x P/E multiple to value DLF. Multiple expansion due to higher growth (excess of 20%) is likely
In comparison to international peers, especially the China developers, larger China developers are currently trading at 11.2x FY09E EPS. Furthermore, DLF also has a significantly larger land bank (approximately 748m sqft.) in comparison to its Chinese counterparts (highest being approximately 323m sqft. for China Vanke), which will support higher valuations.
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Exhibit 20: Comparable Valuation Share Security
price (USD)
–——— Revenue –——— –———— EPS ————–
EPS growth
–———— P/E ————–
—— Mkt cap— 07-08E 08-09E 09-10E 07-08E 08-09E 09-10E 08-09E 09-10E 09-10E 08-09E 09-10E (LC m) (USD m) (USD m) (USD m) (USD m)
(USD)
(USD)
(USD)
(%)
(%)
India DLF* Unitech* Akruti City Anant Raj Industries
15.17 1,034,407
25,642
3,296
4,818
5,709
1.05
1.42
1.67
35.4
17.9
14.5
10.7
9.1
6.65
431,061
10,686
1,072
1,747
2,427
0.27
0.38
0.52
39.8
38.4
24.6
17.6
12.7
22.35
59,640
1,478
117
233
779
0.75
2.14
6.26
186.6
192.9
30.0
10.5
3.6
5.72
62,950
1,560
225
350
736
0.31
0.73
1.25
133.1
72.3
18.4
7.9
4.6
HDIL
15.41
132,077
3,274
559
892
1,357
1.29
1.96
2.83
51.5
44.4
11.9
7.9
5.5
Indiabulls Real Estate
12.35
119,009
2,950
150
177
724
0.36
0.36
1.20
0.0
230.6
34.0
34.0
10.3
5.14
35,651
884
624
960
1,247
0.66
1.00
1.72
52.5
71.5
7.8
5.1
3.0
Omaxe Parsvnath Developers Phoenix Mills Puravankara Sobha Developers
5.19
38,324
950
580
988
1,192
0.65
1.11
1.82
70.4
63.3
7.9
4.7
2.9
10.05
54,523
1,352
54
91
121
0.16
0.20
0.29
24.2
41.5
61.4
49.4
34.9
7.18
61,285
1,519
185
353
568
0.28
0.57
0.89
106.2
56.7
26.1
12.7
8.1
16.85
49,129
1,218
403
583
867
0.80
1.17
1.94
46.1
65.4
21.0
14.3
8.7
188,914
4,683
660
1,017
1,430
0.60
1.00
1.85
67.8
81.4
23.4
15.9
9.4
Average
China Large and regional developers China Overseas
1.58
95,113
12,194
2,181
3,353
4,467
0.07
0.10
0.13
48.2
32.4
23.6
15.9
12.0
CR Land
1.49
46,860
6,008
783
1,499
2,530
0.04
0.08
0.13
107.6
61.6
38.2
18.4
11.4
Country Garden
0.84
107,322
13,759
2,341
3,666
5,718
0.03
0.05
0.08
60.3
42.2
25.5
15.9
11.2
Agile
1.00
29,254
3,750
1,365
2,043
2,632
0.07
0.10
0.13
56.2
30.2
15.3
9.8
7.5
Guangzhou R&F
2.38
18,803
2,411
2,920
4,354
5,964
0.23
0.30
0.33
31.6
12.0
10.5
8.0
7.1
Hopson
1.35
15,430
1,978
1,345
1,683
2,106
0.18
0.27
0.35
53.0
29.9
7.6
5.0
3.8
New World China
0.61
18,208
2,334
447
864
2,865
0.04
0.05
0.10
32.6
104.3
15.9
12.0
5.9
Shimao
1.66
38,981
5,490
1,451
2,567
3,599
0.14
0.18
0.25
26.3
40.1
11.8
9.3
6.7
Greentown
1.02
11,117
1,566
961
1,199
1,849
0.11
0.17
0.24
57.4
44.1
9.6
6.1
4.2
42,343
5,499
1,254
1,930
2,885
0.08
0.12
0.16
52.6
44.1
17.6
11.2
7.8
Average
Small and city developers Guangzhou Inv
0.24
11,965
1,534
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
Beijing Capital Land
0.53
3,093
436
1,034
1,454
2,051
0.07
0.09
0.11
30.2
17.9
6.2
4.7
4.0
Shanghai Forte
0.47
3,325
468
880
1,105
1,964
0.06
0.07
0.08
27.3
11.5
7.7
6.0
5.4
Beijing North Star
0.55
2,369
334
767
1,001
NA
0.03
0.04
NA
34.4
NA
14.8
11.0
NA
CC Land
1.02
14,753
1,891
141
328
896
0.00
0.02
0.14
385.3
545.5
200.3
41.3
6.4
Shanghai Real Estate
0.21
3,751
481
507
486
675
0.03
0.03
0.04
18.2
9.6
6.2
5.3
4.8
6,542
857
666
875
1,397
0.04
0.05
0.09
99.1
146.1
47.0
13.7
5.2
Average
Note: Local currency for Indian developers is INR, and for Chinese developers is CNY and HKD Sources: DLF Ltd; company data; Bloomberg; BNP Paribas estimates
Our NAV estimate for DLF is INR804 per share Our net asset value (NAV) for DLF’s core business (residential, commercial, retail and hospitality) is INR804 per share. Our NAV calculation excludes the Bidadi Township, asset management business and infrastructure venture. The key assumptions used in arriving at our NAV calculation are shown below.
