Real estate shares: Should you buy DLF stocks? Analysis

The benchmark indices Sensex finished finally on a subdued note, however, there was one realty stock which gained massively making many investors rich. DLF, real estate firm, on Thursday, finished at Rs 201.35 per piece on BSE, up by Rs 9 or 4.68%.  However, the stock has jumped by nearly 6%, as it clocked an intraday high of Rs 203 per piece on the same index. Interesting, rating agency CLSA has given a buy call on DLF, with a price target of Rs 229. 

CLSA  says, " After adding debt at an Rs 8-10 bn/quarter pace for 4+ years, DLF’s consecutive quarters of flat debt trend on break-even cash flows marks a long-lasting turn, in our view. The rental business, with private equity support, is set to deliver double-digit compounding over the long term, crossing US$0.5 bn lease income by FY21."

It added, "The development business would stay high value-focused as low debt helps it adopt a low-risk, land-bank mining path. DLF has done well to deliver on project commitments making it among the very few survivors in the large NCR market. Upgrade DLF from Sell to Buy with a revised TP of Rs 229."

While giving a buy rating, CLSA listed out four factors which will decide the course for DLF in upcoming fiscals. 

1. Leasing business to deliver double-digit growth with stable balance sheet

DLF’s total lease income is set to rise ~50% over FY18-21 to touch Rs 40 bn (US$0.55 bn), and further at 10%+ Cagr over the long run. The main lease asset holding subsidiary DCCDL JV with a private equity partner is currently generating c.Rs 15-17 bn in annual cash surplus; enough to fund annualised capex of 1.5-2.0 m sf and/or substantial dividends. Quality land availability (19m sf, Cybercity) and mark-to-market potential of existing leases (16-18%) add to visibility.

2. Development business has achieved stability; growth eyed

The development business’s near cash-flow break-even for two quarters should mark a lasting turn. The Rs 123 bn inventory sells at Rs 5-6 bn/qtr as completed apartments are finding takers even in a weak NCR market. DLF’s two major new devco projects (10m sf) will also be under private equity JVs. The Rs 159bn debt on devco has a visible path to substantial reduction via asset transfers to DCCDL (Rs 60-80 bn), warrant money infusion (Rs 23 bn) and a pending QIP (c.Rs 32 bn).

3. Management espouses lower risk; cash-flow-focused business model

DLF’s promoters reiterated their commitment to building a ‘debt-free’ devco and a large cash surplus generating lease business. The latter could be used for higher shareholder returns/asset acquisitions. Development business will remain high-margin and selling back-ended.

4. Upgrade target and earnings

Improved balance sheet and cash-flows and management’s conviction in the lower-risk model will ensure  business should be a lasting one.

Thereby, if you take current market price and compare it with CLSA's target value, then DLF is seen to rise by nearly 14%. Hence, if you are looking to buy this stock, then now would be the right time.