DLF: Investors should be cautious given weak demand scenario, downside risk

Cost control efforts and ongoing consolidation are other triggers for the stock

The DLF stock is up 8 per cent in the past two trading sessions on expectations that the company’s focus on mid-income segment projects, lower costs, and monetisation of land bank would help improve its revenue growth and cash flows. While the current year is expected to be a tough one for residential real estate players, the company indicated it sees green shoots, with revival across markets. 

The immediate trigger would be the pace of launches in the mid-income segment and monetisation efforts. Biplab Debbarma of Antique Stock Broking says the company’s focus has now moved from luxury/premium projects with unit costs of Rs 5 crore and more, to mid-income and affordable segments, where costs range between Rs 50 lakh and Rs 2 crore. Further, the company is also changing its sales strategy, with new projects witnessing sales during the construction period. This is a major shift from the previous strategy of selling ready inventory. 

The other positive for the stock is the monetisation of its land bank of 192 million square feet, of which more than half is in Gurugram. The book value of the land bank is pegged at Rs 12,000 crore. Analysts at Kotak Institutional Equities believe that the company’s attempt to fast track development of the land bank is a positive, as the economic value added from the development business, at Rs 5,000 per square feet, is well in excess of the land value of Rs 720 per square feet.

Further, the ongoing consolidation, especially in the National Capital Region, will help DLF gain market share, as a weak demand environment could lead to smaller developers going out of business. In this scenario, developers with low leverage, market leadership, and healthy office portfolio such as DLF are best placed to survive the turmoil, believe analysts at Edelweiss Research.   

The company’s efforts to bring down its costs should help improve liquidity. DLF is aiming to reduce its fixed costs, which were at Rs 650 crore by 50 per cent in the current financial year, with most of the gains coming from non-salary overheads.

Despite the recent price uptick, given the fair value or target price of analysts at around the Rs 200 mark, there is a 27-per cent uptick from current levels. Investors, however, should be cautious, given the weak demand scenario and a downside risk of further lockdowns.