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Exhibit 21: NAV Assumptions WACC (%)
15
Issued shares (m)
1,705
Tax rate (%)
20
Price growth (y-y %)
5
Cost growth (y-y %)
5
Cap rate (%)
9
Bookings (%)
100
Sources: DLF Ltd; BNP Paribas estimates
Exhibit 22: NAV – Highly Sensitive To Price Increase, Project Delays And Bookings
14.0%
15.0%
16.0%
17.0%
1,028
986
946
909
875
5.0%
870
836
804
775
746
2.0%
733
706
680
656
634
(%)
8.0%
———————— WACC ————————
13.0%
Booking
Price
increase
———————— WACC ————————
13.0%
14.0%
15.0%
16.0%
17.0%
90%
764
734
705
679
654
95%
817
785
755
727
700
100%
870
836
804
775
746
delays
Project
———————— WACC ———————— 13.0%
14.0%
15.0%
16.0%
17.0%
1
767
730
695
663
633
0
870
836
804
775
746
(1)
987
958
930
904
879
Sources: Company reports; BNP Paribas estimates
Quarterly results likely to be lumpy DLF recognises revenues on a percentage of completion method, and hence quarterly results are likely to be lumpy. So, we prefer to look at the annual impact of results. But since DLF discloses bookings and construction details, we encourage investors to monitor the same on a quarterly basis. Due to the sale of a 49% stake in certain residential projects, the top-line will include the 100% consolidated revenue number with the 49% stake to be allocated from the minority interest line. Hence, it is necessary to focus on EPS rather than top-line growth.
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APPENDIX
DLF
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1
Devil’s advocate: Risks to our investment case The property boom in India has led to growing concerns over unsustainable propertyprice appreciation. Volumes in the premium segment have slowed down though pricing has remained intact. Flow of institutional money (private equity and IPOs) has eased the pressure on developers who have thus far maintained pricing. A prolonged weakness in the market will impact volumes and pricing going forward. Other key risks to the DLF story include:
DLF Assets listing in the Singapore REITs market Delays in construction can negatively impact earnings Slowdown in demand for residential real estate in India Low float (approximately 12% of shares outstanding) increases stock volatility Political and regulatory risks Macro-economic risks including slowdown of GDP growth, higher interest rates, higher taxation, credit slowdown
DAL listing remains a question market DLF Assets (DAL) is a promoter-owned company that buys commercial properties from DLF at a predetermined cap rate (9%). DLF has thus far sold approximately10m sqft of commercial property to DAL. Approximately 30% (INR20b) of receivables of DLF is from DAL. DAL proposes to pay DLF by listing its assets in a REIT-like structure in Singapore. But given the recent weakness in the Singapore REIT markets, we believe DAL may find it difficult to list at an attractive yield. Hence the possibility of DLF shareholders benefiting from cap rate compression seems unlikely. If the DAL listing does not go through, the company will look at obtaining funding from privateequity investors. We believe the longer-term implication is that DLF will have to scout for new buyers for its commercial properties. We estimate commercial sales will contribute approximately INR93.4b (49% of total) to FY09E sales.
DAL currently accounts for 50% of total sales (9 months ended Dec 07)
Delays can hit earnings Our channel checks indicate that DLF is facing three to six months delays in some of its residential projects including Summit, Icon and Pinnacle in Gurgaon. Though we do not currently see the construction delays affecting results significantly, any further construction delays are expected to push back earnings since the company recognises revenues on the percentage of completion of total costs. The company also anticipates launching several new projects in FY09. Delays in new launches in excess of six months will likely impact earnings.
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Exhibit 2.1: Ongoing & Expected DLF Projects – Residential Project
City
Type Saleable area Scheduled launch (m sqft)
Bannerghatta road
Bangalore
Garden City - OMR
Residential
9.00
FY09E
Chennai
Residential
6.11
FY08
DLF Riverside
Cochin
Residential
0.52
FY08
Garden City, New Indore
Indore
Residential
1.04
FY08
Goa
Residential
2.49
FY08 FY09E
Goa Hyderabad
Hyderabad
Residential
11.41
Tulsiwadi
Mumbai
Residential
0.89
FY09E
Kakkanad
Cochin
Residential
5.39
FY09E
New Town Heights
Kolkata
Residential
1.37
FY08
Chanakyapuri
NCR - Delhi
Residential
1.84
FY09E
DLF Park Place
NCR – Gurgaon
Residential
2.20
FY07
Magnolias
NCR – Gurgaon
Residential
2.50
FY06
The Belaire
NCR – Gurgaon
Residential
1.30
FY07
The Summit
NCR – Gurgaon
Residential
0.70
FY03
The Icon
NCR – Gurgaon
Residential
1.00
FY04
The Pinnacle
NCR – Gurgaon
Residential
1.10
FY03
The Royalton towers
NCR – Gurgaon
Residential
0.20
FY04
Chandigarh
Residential
7.90
FY08
Panchkula Sources: DLF Ltd; BNP Paribas estimates
Exhibit 2.2: Ongoing And Expected Projects – Commercial Project
City
Type
Saleable area Scheduled launch
Bangalore
Commercial
1.35
DLF IT Park
Chandigarh
Commercial
0.65
FY08
DLF IT Park
Chennai
Commercial
6.64
FY08 FY08
(m sqft) DLF Technopolis
Gurgaon Hyderabad DLF IT Park 1 DLF Pune, Hingewadi
FY09E
Gurgaon
Commercial
20.35
Hyderabad
Commercial
6.95
FY08
Kolkata
Commercial
1.17
FY08
Pune
Commercial
3.36
FY09E
Sources: DLF Ltd; BNP Paribas estimates
Exhibit 2.3: Ongoing And Expected Projects – Retail Project
City
Type
Saleable area
Scheduled launch
(m sqft) Whitefield
Bangalore
Retail
0.72
FY09E
Gachibowli
Hyderabad
Retail
2.31
FY09E
Mumbai
Retail
1.69
FY08
NCR - Delhi
Retail
0.34
FY08
The Galleria, Mayur Vihar
NCR - Delhi
Retail
0.16
FY08
Courtyard, Saket
NCR – Delhi
Retail
0.25
FY08
Jasola Mall
NCR – Delhi
Retail
0.84
FY08
Emporio, Vasant Vihar
NCR – Delhi
Retail
0.33
FY08
NTC Mills South Court, Saket
Promenade, Vasant Vihar
NCR – Delhi
Retail
0.45
FY08
DT City Center, Shalimar Bagh
NCR – Delhi
Retail
0.26
FY08
Mall of India
NCR - Gurgaon
Retail
3.93
FY08
South Point
NCR – Gurgaon
Retail
0.17
FY08
Star Mall
NCR – Gurgaon
Retail
0.22
FY08
NCR – Noida
Retail
1.52
FY08
Townsquare Sources: DLF Ltd; BNP Paribas estimates
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Key company information Exhibit 3.1: Industry Data
Exhibit 3.2: Sales Breakdown – 9MFY08
Industry structure :
Fragmented
Customers :
DLF Assets account for 50% of sales currently
Competitors :
Unitech, Emaar MGF, Parsvnath and Omaxe
Markets :
Pan-India presence
Regulation :
Medium
DAL 50%
Non - DAL 50%
Source: BNP Paribas
Source: DLF Ltd; BNP Paribas estimates
Exhibit 3.3: Ownership Structure
Exhibit 3.4: Average Annual Cost Breakdown
Public shareholding 11.8%
Land cost 15.0%
Raw material 59.5%
Promoter and promoter group 88.2%
Wages 25.5%
DAL
Promoters
PE Investors
Sources: DLF Ltd; BNP Paribas estimates
Sources: DLF Ltd.; BNP Paribas estimates
Exhibit 3.5: Company Background
Exhibit 3.6: Major Institutional Holders
DLF Ltd is India's largest real-estate developer with a land bank of Holder name
% of outstanding shares
approximately 748m sqft. 81% of the company’s land bank is based in
(%)
Metropolitan regions in the country. The company is present across T Rowe Price
1.42
all three real estate verticals including residential, commercial and Federated Investment
0.42
retail. DLF’s business model is based on selling residential properties DWS Investments
0.46
and selling/ leasing its commercial/retail properties.
