Weak show, DCCDL key trigger

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1 RESULTS REVIEW 4QFY17 29 MAY 2017 DLF NEUTRAL INDUSTRY REAL ESTATE CMP (as on 29 May 2017) Rs 176 Target Price Rs 192 Nifty 9,605 Sensex 31,109 KEY STOCK DATA Bloomberg DLFU IN No. of Shares (mn) 1,784 MCap (Rs bn) / ($ mn) 314/4,864 6m avg traded value (Rs mn) 1,652 STOCK PERFORMANCE (%) 52 Week high / low Rs 216/101 3M 6M 12M Absolute (%) Relative (%) SHAREHOLDING PATTERN (%) Promoters DIIs & Local MFs 0.74 FPIs Public & Others 6.16 Source : BSE Parikshit D Kandpal parikshitd.kandpal@hdfcsec.com Weak show, DCCDL key trigger DLF s 4QFY17 APAT came in 17% below estimates. The Residential segment continues to reel under cost overruns in legacy projects completion, resulting in EBIDTA losses. The Rental seg is the key driver of profitability. The B/S continues to deteriorate on account of (1) Slowing pre-sales, (2) Cost overruns in legacy proj and (3) Construction step-up in proj nearing completion. This has resulted in Rs 28.9bn increase in net debt YoY. In FY17, DLF recorded gross pre-sales of Rs 21bn, and post cancellation/upgradation, net pre-sales stood at Rs 11.6bn. The co expects softer 1HFY18E. DCCDL s funds inflow owing to stake sale could take place in 3QFY18E. With the demonet impact diminished, we maintain NEU with increased NAV- based TP of Rs 192/sh (we have removed 15% NAV discount on account of demonet). Highlights of the quarter Weak financial performance: Owing to weak profitability from Residential, DLF reported EBIDTA margin of 31.9% (-1,462bps QoQ). Gross leasing stood at 4mn sqft, and net leasing (post 3.15mn sqft termination/expiry) at 0.88mn sqft. Renewals are taking place at higher rates. Phase V sales weak, high Residential inventory: DLF has ~Rs 140bn (7-yrs on FY18E pre-sales) of high value inventory nearing completion. We remain cautious on the residential segment recovery. DCCDL stake sale in last lap, key re-rating trigger: DLF expects to close the DCCDL transaction by 3QFY18E. We expect inflow of Rs bn, and will reduce DLF s debt by 50%, and net D/E from 1.02x to 0.33x by FY18E. Stake sale is the key trigger for DLF s re-rating. Financial Summary* Y/E March (Rs mn) 4QFY17 4QFY16 YoY (%) 3QFY17 QoQ (%) FY16 FY17E FY18E FY19E Net Sales 22,252 25,465 (12.6) 20, ,256 82,212 84,215 88,551 EBITDA 7,102 7,133 (0.4) 9,578 (25.9) 39,977 34,333 36,228 38,399 APAT 480 (609) ,275 2,642 3,479 5,705 Diluted EPS (Rs) 0.3 (0.3) P/E (x) EV / EBITDA (x) RoE (%) Source : Company, HDFC sec Inst Research, * Consolidated HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

