DLF: Upside potential of 35% : By KRChoksey
INVESTMENT RATIONALE
Premium land bank and diversified product-mix DLF’s landbank is primarily located in the NCR, Kolkata, Chennai and Bangalore, which are high-margin locations where significant commercial, retail and residential demand is expected. DLF has also acquired land in up-market locations in New Delhi and Mumbai, where the company plans to develop super-luxury apartments. DLF has total developable area of 430 mn sq. ft. in various regions across India. Of this, ~80% is in super-metros and metros.
Further, the company has been acquiring this land bank over past many years as a result of which its average land cost stands at ~Rs 320 / sq. ft., this provides key long-term competitive advantage to the company. We believe; DLF’s premium land bank (accumulated at low cost) provides the management the flexibility to implement prudent strategies. Thus, the company can take timely and proactive measures to counter slowdown in any particular segment, without taking a significant hit on its profitability.
Residential demand has revived and expected to stay strong
Despite an expected rise in the interest rate the residential demand remains robust. The residential demand is not just the function of the interest rate but it is also driven by job creation and job confidence. With the industrial growth and improving economic conditions, the demand for homes will escalate. Home prices may remain firm or increase slightly in metros such as Delhi and Mumbai and their suburbs as demand picks up once again on the back of renewed activity on the employment front.
In the last six months, prices of affordable apartments have appreciated by around ~15-20% across the country. With improvement in the sentiment in the economy, transactions in the affordable range of residential real estate have gone up, which ahs lead to increase the prices. The pick up in the demand and prices are evident from the response the real estate developers, including DLF, got for some of their recent launches. DLF sold out 1,200 units of independent floors for Rs 500 crore in the first phase of its integrated township at Panchkula (Haryana).
Demand in commercial segment
Commercial real estate market across the country continued to show a downward trend over the past few quarters as most of the eight major cities recorded negative growth in rental values. Most micro-markets across the country witnessed 15-25% decline in rentals in 2009 as compared to 2008. The Vacancy levels continue to remain high at 15- 20% with most IT/ITeS destinations contributing to high vacancy levels.
Though 2009 saw a drop in expected supply, major cities recorded 51.8 million sq. ft. of new office space supply. As corporates start to re-look at leasing large spaces, this new supply is expected to be absorbed in 2010-11. Due to the gradual recovery of the economy, we believe the demand for office space is likely to increase by the second half of 2010. Corporates have been cautious about expansion in 2009, both because of the recession and also falling office space rentals. However, with several large and mid-sized US corporates firming up their plans to outsource their work to India, the outlook seems positive for the employment market and the commercial real estate segment
Valuations
We recommend a BUY on the stock with a 12-month target price of Rs385 per share, based on NAV valuation methodology, which offers a potential upside of 35.1%.
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