Sources: DLF Ltd; BNP Paribas
Aberdeen Investments
0.14
Capital International
0.08
Vanguard Group
0.08
SBI Fund Management
0.06
William Blair & Company
0.05
Nomura Asset Management
0.05
HSBC Investments
0.04
Sources: Bloomberg; BNP Paribas estimates
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Corporate governance Exhibit 4.1: Corporate Governance Matrix DLF
Benchmark
Size of the board
12
15
Percentage of independent directors on the board (%)
50
55
Director attendance at board meetings (%)
88
80
Board
Number of other directorships and committee memberships held by CEO CEO/MD and chairman role separation
1
3
Yes
Yes
Audit Frequency of audit committee meetings (%) Percentage of independent directors on the audit committee (%)
4
4
100
100
100
100
0
0
Compensation Percentage of independent directors on the board (%) Stock options being awarded to independent directors (%) Ownership Promoter group holding in company (%)
88
20
Cross holding across group companies (%)
Yes
No
Loan to subsidiaries
Yes
No
12
3
1
0
Number of sale/purchase transactions carried out by insiders Number of outstanding shareholder complaints Note: We have adjusted the data available for Infosys to create the benchmark Data taken from annual report 07 for Infosys All Data is as per the latest annual report available Sources: Company reports; BNP Paribas estimates
Exhibit 4.2: Key Management Personnel Key personnel
Designation
Description
Mr. K.P. Singh
Chairman
Mr. K.P. Singh has over 43 years of experience in the real estate industry. Prior to joining DLF Mr. Singh served in the Indian Army. Mr. Singh was the president of The Associated Chambers of Commerce and Industry in India (ASSOCHAM) in 1999.
Mr. Rajiv Singh
Vice Chairman
Mr. Rajiv Singh has over 25 years of experience in the real estate industry. He directs the strategy and oversees the various Business Segments of the company. He holds a degree in mechanical engineering from Massachusetts Institute of Technology, USA.
Mr. T.C. Goyal
Managing Director
Mr. Goyal has over 37 years of experience in finance and project counseling. He has been with DLF since 1981. Prior to joining DLF he was working with the Birla Group.
Ms. Pia Singh
Director
Ms. Pia Singh heads DT Cinemas and is also engaged in the retail operations of the company. Previously, she has worked with the risk undertaking department at GE Capital. She is a graduate from the Wharton School of Business.
Mr. Kameshwar Swarup Executive Director Legal
Mr.Swarup has over 44 years of management experience. He has worked as a senior member of the Delhi Stock Exchange of India and was also a member of various SEBI committees. He is a post graduate from the University of Lucknow and a qualified company secretary.
Mr. G.S. Talwar
Director
Mr. Talwar is founding Chairman and Managing Partner of Sabre Capital Worldwide, a private equity and investment company. Mr. Talwar is the first Asian to have become the Group Chief Executive of FTSE 25 company in the UK. He holds bachelor’s degree in economics from St. Stephen’s College, University of Delhi.
Sources: DLF Ltd; BNP Paribas
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Regulatory environment in India The legal structure of the real-estate industry in India is two-layered. The first layer consists of the laws developed by the central government and second is the state-level laws. Some of the important central government laws are stated below: Exhibit 5.1: Key Real-Estate Regulations Act
Overview
Impact
The Urban Land
The act limits the area that can be acquired by an entity in a
Introduced use of Special Purpose Vehicle (SPV) structures
Ceiling Act, 1976 region so that the government can use the land for social
to enable land aggregation.
and welfare schemes. The act has been repealed in most of the states. Maharashtra was the most recent one. Registration Act, The purpose of the act is to conserve evidence, assurances, In India clarity on the ownership of the land is a major 1908
title, publication of documents and prevention of fraud.
concern. The registration act helps to provide clarity on the ownership of the land.
The Indian
Stamp duty is to be paid on all documents that are
The high stamp duty encourages cash transactions in the
Stamp Act, 1899 registered, the percentage of stamp duty varies with each state (3% to 12%). Instruments that are not duly stamped
property market. Rationalization of stamp duties across states is an urgent issue that needs to be tackled.
are incapable of being admitted in court as evidence of the transaction contained. Source: Government of India
Special Economic Zones, Act, 2005 (SEZ): The SEZ act has been enacted for the establishment, development and management of the SEZs for the promotion of exports. An SEZ is specifically delineated duty-free enclave, deemed to be a foreign territory for the purposes of trade as well as duties and tariffs. A Board of Approval (BOA) has been set up by the Government to promote SEZs and ensure its orderly development.