2 Revenue/ EBIDTA declined 12.6/ 0.4% YoY. Adjusted for exceptional gain in Blackstone JV restructuring, adjusted PAT came in 16.8% below estimates EBIDTA margins expanded 390.6bps YoY to 31.9%, owing to (486.5)/30.1/65.9bps (decrease)/increase in material/employee/other expenses. Reported net profit came in at Rs 1,421mn and adjusted for Rs 941mn exception gain from JV restructuring, APAT came in at Rs 480mn Adjusted for DCCDL, residential business continues to record losses on the back of legacy projects FY17 Net D/E stood at1.02x and net debt increased Rs 6,990mn QoQ to Rs 250.9bn. Gross debt is Rs 292bn Quarterly Financial Snapshot (Consolidated) Particulars (Rs mn) 4QFY17 4QFY16 YoY (%) 3QFY17 QoQ (%) FY17 FY16 YoY (%) Net Sales 22,252 25,465 (12.6) 20, ,212 99,256 (17.2) Material Expenses (11,065) (13,902) (20.4) (7,294) 51.7 (34,658) (45,579) (24.0) Employee Expenses (790) (827) (4.5) (1,017) (22.4) (3,283) (3,152) 4.1 Other Operating Expenses (3,295) (3,603) (8.5) (2,691) 22.5 (9,939) (10,548) (5.8) EBITDA 7,102 7,133 (0.4) 9,578 (25.9) 34,333 39,977 (14.1) Interest Cost (7,383) (6,468) 14.1 (7,586) (2.7) (29,798) (26,798) 11.2 Depreciation (1,402) (1,493) (6.1) (1,420) (1.3) (5,725) (7,659) (25.3) Other Income 3, , ,485 4, PBT 2,121 (152) (1,491.4) 1, ,295 10, Tax (537) (1,646) (67.4) (516) 4.1 (2,293) (5,642) (59.4) Minority Interest (6) 315 (13) (146) 253 Share of associates (157) (313) (49.9) (267) (923) (1,569) (41.2) PAT 1,421 (1,796) ,934 3, E/o (adj for tax) (941) 1,187 - (4,293) 1,967 RPAT 480 (609) 976 (50.8) 2,642 5,275 (49.9) Margin Analysis (Consolidated) 4QFY17 4QFY16 YoY (bps) 3QFY17 QoQ (bps) FY17 FY16 YoY (bps) Material Expenses % Net Sales (486.5) , (376.4) Employee Expenses % Net Sales (139.3) Other Ope Expenses % Net Sales EBITDA Margin (%) (1,462.6) Tax Rate (%) 25.3 (1,079.9) (378.6) APAT Margin (%) 2.2 (2.4) (258.2) (210.2) FY17 gross presales stood at Rs 21bn and post cancellation/upgradation net presales stood at Rs 11.6bn Page 2

3 DLF is undergoing a major restructuring in the Rent Co. business. In the Stage 1 DLF s promoters will convert CCPS in DCCDL into 40% stake. GIC Singapore has been finalised as the buyer of promoters stake We expect Rs 82-90bn inflow to promoters post-tax Rent co divestment: Key deleveraging trigger Stage 1: DLF s promoter stake monetisation in DCCDL: DLF is in advance stages of closing the Game Changer, the term it uses to describe DLF s promoters 40% stake divestment in DLF Cybercity Developers Ltd. (DCCDL). The restructuring of the Rent co. will be a two-stage process, with the first stage being that of DLF s promoters converting Rs 16bn of CCPS in DCCDL for its 40% stake. This will be divested to the investors. As publicly disclosed by DLF, GIC Singapore is in advance stages of confirmatory due diligence, while legal documentation is being carried out simultaneously. The deal is expected to consummate (money to flow in) by Oct-Nov-17E-end, when the valuation will be finalised (effective date one month prior to signing the contract). Stage 2: The funds so received post-capital gains tax shall be infused into DLF. This will result in a fresh share issue to promoters, hence will breach the 75% shareholding norm. The fund infusion will have to be followed by QIP dilution, so as to bring the shareholding back to 75%. We expect Rs 82-90bn proceeds from Stage 1. In the Stage 2: DLF promoters will infuse the proceeds into DLF parent. Their stake will go up from 74.9% to 80.2%, crossing regulatory shareholding cap of 75% The fund infusion has to be followed by 6-7% equity dilution through QIP. This will help raise another Rs 27-30bn Stage 1: DLF Promoter Stake Monetisation in DCCDL DCCDL Assets FY17E FY18E FY19E Gross area for lease (mn sqft) Average occupancy % Leased space (mn sqft) Average Rental (Rs/sqft/month) Rental income (Rs bn) Implied Cap Rate % DCCDL EV (Rs bn) Development Potential Pipeline (mn sqft) FSI sale Value (Rs/sqft) 6, , ,000.0 EV of Development Potential (Rs bn) Utilities Maintenance at 10x Revenue Total DCCDL EV (Rs bn) DCCDL Net Debt (Rs bn) - end FY DCCDL Equity Value (Rs bn) % Promoter's stake Capital Gains Tax 15% on Promoter stake sale (Rs bn) Net Inflow to Promoters (Rs bn) Page 3

