Stock Recos : Buy DLF, target Rs 800: CLSA

CLSA is bullish on DLF and has maintained buy rating on the stock with target price of Rs 800.

CLSA research report on DLF

Listing of DAL (DLF Asset Ltd)

A company owned by the promoters of DLF – will be a likely near-term trigger for DLF as it will give more evidence of cap rate compression for IT-SEZ properties driving a 5% increment to our NAV of Rs645/share. While the stock trades at 18% premium to our forward NAV, we believe that a gradual shift to a PE based valuation methodology, as seen in China, will be beneficial for DLF. In a blue sky scenario, the stock could trade up to 20xFY09CL earnings i.e. Rs1,000/share. Maintain BUY.

DAL REIT listing adds visibility to earnings

Speaking at CLSA’s investor forum last week, DLF’s management confirmed listing of a Reit by DLF Assets Ltd (DAL) during 2HFY08. The Reit, which seeks a valuation of approx USD 2 billion, will add visibility to DLF’s earnings as sale of DLF’s commercial assets to DAL are expected to contribute c.50% of near term earnings. While the listing of DAL in itself is unlikely to have any direct impact on DLF, a possible lower cap rate of 7% (currently we assume a 9%) will likely set a better valuation benchmark for future asset sale by DLF and hence is a positive. A potential 200bps cap rate compression on IT-SEZ properties will add 5% to DLF’s forward NAV of Rs645/share.

Strong rollout plans

DLF plans to ramp up delivery from 10 million sft in FY07 to 22 million sft in FY09. The company targets steady state delivery capability of 12 million sft of office and 8million sft of retail space annually. DLF is also making a big entry in mid-income housing in 3QFY08 with a selling rate of close to Rs3,000/sft. Management expects to launch 9 million sft of mid-income houses by FY08 end across 5 new locations viz. Chennai, Bangalore, Cochin, Lucknow and Indore.

Gradual shift to PE based valuations underway

While real estate stocks are usually valued on the basis of P/NAV ratio, an increasing trend in comparable markets such as Brazil and China points towards a trend of valuing stocks on a P/E basis. While P/E method is simple and addresses the issue of variability in underlying assumptions for NAV calculation, theoretically, it ignores the issue of ‘sustainability’ of earnings.

However, we believe that DLF’s near-term earnings are sustainable as a potential property price correction will be more than offset by volume jump. While the stock trades at 18% premium to forward NAV, we believe that the stock price will move on anticipated NAV accretion in the future. Comparable Chinese stocks trade at 22-25x on Dec’08 earnings and 30-65% premium to NAV. Thus, in a blue sky scenario, the stock could trade up to 20xFY09CL earnings i.e. Rs 1,000.