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Exhibit 5.2: Procedure For Setting Up An SEZ By Developer
Procedure for setting up an SEZ
Application to the respective state government/BOA 45 days BOA communicates the decision to the Central Government 30 days
In-principal approval – valid for 1 year (if the land is not acquired)
Formal approval (if the land is acquired)
Developer gets back to the Gol, Moc and Doc with specific details of SEZ
If satisfied the Gol, Moc and Doc notifies the SEZ
Central Government appoint Development Commissioner to monitor the SEZ Note: BOA: Board of Approvals; GoI: Government of India; Moc: Ministry of Commerce; Doc: Department of Commerce Sources: Government of India; BNP Paribas estimates
FDI Regulations: As per Press note 2 of 2005, FDI of up to 100% under the automatic route is allowed in townships, housing, built-up infrastructure and construction development projects. FDI is subject to the following conditions Exhibit 5.3: Minimum Area To Be Developed Minimum area Development of serviced housing plots
10 hectares
Construction-development projects
Built up area of 50,000 sqm
Combination of the above two
Any of the above two
Source: Government of India
Exhibit 5.4: Minimum Capitalisation Requirement Minimum capital (USD m) Wholly owned subsidiaries
10
JV with Indian partners
5
Source: Government of India
Further, the funds are to be bought in within six months of the business. Original Investment is not to be repatriated before a period of three years from completion of minimum capitalisation. The investor is permitted to exit earlier with prior approval of the government through the Foreign Investment Promotion Board (FIPB). At least 50% of the project should be completed within five years. The investor would not be permitted to sell undeveloped plots.
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STATEMENTS
DLF Ltd Profit and Loss (INR m) Year Ending March
2006A
2007A
2008E
2009E
2010E
Revenue Cost of sales ex depreciation Gross profit ex depreciation Other operating income Operating costs Operating EBITDA Depreciation Goodwill amortisation Operating EBIT Net financing costs Associates Recurring non operating income Non recurring items Profit before tax Tax Profit after tax Minority interests Preferred dividends Other items Reported net profit Non recurring items & goodwill (net) Recurring net profit
19,602 (9,286) 10,317 (1,572) 8,745 (358) 8,387 (1,685) 6,702 (2,590) 4,112 (10) 8 4,110 4,110
40,533 (7,278) 33,255 (4,199) 29,056 (578) 28,478 (3,076) 25,402 (6,052) 19,350 (11) (2) 19,336 19,336
132,960 (33,057) 99,903 (7,527) 92,375 (593) 91,783 (2,825) 88,957 (16,875) 72,083 (63) 51 72,071 72,071
194,374 (59,844) 134,530 (8,093) 126,437 (726) 125,711 (3,696) 122,015 (24,403) 97,612 97,612 97,612
230,302 (70,923) 159,378 (10,015) 149,363 (837) 148,526 (4,620) 143,906 (28,781) 115,125 115,125 115,125
Per share (INR) Recurring EPS * Reported EPS DPS
2.69 2.69 -
12.64 12.64 -
42.17 42.27 -
57.11 57.26 -
67.36 67.53 -
-
106.8 232.3 239.6 370.4 370.4
228.0 217.9 222.3 233.5 234.4
46.2 36.9 37.0 35.4 35.4
18.5 18.1 18.1 17.9 17.9
Operating performance Gross margin inc depreciation (%) 50.8 Operating EBITDA margin (%) 44.6 Operating EBIT margin (%) 42.8 Net margin (%) 21.0 Effective tax rate (%) 38.7 Dividend payout on recurring profit (%) Interest cover (x) 5.0 Inventory days 346.1 Debtor days 122.5 Creditor days 574.7 Operating ROIC (%) 30.9 Operating ROIC - WACC (%) 14.0 ROIC (%) 21.2 ROIC - WACC (%) 4.3 ROE (%) 81.9 ROA (%) 15.1 * Pre exceptional, pre-goodwill and fully diluted
80.6 71.7 70.3 47.7 23.8 9.3 1645.1 97.4 1197.3 22.5 5.6 19.4 2.4 84.8 17.1
74.7 69.5 69.0 54.2 19.0 32.5 934.5 97.8 352.9 31.5 14.5 28.5 11.6 62.8 28.3
68.8 65.0 64.7 50.2 20.0 34.0 803.3 123.7 234.1 26.7 9.8 24.4 7.5 40.2 25.1
68.8 64.9 64.5 50.0 20.0 32.1 950.9 132.0 258.8 23.5 6.6 22.0 5.0 33.0 22.8
Key Assumptions (INR m)
2007A
2008E
2009E
2010E
5.00
5.00
20.00
20.00
20.00
20.00
Growth Revenue (%) Operating EBITDA (%) Operating EBIT (%) Recurring EPS (%) Reported EPS (%)
2006A
Annual price growth (%) Average const. cost (INR 1500 - 3000) Maintenance margins Estimated project duration (2-3 yrs) Tax rate
Revenue By Division (INR m) Residential - Sales Commercial - Sales Retail - Sales Lease and Maintenance Others
2006A
19,602
2007A
40,533
2008E
2009E
2010E
132,960
69,463 93,414 18,365 11,751 1,381
119,558 65,592 23,790 19,582 1,780
Residential sales will contribute approximately 50% to FY10 sales
EBITDA margins to decline to 65% by 2010 due to higher middleincome sales
Tax rates to remain at 20% due to SPV-based structure
Sources: DLF Ltd; BNP Paribas estimates
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Cash Flow (INR m) Year Ending March
2006A
2007A
2008E
2009E
2010E
Recurring net profit Depreciation Associates & minorities Other non-cash items Recurring cash flow Change in working capital Capex - maintenance Capex - new investment Free cash flow to equity Net acquisitions & disposals Dividends paid Non recurring cash flows Net cash flow Equity finance Debt finance Movement in cash
4,110 358 10 4,478 (6,467) (1,989) (16) (15,384) (17,388) 31,987 14,599
19,336 578 11 19,926 (79,504) (21,620) (81,199) (18) 15,908 (65,308) 5 67,509 2,205
72,071 593 63 72,726 (114,512) 1,738 (40,047) (7,978) (13,206) (61,231) 88,665 (6,925) 20,509
97,612 726 98,338 (86,361) (29,094) (17,117) (17,117) (17,117)
115,125 837 115,962 (94,708) (8,058) 13,196 13,196 13,196
2.93 (1.30)
13.03 (53.09)
42.66 (23.49)
57.68 (10.04)
Per share (INR) Recurring cash flow per share FCF to equity per share
2006A
2007A
2008E
2009E
2010E
Working capital assets Working capital liabilities Net working capital Tangible fixed assets Operating invested capital Goodwill Other intangible assets Investments Other assets Invested capital
26,182 (14,621) 11,561 24,799 36,359 8,500 8,149 3 53,011
124,188 (33,124) 91,065 41,851 132,916 8,935 2,107 143,958
236,373 (30,796) 205,577 52,027 257,604 16,223 13,489 287,316
337,914 (45,976) 291,938 80,395 372,333 16,223 13,489 402,045
441,242 (54,596) 386,646 87,616 474,262 16,223 13,489 503,974
