DLF_initiation_12Nov08

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DLF Limited

Long way to bottom: Sell

November 2008

Urmik ChhayaTel: +91 3954 1558E-mail: [email protected]

Nirav Parikh, CFATel: +91 3954 1563E-mail: [email protected]


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A Reliance Capital company2

Investment summary

DLF (CMP: Rs 255, target price: Rs 176)

Volumes to disappoint in the immediate period

Rising receivables during the better part of the cycle (again to result in lower volumes)

Commercial property sale to slow post DLF Assets (DAL) transaction

Valuation

Based on our assumption, DLF has an NAV of Rs 220/share. (Please refer to our Valuationsection on page 7.)

Volumes are likely to disappoint significantly going ahead

We initiate coverage with a Sell rating and a target price of Rs 176/share implying a discountof 20% to the NAV


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Investment concerns

Volume delivery to disappoint in the immediate period

DLF has planned average delivery of 50m sq. ft. annually through FY09-FY18E. It has booked

sales of 36.6m sq. ft. in FY081H FY09, while delivery stood at 14.2m sq. ft. The differencebetween delivery and sales is due to the Percentage Completion of Contract Method (PCCM).

The company currently has 63.6m sq. ft. under construction against a targeted averagedelivery of 50m sq. ft. annually for FY09-FY18E. However, sales booked (NOT delivered) inthe last 30 months has been 53m sq. ft.

Delivering 50m sq. ft. annually (even with its focus on the mid-income housing* segment) willbe difficult, in our view

* Note:Mid income accounted for 92% of sales in volume terms in the last 18 months

Volume data

Million sq. ft

Delivered (FY08, H1FY09) 14.2

Under construction 63.2

Sales booked (during FY08, H1FY09) 35.4

Sales booked (opening bal FY08) 16.4

Planned delivery (Yearly) 40.0

Source: Company data, Reliance Equities research.


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Investment concerns (contd)

Commercial property sale post DLF Assets (DAL) transaction to slow down

DAL accounted for 47% and 39% of sales respectively in FY08 and 1H FY09 respectively. DLF hassold four commercial properties (total sales value of Rs 150 billion) to DAL

So, far DLF has recognized sales of Rs 99.7 billion out of a total value of Rs 150 billion. Of this,48% of the sales recognized is yet to be received, while the balance sales to be recognized standsat Rs 50.3 billion

DLF has so far delivered 4.7m sq. ft to DAL and expects to deliver another 5.3m sq. ft by March2009. DALs total portfolio will include 20m sq. ft (balance 10m sq ft expected to be delivered byMarch 2010)

Thus, around 67% of the total value of sales to DAL has been recognized, while the company isyet to deliver 75% of the space. (Please refer to Annexure III: DAL detailson page 14.)

Sales mix

Rs million

FY08 1H FY09 TotalSale - DAL 69,430 30,270 99,700

(% of total sales) 48 39 45

Sale - non DAL 75,520 46,592 122,112

(% of total sales) 52 61 55

Total sales 144,950 76,862 221,812Source: Company data.


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Investment concerns (contd)

Rising receivables during better part of the cycle (again to result in lower volume delivery)

DLF had total sales of Rs 221 billion in FY081H FY09

Receivables currently stand at Rs 97 billion

Thus, effectively 44% of sales during this the period are yet to be received

Rising receivables during the better part of the cycle clearly indicates volume slowdown goingahead


6/17A Reliance Capital company6

Key risk to the call

Funding of DAL

Till date, DAL has received equity funding of US$1.05 billion from private equity investors namelyDE Shaw and Symphony Capital

DAL has paid Rs 52 billion to DLF (till 1H FY09), while Rs 48 billion is yet to be paid (for salesrecognized)

Sales of Rs 50 billion is yet to be recognized (this is likely over the next few quarters)

Thus, any extra funding on the DAL front, should help to bring down receivables



Valuation methodology

NAV-based approach is more appropriate due to:

Lumpiness in the earnings due to the percentage completion method (PCCM)

Scale of projects undertaken compared to historical execution. (Please refer to Annexure I:Historical volume summaryon page 11)

A P/E-based approach is more appropriate for the sector when it has consistent historicalearnings. Once consistent earnings are delivered and appropriate data is available, the sector willbe valued like a cyclical industry



NAV calculation assumptions

Prices across segments have been dropped by 5% and 10% for FY09E (compared to FY08) andFY10E respectively

WACC has been assumed at 14.3%, while the capitalization rate has been assumed at 10%

The Dankuni project has not been included for the calculation of NAV

NAV summary

Rs million

Segment

Residential 292,766

Retail 115,616

Office 146,150

Hotels 18,096

Less:

Debt 146,730

Land payment 57,390

Add:

Cash 13,326

NAV 381,834

NAV/share (Rs) 222

Source: Reliance Equities estimates



Financial summary

Profit and loss

Rs million, year-end March

FY06 FY07 FY08 FY09E FY10E

Net sales 18,357 26,344 144,375 160,568 183,799

Other income 1,082 14,170 1,414 3,000 3,000

Cost of land, plots and constructed prop 8,502 6,394 24,350 58,169 71,927

Other expenditure 2,355 5,083 22,874 5,286 6,608

EBIDTA 7,500 27,948 97,306 97,113 105,264

EBIDTA (%) 41 71 67 60 57

Depreciation 358 578 901 1,457 1,857

EBIT 7,142 27,370 96,406 95,656 103,407

Interest 1,685 3,076 3,100 13,027 14,277

Profit before tax 6,702 25,402 95,614 86,629 93,130

Provision for tax 2,590 6,052 17,391 21,657 23,282

Profit after tax 4,112 19,350 78,223 64,971 69,847

Share of loss in associates 0 -13 264 0 0

Minority interest -10 -11 -355 0 0

Profit after tax and minority interest 4,102 19,326 78,133 64,971 69,847

Source: Company data, Reliance Equities estimates.