4 Stage 2: Promoter/QIP fund infusion to result in 50% debt reduction Total fund infusion in two stages of corporate action is expected at Rs bn This will result in net D/E coming down from 1.02x to 0.33x end FY18E We expect the QIP to take place at the time of DLF s promoters fresh share issue or a little later, within the regulatory window of paring stake to 75%. The inflow through the QIP will be ~Rs 27-30bn. We model for total fund inflows, post Game Changer, into the DLF parent at Rs bn. Post restructuring, DLF s share in debt will reduce to Rs bn, ~51% of the Rs 223bn of DLF s attributable debt as of FY17-end. At current market capitalisation, DLF s promoters fund infusion of Rs 82-90bn will result in 26.3% equity dilution, which shall raise the promoter stake to 80.2% from 74.9% currently. This will require further equity dilution of 6-7% through QIP (Rs 27-30bn), to bring down DLF s promoter stake to the regulatory ceiling of 75%. Total fund infusion of Rs bn is expected in two stages at. This will result in net D/E reducing from 1.02x currently to 0.33x end-fy18e. Due to regulatory approvals required for the deal closure, fund inflows may come in 3QFY18E. Post deal CCI/Shareholders approval will be required. Stage 2: DLF Promoter Inflow Into DLF Along With QIP Rs bn FY18E FY19E DLF Promoter inflow into DLF QIP Size to maintain DLF 75% holding Net Inflow into DLF - A Current Net Debt DLF Less: Share of DLF Promoter Net Debt in DCCDL at 40% DLF attributable net debt - B Net debt post transaction C = B-A Net Debt/Equity - Post Game Changer (vs 1.02x currently) 0.33x Page 4

5 Our calculation suggests that, post the implementation of stake sale to the institutional investors, DLF will be able to cut its debt by 50% Games changer: To make DLF cash-flow surplus In the exhibit below, we have arrived at Rs 11bn cash flow shortfall for DLF during FY19E. This shortfall needs to be funded by bank loans. The intensity of the shortfall may continue until the Dev Co. s revenue and EBIDTA improve, and contribute incremental Rs 10bn in EBIDTA. For achieving this, DLF s residential pre-sales have to pick up sharply, which we believe is slightly challenging in the current environment, owing to high value inventory/ unaffordability. To mitigate pressure on cash flows, DLF has the option to cut property prices or monetise non-core assets. DLF is considering fund infusion from promoters as well, to shrink the CF gap. Game Changer is a big step towards achieving this. Our calculations suggest that, post the stake sale to the institutional investors, DLF will be able to cut its debt by 50%, resulting in an interest expense saving of Rs 14-15bn. This shall result in DLF turning net cashsurplus from FY19E. This shall result in DLF turning net cash surplus from FY19E Proforma Cash Flows: Post Game Changer Rs bn FY18E FY19E Real Estate Collections Construction Spend Operating Cash flows - Dev Co Rental Assets Collections Operating Costs - Rent Co Operating Cash flows - Rent Co Gross OCF Employes+Other Expenses Taxes Total OCF Less: Assets Capex Less: Land Capex Net OCF (1.6) 7.6 Less: Interest Outgo FCFE (32.2) (22.6) Add: Non Core Asset Monetization Other Income Net Surplus (21.0) (11.3) Interest Expense Post Game Changer Savings in Interest Expense 4.8* 15.0 Net Surplus Post Game Changer (16.2) 3.7, * factored interest savings for 4month period as fund flow may happen in Nov-17E Page 5