Cash & equivalents (1,950) (4,155) (24,664) Short term debt Long term debt * 41,320 99,327 92,403 Net debt 39,371 95,172 67,739 Deferred tax 183 197 463 Other liabilities 3,364 12,948 21,139 Total equity 10,038 35,549 194,132 Minority interests 54 92 3,843 Invested capital 53,011 143,958 287,316 * Includes convertibles and preferred stock which is being treated as debt
(7,547) 92,403 84,856 463 21,139 291,744 3,843 402,045
(20,743) 92,403 71,660 463 21,139 406,869 3,843 503,974
171.13 161.61
238.65 229.14
28.7 18.6 7.5 4.2
17.4 12.4 8.5 5.6
2008E
2009E
2010E
Recurring P/E (x) * 225.6 48.0 14.4 Recurring P/E @ target price (x) * 375.8 79.9 24.0 Reported P/E (x) 225.6 48.0 14.3 Dividend yield (%) P/CF (x) 207.1 46.5 14.2 P/FCF (x) neg neg neg Price/book (x) 2.3 26.1 5.3 Price/tangible book (x) 14.9 34.8 5.8 EV/EBITDA (x) ** 7.1 18.7 11.5 EV/EBITDA @ target price (x) ** 8.9 29.6 18.6 EV/invested capital (x) 1.2 7.1 3.8 * Pre exceptional, pre-goodwill and fully diluted ** EBITDA includes associate income and recurring non-operating income
10.6 17.7 10.6 10.5 neg 3.5 3.8 8.8 14.3 2.8
9.0 15.0 9.0 8.9 78.3 2.5 2.6 7.5 12.1 2.2
Financial strength Net debt/equity (%) Net debt/total assets (%) Current ratio (x) CF interest cover (x)
Valuation
265.02 40.62
23.24 17.40
390.1 56.6 1.9 3.7
267.0 52.5 3.9 (18.4)
2006A
2007A
113.87 104.35 34.2 19.8 8.5 (13.8)
2008
68.02 7.74
Balance Sheet (INR m) Year Ending March
Per share (INR) Book value per share Tangible book value per share
MARCH
DLF has one of the lowest debt/equity ratios amongst Indian real estate companies
Sources: DLF Ltd; BNP Paribas estimates
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India Research Team Praveen Chakravarty
Preeti Dubey, CFA
Karan Gupta
Head of India Research BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1696 [email protected]
Metals & Mining BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1671 [email protected]
Metals & Mining (Associate) BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1662 [email protected]
Vishal Sharma
Shashank Abhisheik
Sandeep Mathew
Infrastructure - E&C BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1672 [email protected]
Infrastructure - E&C (Associate) BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1673 [email protected]
Real Estate BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1665 [email protected]
Avneesh Sukhija
Lakshminarayana Ganti
Charanjit Singh
Real Estate (Associate) BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1667 [email protected]
Capital Goods/Cement BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1676 [email protected]
Capital Goods/Cement (Associate) BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1686 [email protected]
Girish Nair
Sriram Somayajula
Amit Shah
Utilities BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1679 [email protected]
Utilities (Associate) BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1670 [email protected]
Oil & Gas BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1664 [email protected]
Alok Deshpande
Abhiram Eleswarapu
Avinash Singh
Oil & Gas (Associate) BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1663 [email protected]
Tech - IT BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1684 [email protected]
Tech - IT (Associate) BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1685 [email protected]
Sameer Naringrekar
Kunal Vora, CFA
Vijay Sarathi, CFA
Tech - Telecom BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1674 [email protected]
Tech - Telecom (Associate) BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1675 [email protected]
Financial Services BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1677 [email protected]
Abhishek Bhattacharya
Joseph George
Manish A Gupta
Financial Services (Associate) BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1678 [email protected]
Consumer BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1669 [email protected]
Consumer (Associate) BNP Paribas India Solutions Pvt Ltd (91 22) 6650 1668 [email protected]
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DISCLAIMERS
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2008
DISCLOSURES
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All share prices are as at market close on 13 March 2008 unless otherwise stated. Stock recommendations are based on absolute upside (downside), which we define as (target price* - current price) / current price. If the upside is 10% or more, the recommendation is BUY. If the downside is 10% or more, the recommendation is REDUCE. For stocks where the upside or downside is less than 10%, the recommendation is HOLD. In addition, we have key buy and key sell lists in each market, which are our most commercial and/or actionable BUY and REDUCE calls and are limited to at most five key buys and five key sells in each market at any point in time. Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on market price and the formal recommendation. *In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value. Sector recommendations are based on: OVERWEIGHT – Sector coverage universe fundamentals are improving. NEUTRAL – Sector coverage universe fundamentals are steady, neither improving nor deteriorating. UNDERWEIGHT – Sector coverage universe fundamentals are deteriorating. © 2008 BNP Paribas Group
35
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37
India Equity Research | Real Estate DLF
Result Update
DLF
INR 813
Growth intact; attractive valuation
BUY
DLF’s Q3FY08 results were in line with our expectations both in terms of revenues and EBITDA margins. However, net profit was higher than our expectations primarily due to
February 1, 2008
lower interest charges and tax rates. Revenue grew at 11% Q-o-Q to INR 36 bn against INR 32.5 bn and EBITDA margins grew at 10.5% Q-o-Q to INR 25 bn against INR 23 bn. Net profit was up 6% Q-o-Q at INR 21 bn against INR 20 bn. The company has invested in wind power and benefits from thereon have resulted in tax depreciation, which in turn has led to lower tax provision at 13% against 28% in Q1FY08.