Financial summaryBalance sheet

Rs million, year-end March FY06 FY07 FY08 FY09E FY10E

Sources of funds

Shareholders' funds 10,038 35,549 196,883 258,716 320,392

Equity capital 378 3,059 3,410 3,410 3,410

Preference share capital 0 9,498 9,496 13,959 13,959

Reserves and surplus 9,661 22,992 183,977 241,347 303,023

Minority interest 54 92 3,894 3,894 3,894

Loan funds 41,320 99,327 122,771 137,771 147,771

Deferred tax liability 183 197 359 359 359

Total capital employed 51,596 135,165 323,907 400,741 472,416

Application of funds

Goodwill 8,500 8,935 20,930 20,930 20,930

Net block 8,166 15,632 48,191 68,026 86,169

Capital WIP 16,633 26,219 51,840 43,352 42,165Investments 8,149 2,107 9,102 9,102 9,102

Pre-operative expense 3

Current assets, loans and advances 28,132 128,343 266,001 341,469 413,574

Current liabilities and provisions 17,985 46,072 72,157 82,138 99,523

Net current assets 10,146 82,272 193,844 259,331 314,051

Total capital employed 51,596 135,165 323,907 400,741 472,416

Source: Company data, Reliance Equities estimates



Annexure I: Historical volume summary

Volumes: Sales booked

million sq. ft

Segment FY07 FY08 1H FY09

Residential 10.0 4.9

Office 11.9 3.5

Retail 3.7 1.3

Total 16.4 25.6 9.7

Source: Company data.

Volumes delivered

million sq. ft

Segment FY08 1H FY09

Residential 2.0 1.1

Office 5.7 3.8

Retail 1.4 0.2

Total 9.0 5.1


Under construction

million sq. ft

Segment

Residential 15.4

Office 35.6

Retail 12.2

Total 63.2




Annexure 1: Historical volume summary (contd)

DLF has booked 53m sq. ft of space in the last 2.5 years, while planned delivery includes averagevolume delivery of 50m sq. ft for the next 10 years (till FY19)

Since its inception six decades back till November 2006, the company has completed 220m sq. ftof real estate development, while for FY08 and 1H FY09, it delivered 14.1m sq. ft. Thus, excludingplot development, since its inception DLF has delivered 40m sq. ft* across segments

* Note: Numbers for December 2006 to March 2007 are not available

Completed development (from inception till November 2006)

million sq. ft

Segment

Plots 195

Residential 17

Commercial 6

Retail 2

Total 220




Annexure II: Volume summary (used for NAV)

Planned volume summary

million sq. ft

Segment FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Total

Residential 20 23 35 44 49 51 48 48 52 10 9 4 394

Retail 14 12 10 8 8 8 9 10 7 0 0 0 86

Office 14 13 17 17 13 11 7 14 13 11 0 0 128

Total 47 49 62 69 70 70 64 72 72 20 9 4 608

Source: Reliance Equities estimates.Note: The above volume summary does not include the Dankuni project.



DLF Asset Limited (DAL) details

PE investment in DAL

US$ million

Period Investors Amount

1Q FY08 DE Shaw 400

1Q FY08 Lehman Brothers 200

4Q FY08 Symphony Capital 450

Total 1,050


Current investors in DAL

US$ million

Investors in DAL

DE Shaw 600

Symphony Capital 450

Total 1,050


DALDLF transactions

Rs billion

Total sales to DAL 150

Sales recognized 100

CF received 52

Receivables 48

Sales yet to be recognized 50

Source: Company data, Reliance Equities research.



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Key to REIPL recommendationsBuy = Expected return +15% or moreHold = Expected return in a band of +/- 15%Sell = Expected return -15% or lessAll returns calculated over a 12-month period (including dividend).

DISCLOSURES

This document has been prepared by the Research Division of Reliance Equities International Private Limited, Mumbai, India (REIPL) and is meant foruse by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without priorpermission of REIPL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security.

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been madenor is its accuracy or completeness guaranteed. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation thatany investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report maynot be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and

specific needs. The recipient should independently evaluate the investment risks. The value and return of investment may vary because of changes ininterest rates, foreign exchange rates or any other reason. REIPL and its affiliates accept no liability for any loss or damage of any kind arising out ofthe use of this report. Past performance is not necessarily a guide to future performance. Actual results may differ materially from those set forth inprojections. Forward-looking statements are not predictions and may be subject to change without notice.

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