DLF : Getting real

The sharp fall in the stock price now leaves some room for appreciation.

India's biggest real estate player DLF Ltd celebrated its entry into the S&P CNX Nifty with an 8 per cent rise. The stock has been among the biggest losers in the recent fall: it listed at Rs 570, saw a high of Rs 1205 and fell sharply, by as much as 60 per cent, before recovering to Rs 654 on Friday.

It's not simply the weak sentiment in the market that has led to correction in the price; continuing high interest rates and the possibility of a slowdown in offshoring by foreign IT and ITES companies, some of whom are DLF has clients, have made investors cautious.

If that happens, the company's plans to develop about 16-17 mn sq ft in FY08 and about 20-24 mn sq ft in FY09, may not be fully achieved. However, DLF has very little exposure to the residential space, where demand has slackened considerably.

Further, analysts are concerned about the high expenses on intrerest and the sharp rise in the company's debt of about 19 per cent q-o-q, seen in the December 2007 quarter. What's also worrying is that the higher debt is due to a fairly large rise in debtors.

Moreover, about a third of the total debt of about Rs 4,000 crore, is believed to be due from DLF Assets Company (DAL), a company owned mainly by the promoters of DLF. To improve its cash flows, DLF has offloaded stakes in some projects to private equity firms. For instance, Merrill Lynch has picked up stakes in several projects.

However DLF has not yet been able to list projects on the Singapore Exchange through the REIT structure. The firm's operating margin in the December 2007 quarter was flat at 69.5 per cent while the net profits rose 6 per cent q-o-q to Rs 2,145 crore.

It should close FY08 with revenues of about Rs 13,350 crore and net profits in the region of Rs 7,300 crore. That would result in an earnings per share of about Rs 43. In FY09, sales are expected to increase to about Rs 17,000 crore while net profits could cross Rs 9,000 crore.

Analysts estimate the net asset value, based on the discounted cash flow model, at around Rs 715. They believe the stock should trade at a premium of about 15-20 per cent to the NAV, given the quality of the company's 615 mn sq ft land bank and strong position in the high margin commercial segment.