Akshit Shah +91-22-4019 4714 [email protected] Sachin Sharma +91-22-4019 4510 [email protected]
Outlook and valuations: Attractive; upgrade to BUY We are reducing DLF’s tax rate to 20% against 30% earlier. This is due to the lower taxation rate attracted by the company in the past two quarters and the guidance from the management for the years to come. We continue to believe that being the industry leader with a huge quality land bank, DLF is among the best companies in the listed real estate space in India. We have valued its existing land bank at INR 843 per share. While valuing commercial and retail properties, we have capitalized lease rentals at a discounted cap rate of 9%, which takes into account part benefit from the listing of the REIT. Further benefit of cap rate compression could be higher, but to incorporate the additional benefit we would like to wait for the listing of its
Reuters
:
DLF.BO
Bloomberg
:
DLFU IN
52-week range (INR)
:
1,225 / 505
Shares in issue (mn)
:
1,704.8
M cap (INR bn/USD mn)
: 1,385 / 35,177
REIT. Also, we have applied 50% probability discount to its SEZ business due to lack of visibility on the land acquisition process. We have valued other businesses together at INR 148 per share. The company’s total NAV comes to INR 1,607 bn or INR 943 per share. At current market price of INR 813, the stock is trading at 14% discount to its current NAV. Its REIT launch plans in Singapore are on track and we expect it to be launched in the near future, which will help the company to reduce cap rates for its lease earning properties. The
Market Data
Avg. Daily Vol. BSE/NSE (‘000) :
5,737.9
stock has corrected by more than 17% since our last update and we believe this is a good buying level. Therefore, we are upgrading our recommendation to “BUY” from “ACCUMULATE”.
Share Holding Pattern (%) Promoters
:
88.2
MFs, FIs & Banks
:
0.5
FIIs
:
7.9
Others
:
3.4
Financials Year to March
Q3FY08
Q2FY08 % change
FY07
FY08E
FY09E
10.7 10.5 6.0 6.4
26,152
114,898
170,673
14,953
79,219
119,467
19,437
60,509
94,143
11.4
35.5
55.2
Net rev (INR mn)
35,984
32,499
EBITDA (INR mn)
25,014
22,637
Net profit (INR mn)
21,389
20,182
12.6
11.8
EPS (INR) P/E (x)
-
71.3
22.9
14.7
EV/EBITDA (x)
-
99.5
18.1
12.1
79.1
61.1
46.9
ROE (%)
Edelweiss research is also available on Bloomberg EDEL
1
38
DLF
Segmental snapshot
Residential business
Aggressive launch of mid income housing projects in second half of Q3FY08 with primary focus on Chennai, Indore, and Kolkata.
The New Town Heights in Rajarhat witnessed aggressive absorption; it was sold out with in four days of its launch.
Selling prices of the luxury housing category increased.
New tools like one house per family and one year lock in period were used to cut down speculative demand.
Commercial segment
Aggressive growth in area under construction; it increased by 16% and 35% over Q2FY08 and Q1FY08, respectively.
On track to achieve lease volume target of 12 mn sq ft per annum.
Average lease rates have dropped over the past quarter by more than 30%, primarily due to change in location.
Hotel segment
Management has identified 51 hotel sites compared to 39 in the previous quarter.
The first Hilton Garden Inn is set to open in Saket (New Delhi) by end 2008.
4,000 hotel rooms expected to be operational by FY10 end with a long term target of 25,000 hotel rooms in the next six-seven years.
International Convention Centre at Dwarka, New Delhi, is in advanced stage of design and development.
Acquisition of “Aman” gives a significant thrust to the hotels business unit, with a strong international footprint.
SEZ business
Five SEZs got notified, aggregating to 27 mn sq ft.
Six SEZs have been sent for final approval.
Land acquisition for both Manesar and Ambala SEZs is in progress.
For Goa, land acquisition process has just begun.
New land acquisition
DLF added 26 mn sq ft during the quarter, adding 748 mn sq ft compared to 738 mn sq ft in the previous quarter. The new acquisitions were as follows:
Hyderabad Raidurg: Acquired two parcels of 26 and 30 acres of and.
Adjoining site of Chennai IT Park: Acquired 1.73 acres site adjoining Chennai IT Park.
32 milestone : Executed collaboration agreement for 10.45 acres for new site at Village Silokhera Gurgaon.
2
39
DLF
Table 1: Total land reserve (mn.sq.ft) Super metros
Metros
Tier-I
Tier-II
Total % of total
Segment Office
53
71
21
6
151
Retail
31
35
13
9
88
Super luxury Luxury Mid income /Villas /Plots Hotel / Convention centre / Service apt. Grand total
% of total
4
0
0
0
4
40
6
1
0
47
129
230
67
14
440
7
4
4
2
17
265
346
106
31
748
35.4
46.3
14.2
4.1
20.2 11.8 0.5 6.3 58.8 2.3 -
Source: Company
During the quarter, DLF has injected money through private equity by selling 49% stake i.e., 37 mn sq ft. Table 2: Reconciliation of land bank with Q2FY08 (mn.sq.ft) Land reserves as per Q2 FY08
Super Metros
Metros
Tier-I
Tier-II
Total
257
333
105
43
738
-
-
Area developed & sold Area atributable to partners ( Merill & Brahma )
(4) -
(2) (30)
(5)
(6) (2)
(37) 26
Business preposition / product mix changed
8
39
(11)
(10)
New acquisitions- during Q3
4
5
17
-
265
346
106
Land reserves as per Q3 FY08
31
26 748
Source: Company
Sales to DAL Sales to DAL still remain a concern as sales as a percentage to total sales have gone up consistently. They have risen from 41% in Q1 to 56% in Q3. Management is confidant on the same and has set a target of bringing it below 20% by FY10E. Table 3: Sales break up (%) DAL
Non-DAL
Q1FY08
41.4
58.6
Q2FY08
53.0
47.0
Q3FY08
56.3
43.7
Source: Company
Outlook and valuations: Attractive; upgrade to ’BUY’ Our some-of-the-parts valuation of DLF is INR 1,606 bn or INR 943 per share. While valuing the commercial and retail properties, we have capitalized lease rentals at a discounted cap rate of 9%, which takes into account part benefit due to listing of the REIT. Further benefit of cap rate compression can be higher, but to incorporate the additional benefit we would wait for the listing of the REIT. Also, we have applied 50% probability discount to its SEZ business due to lack of visibility on the land acquisition process.
