DLF Share: Risk Reward Attractive

Review by UBS

We maintain our ‘buy’ rating on DLF Ltd with a 12-month price target of Rs. 280, which is based on a 30 per cent discount to our NAV of Rs. 400. The discount factors in delays in efforts to cut debt and slower-than-expected execution ramp-up. That said, we still believe DLF Ltd  has a superior business model, good asset-geographic mix and strong growing rental income of Rs. 1,800 crore per annum, which differentiates it from peers.

We believe the negative sentiment on back of recent news of political links is largely priced in with the stock down 11 per cent over the past week. DLF Ltd has denied and clarified the allegations, highlighting the company has not given any unsecured loan or sold any properties at below market rates for undue favours in land allocation.

Lack of clarity on whether increased media headlines on DLF's political linkages could lead to an investigation by the authorities remains an overhang. We believe it will be difficult to investigate these allegations, given the issues are more politically motivated (a similar controversy on the Vadra – DLF Ltd  link was raised in March 2011 but nothing materialised).

Also 3 to 4 year old transactions & low levels of disclosure in the sector make it tough. Further, linkage of politicians with real estate developers / promoters has been a common concern in real estate development. Factoring all such instances, we do not expect any major negative impact for DLF Ltd .

We believe potential rate cuts & early debt reduction following more asset sale closures over next few months will revive stock sentiment we see this weakness as an attractive risk-reward opportunity.

In new our view, the de-leveraging seems to progressing well. We expect asset sale closures of Rs. 2,400 to 2,900 crore (Aman resorts, windpower) over the next 2 to 3 months as informal channel checks suggest Aman sale is in advanced stages of closure.

Further, with receipt of Mumbai land sale cash flow of Rs. 2,700 crore, we believe and early debt reduction of Rs. 2,00 to -3,000 crore by January 2013 (versus DLF Ltd  Rs. 5,000 crore management guidance by March 2013) will help offset current negative sentiment.

We believe likely interest rate cuts of 1% followed by encouraging pre-sales in the second half of FY13 (Magnolias-II planned for launch) & scale-up in construction would be other positives.

- UBS

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