Building brick by brick

We upgrade DLF to Overweight with a Mar-14 price target of Rs 300 (earlier Mar-13 PT of R220). Debt reduction and launch of luxury Gurgaon projects should boost core operating cash flows, thus returning the company into a surplus free cash flow zone. Rate cuts through FY14 will be an added positive. We believe the company's turnaround strategy of fixing execution, de-leveraging and focusing back on performing north India markets should start bearing fruit henceforth. Over the next three months, we see multiple catalysts potentially pushing the stock higher. These are: (i) Q4 launch of luxury "Magnolia/ Park Place" projects, (ii) additional traction in asset sales, and (iii) rate cuts.

Initiatives on business consolidation paying off: We think DLF has been making the right moves in terms of fixing its business efforts, which have now started bearing fruit. Debt reduction has started to come through and more should follow. A revised execution strategy is also in place (15msf+-million sq ft—deliveries expected in FY13). As the company turns on launches in its core north India markets, we expect a turnaround in the operating cash flows for the company going into FY14. Some of the key steps undertaken to improve its business position over the last year are:

(i) Reducing debt levels by asset sales: Some of the key large transactions have been concluded (NTC, Aman Resorts) generating Rs 43bn in asset sales. The company now seems to be closer to its net debt target of R185 bn by FY13 end (JPMe-R190 bn). Post-NTC Mumbai transaction, net debt has come down to Rs 212bn and is expected to come down further as proceeds from Aman sale come in (R16 bn). We note there are additional transactions in the pipeline (Wind Power R8 bn, potential sale of certain operating hotels, plots, etc.).

(ii) Improving project execution by outsourcing to large contractors: The company's strategy of outsourcing of construction to two large reputed contractors, L&T/Shapoorji Pallonji, should aid the pace of construction and deliveries ahead. In H2FY13, the company expects to deliver almost 15 msf of projects, which should significantly de-stress business execution, enabling a restart of its construction portfolio starting FY14. This should also moderate focus on plotted developments, which is there currently.

... contd.

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