3
40
DLF
Table 4: SOTP valuations Existing business (INR mn)
1,436,568
Hotel business (INR mn)
57,859
Construction busines (INR mn)
18,464
SEZ business (INR mn)
176,173
Total NPV (INR mn)
1,689,064
Unpaid land cost (INR mn)
30,000
Discount years
2
NPV of unpaid land cost (INR mn)
23,574
Cash (INR mn)
84,915
Debt (INR mn)
143,032
Total NAV (INR mn)
1,607,373
No of shares (mn)
1,705
NAV per share
943
Source: Edelweiss research
At current market price of INR 813, the stock is trading at 14% discount to its current NAV. The REIT launch plans are on track and we expect it to be launched in the near future, which will help the company reduce the cap rate. The stock has corrected by more than 17% since our last update and we believe this is a good buying level. Therefore, we are upgrading our recommendation to “BUY” from “ACCUMULATE”.
Financials snapshot Year to March Income from operations Direct costs Employee costs Other expenses
(INR mn) Q3 FY08
Q2 FY08
35,984
32,499
9,512
8,326
609
606
850
930
Total operating expenses
10,970
9,863
EBITDA
25,014
22,637
148
110
24,866
22,527
Depreciation and amortisation EBIT Interest expenses
788
36
Other income
528
993
Profit before tax
24,606
23,484
Provision for tax
3,218
3,301
Reported profit
21,389
20,182
Adjusted net profit
21,389
20,182
Shares outstanding
1,705
1,705
% change 10.7 14.2 0.4 (8.6) 11.2 10.5 35.1 10.4 2,064.0 (46.8) 4.8 (2.5) 6.0 6.0 -
FY07
FY08E
FY09E
26,152
114,898
170,673
7,090
34,215
47,460
-
-
-
4,109
1,464
3,746
11,199
35,679
51,206
14,953
79,219
119,467
571
769
1,691
14,382
78,450
117,776 17,164
3,076
14,303
14,189
11,490
17,067
25,495
75,637
117,679
6,058
15,127
23,536
19,437
60,509
94,143
19,437
60,509
94,143
1,705
1,705
1,705
Dividend per share
-
3.5
5.5
Dividend payout (%)
-
10.0
10.0
4
41
DLF
Company Description DLF, incorporated in 1963, is one of the largest real estate development companies in India, with focus on residential, retail, and commercial construction activities. The company is promoted by Mr. K.P. Singh who has four decades of experience in the Indian real estate industry. DLF went public in 2007 with the issue of ~175 mn shares at INR 525 per share.
Investment Theme Default play on real estate in India DLF is the leader in the Indian real estate industry in terms of developable area. Its land bank of 748 mn sq. ft. of saleable area spread across the country. DLF’s land cost of INR 250 per sq. ft. is marginal compared to prevailing land prices. The company has an established presence across all property development verticals, with a balanced project portfolio.
Related businesses - to enhance value DLF has entered into tie-ups in related businesses with some of the best names in their respective industries. For its SEZ initiative, DLF has tied up with Nakheel, one of the leading property developers in the UAE; for hotels, it has a partnership with the Hilton Group; and for construction, it has tied up with the UK-based Laing O’Rourke Plc. We expect DLF’s SEZ and hotel businesses to start adding to its topline in the next 3–4 years; the value of these initiatives is, however, not captured in current valuations. Compressing cap rates – increasing valuations Retail and commercial properties in India are currently capitalised at 9–10%. DLF has filed with Singapore stock exchange for listing its REIT like structure which we feel will help the company to reduce the capitalization rate for its lease earning properties.
Key Risks We estimate DLF to complete its ongoing projects within 12-13 years, though the management expects to complete these projects in next 10 years. Till March 2007, DLF has developed and sold 224 mn sq. ft., representing 35-40% of company’s future plans. We believe that the company has the execution capabilities and will be able to deliver the same. However, timely completion of these projects will continue to remain a strong execution challenge for the company. Any delay in the execution of projects will put strain on cash flows and valuation, and will hamper the company’s growth prospects. DLF, for its SEZs, needs to acquire huge land bank, mainly in Gurgaon (20,000 acres). We have taken the complexity into account and taken 19-20 years to complete all four SEZs. We think this is sufficient time for such a big developer to acquire the land and complete the project. However, if the company does not get the land, then valuation of the business will suffer, as 13% of the valuation comes from SEZ only.
