BIG Upgrade on DLF: Edelweiss says BUY DLF, price target Rs 370 (44% potential upside)

DLF is the largest (by market-cap) real estate player in India with exposure across office, retail (mall) and residential assets. The company is an established player in Delhi-NCR and is also present in 17 other cities across 13 Indian states. Edelweiss believes that the renewed focus on residential business a key positive for DLF going forward and the stock price can see huge rerating from here on.

Edelweiss believes DLF has certain key valuation triggers such as expectations of:

(a)    16% rental income CAGR by FY24E on commissioning of its 4msf under-construction assets, which would further strengthen its commercial portfolio
(b)   material de-leveraging owing to monetization of its rental portfolio through REIT listing
(c)    acceleration in sales growth and cash flows due to its robust 35msf diversified launch pipeline
(d)   re-rating in its land valuation on account of the continued rise in demand, which would confirm the industry upcycle

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Edelweiss initiates a ‘Tactical BUY’ on DLF with a price target of Rs 370/share (44% upside).

DLF operates the largest commercial portfolio in India with 35msf of assets under operations (includes assets in DLF Cyber City Developers Ltd or DCCDL), which is pegged to increase further to 40msf by end-FY24. This, along with contractual escalations and mark-to-market potential should enable DLF to deliver 16% rental income CAGR to Rs 4500 cr through FY24E. Further, Edelweiss expects DLF to continue delivering double-digit CAGR through gradual development of its 26msf land bank at existing locations over the next 15 years. While leverage at 6x of FY20 EBITDA is a concern for DCCDL, it is likely to decline materially as DLF is looking to monetise its commercial portfolio through REIT listing.

Strong pickup in demand across product categories has boosted management’s confidence to take up land development. Currently, DLF has firmed up launch plans for a part (35msf) of its 187msf and bank reserve, and if demand continues to strengthen, the company will consider more launches. DLF’s current launch pipeline includes plans to develop only five of the 20 locations that the company has exposure to, which leaves the company ample scope to develop a few more land parcels in the future. Thus, its well diversified land bank provides the company with a strong opportunity to capitalise on the expected real estate upcycle, explains Edelweiss.

Edelweiss have valued DLF’s considering the following pointers:

(a)    completed and upcoming residential inventory using NAV-based approach
(b)   commercial assets at 8% cap rate on FY23E EBITDA
(c)    land bank using discounted cash flow approach, to arrive at an SOTP-based price target of Rs 370 (44% upside)

While current market cap implies P/BV of 1.1x to DLF’s Rs 217 bn (book value) residential and commercial land bank, Edelweiss land valuation approach implies value of 2.4x to its BV (marginally lower than P/BV of 2.5-4x during the previous upcycle over 2010-13). Thus, sustained demand uptrend is a likely re-rating trigger for DLF’s land bank, in Edelweiss view.