5
42
DLF
Financial Statements Income statement Year to March
FY05
FY06
FY07
FY08E
FY09E
Income from operations
6,081
11,536
26,152
114,898
170,673
Direct costs
3,165
5,243
7,090
34,215
47,460
Other expenses
1,234
1,536
4,109
1,464
3,746
Total operating expenses
4,399
6,779
11,199
35,679
51,206
EBITDA
1,682
4,757
14,953
79,219
119,467
Depreciation and amortisation
333
361
571
769
1,691
1,349
4,396
14,382
78,450
117,776
Interest expenses
390
1,685
3,076
14,303
17,164
Other income
179
884
14,189
11,490
17,067
Profit before tax
1,138
3,595
25,495
75,637
117,679
Provision for tax
259
1,668
6,058
15,127
23,536
Reported profit
879
1,927
19,437
60,509
94,143
1,704.8
1,704.8
1,704.8
1,704.8
1,704.8
EBIT
Shares outstanding Dividend per share
-
-
-
3.5
5.5
Dividend payout (%)
-
-
-
10.0
10.0
FY05
FY06
FY07
FY08E
FY09E
72.3
58.8
42.8
31.1
30.0
Depreciation
5.5
3.1
2.2
0.7
1.0
Interest expenditure
6.4
14.6
11.8
12.4
10.1
EBITDA margins
27.7
41.2
57.2
68.9
70.0
Net profit margins
14.5
16.7
74.3
52.7
55.2
FY06
FY07
FY08E
FY09E
89.7
126.7
339.3
48.5
EBITDA
182.8
214.3
429.8
50.8
PBT
215.9
609.2
196.7
55.6
Net profit
119.2
908.7
211.3
55.6
EPS
119.2
908.7
211.3
55.6
FY05
FY06
FY07
FY08E
FY09E
879
1,927
19,437
60,509
94,143
Common size metrics- as % of net revenues Year to March Operating expenses
Growth metrics (%) Year to March Revenues
Cash flow statement Year to March Net profit Add: depreciation Gross cash flow Less: Dividends
(INR mn)
333
361
571
769
1,691
1,212
2,288
20,008
61,278
95,834
-
-
-
6,051
9,414
(5,535)
8,589
67,025
57,748
32,055
Operating cash flow
6,747
(6,301)
(47,017)
(2,520)
54,364
Less: Capex
5,460
7,194
25,400
6,800
72,039
Free cash flow
1,287
(13,495)
(72,417)
(9,320)
(17,674)
Less: Changes in W. C.
6
43
DLF
Balance sheet As on 31st March
(INR mn) FY05
FY06
FY07
FY08E
FY09E
35
378
12,557
12,907
12,907
Reserves & surplus
7,436
9,123
27,115
145,460
230,189
Shareholders funds
7,471
9,501
39,672
158,367
243,096
Equity capital
Minority interest Borrowings Sources of funds
43
54
92
92
92
9,676
41,320
99,328
119,194
143,032
17,190
50,875
139,092
277,653
386,221
Gross block
8,253
13,023
17,787
36,995
60,554
Depreciation
1,549
1,891
2,412
3,181
4,871
Net block
6,704
11,132
15,375
33,815
55,683
Capital work in progress Total fixed assets
3,506
5,911
26,497
14,089
62,568
10,210
17,043
41,872
47,903
118,251
Goodwill
522
8,489
8,935
8,935
8,935
Investments
400
8,300
2,107
2,107
2,107
Inventories
7,049
16,409
57,006
109,621
157,087
Sundry debtors
2,852
6,580
15,195
0
0
Cash and equivalents
424
1,950
4,155
78,750
84,915
Loans and advances
6,039
10,665
52,438
55,060
57,813
Total current assets
16,364
35,604
128,794
243,431
299,815
8,383
15,095
33,450
3,545
9,937
961
3,374
8,979
21,178
32,950
Sundry creditors and others Provisions Total CL & provisions
9,344
18,469
42,429
24,723
42,887
Net current assets
7,020
17,135
86,365
218,708
256,928
Net deferred tax
(962)
(92)
(187)
0
0
17,190
50,875
139,092
277,653
386,221
4
6
23
93
143
FY05
FY06
FY07
FY08E
FY09E
11.8
22.7
79.1
61.1
46.9
ROCE (%)
8.9
15.5
30.1
43.2
40.6
Current ratio
1.8
1.9
3.0
9.8
7.0
Debtors (days)
171
208
212
-
-
Fixed assets t/o (x)
0.6
0.8
0.9
2.6
2.1
Debt/Equity
1.2
4.1
2.4
0.3
0.2
Uses of funds Book value per share (BV) (INR) Ratios Year to March ROE (%)
Valuations parameters Year to March
FY05
FY06
FY07
FY08E
FY09E
EPS (INR)
0.5
1.1
11.4
35.5
55.2
Y-o-Y growth (%)
-
119.2
908.7
211.3
55.6
346.3
60.5
15.9
47.5
74.2
1,576.8
719.3
71.3
22.9
14.7
185.5
145.9
34.9
8.8
5.7
EV/Sales (x)
229.4
122.8
56.9
12.5
8.5
EV/EBITDA (x)
829.3
297.9
99.5
18.1
12.1
CEPS (INR) P/E (x) Price/BV (x)
7
44
DLF
Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021, Board: (91-22) 2286 4400, Email: [email protected] Naresh Kothari
Co-Head Institutional Equities
[email protected]
+91 22 2286 4246
Vikas Khemani
Co-Head Institutional Equities
[email protected]
+91 22 2286 4206
Shriram Iyer
Head Research
[email protected]
+91 22 2286 4256
Coverage group(s) of stocks by primary analyst(s): Real Estate: DLF and The Phoenix Mills
DLF
Recent Research Date
1325 1165
31-Jan-08
1005 (INR)
Company
Buy
685
31-Jan-08
Buy
14-Jan-08
Jan-08
Dec-07
Nov-07
Nov-07
Oct-07
Sep-07
Aug-07
Jul-07
Jul-07
525
09-Jan-08
2,023
Buy
The Phoenix Fundamental intact; Mills Result update
Rating
Buy
Accumulate
Reduce
110
43
15
Emaar MGF Land
Immense potential;
540-630
Subscribe
IPO Note
The Phoenix India consumption Mills boom play; Initiating
2,290
Buy
Ganesh Hsg. Spreading tentacles; Corporation Visit Note
712
Not Rated
Rating Interpretation
Edelweiss Research Coverage Universe Sell 2
Total
Expected to
Buy
appreciate more than 20% over a 12-month period
Accumulate
appreciate up to 20% over a 12-month period
Reduce
depreciate up to 10% over a 12-month period
Sell
depreciate more than 10% over a 12-month period
188
* 12 stocks under review / 6 rating withheld
Market Cap (INR)
Recos
Coverage
Distribution of Ratings / Market Cap
Rating Distribution*
Price (INR)
Accm
Buy
845
Title
> 50bn
Between 10bn and 50 bn
< 10bn
88
74
26
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8
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