6 Key Assumptions And Estimates Demonetisation, high unaffordabilty and drying up of new launches has resulted in 63% YoY pre-sales decline Realisation to be driven by Gurgaon Phase V projects Rental Income 5.4% FY17-19E CAGR on account of recalibration of existing rentals higher Revenue from Residential sales to be muted as inventory nearing completion will have longish sales velocity. Approx Rs 140bn Residential inventory is expected to be completed in next 2-3yrs and Rs 30bn is already completed and unsold (largely commercial) We have estimated 47% EPS CAGR over FY17-19E as interest expense stabilise Summary Of Key Assumptions And Estimates Estimates Growth (%) Comments FY17E FY18E FY19E FY17E FY18E FY19E Residential (mn sqft) (62.3) New launches driven by 1.5mn in Phase V Gurgaon, 3mn sqft new Gurgaon and 3mn sqft rest of India over FY18-19E Average rate (Rs/sqft) 27,000 23,656 24,964 (2.3) (12.4) 5.5 Sales value (Rs mn) 11,600 20,935 32,129 (63.2) New leasing (mn sqft) (20.0) New addition of mn sqft annually Rental Income Gross area for lease (mn sqft) Average occupancy % (0.9) (1.5) Leased space (mnsf) Occupancy to remain stable Average Rental (Rs/sqft/month) Rental income (Rs mn) 26,500 28,043 29, % FY17-19E rental income CAGR Earnings forecast Residential Sales (Rs mn) 55,713 56,172 59,106 (26.3) % FY17-19E CAGR Rental income (Rs mn) 26,500 28,043 29, Total 82,212 84,215 88,551 (17.2) % FY17-19E income CAGR EBIDTA (Rs mn) 34,333 36,228 38,399 (14.1) % CAGR for FY17-19E EBIDTA Margin (%) Margins to expand in FY18E, as low margins legacy project get completed Net interest expense* 29,798 30,575 30, (1.4) To remain stable APAT (Rs mn) 2,642 3,479 5,705 (49.9) % CAGR for FY17-19E APAT Margin (%) (210.2) Page 6

7 FY18-19E had negative cashflow, owing to interest servicing High realisation of nearingcompletion inventory is the key reason for weak sales velocity and bump up in WC cycle Cash Flow Forecast Rs mn Estimates FY17E FY18E FY19E Comments Cash Flows Forecast CFO ( a) 22,253 29,607 30,894 CFI (b) FCF (a+b) 22,839 30,278 31,651 CFF (c) (22,433) (48,157) (39,029) Total Change In Cash (a+b+c) 406 (17,879) (7,378) Cash shortfall on account of interest servicing DLF is investing in completing these projects despite weak sales Page 7

8 We value the Residential real estate business at Rs 30/share. Commercial annuity assets stand at Rs 113/share, other business at Rs 40/share Land bank at Rs 146/share Adding all these, we arrive at gross NAV of Rs 329/sh We reduce net debt to Rs 138/share to arrive at NAV of Rs 192/share for DLF Valuation: Increase NAV target to Rs 192/sh SoTP valuation We have adopted the DCF methodology to arrive at DLF s NAV/share. We value the Residential real estate business at Rs 30/share, Commercial annuity assets at Rs113/share, others - Hospitality and Project management at Rs 40/share, land bank at Rs 146/share and reduce net debt at Rs 138/share to arrive at end- FY18E NAV of Rs 192/share for the company. With the demonetisation effect ebbing, we have removed the NAV discount of 15% ascribed earlier. We maintain NEUTRAL on DLF with a target price of Rs 192/share. Our valuation is based on 1x our end- FY18E NAV forecast vs 0.85x of NAV earlier. Sum Of The Parts Rs mn Rs/share Rs/share Change (New) (Old) (Rs/share) Comments Gross NAV Residential 53, NAV based on the methodology discussed Gross NAV Commercial 201, NAV based on the methodology discussed Other business 70, x FY17E EV/EBIDTA Land Bank 259, Total Gross NAV 585, Less: Net Debt 244, (0.6) Expected net debt FY18E NAV 341, NAV discount (%) - 15 Final NAV Increase our SOTP by 25.4% Page 8

9 We have used WACC assumption of 14.1% for valuing DLF s Residential business In commercial office/retail space, we have discounted rentals using 14.1% WACC for the forecasted period and terminal value using the cap rate of 10% We have valued services/maintenance and other business at 6-8x FY18E EV/EBIDTA Real estate development: NAV calculation methodology We have divided DLF s entire land bank into residential projects (based on the information given by the company) We have arrived at the sale price/sq ft. and the anticipated sales volumes for each project based on our discussions with industry experts We have deducted the cost of construction based on our assumed cost estimates, which have been arrived at after discussions with industry experts We have further deducted marketing and other costs which have been assumed at 5% of the sales revenue We have then deducted income tax based on the tax applicable for the project The resultant cash inflows at the project level have been discounted, based on WACC of 14.1% (cost of equity 16.8% based on beta of 1.4x & debt/equity ratio of 0.9x). All the project level NAVs have then been summed up to arrive at the NAV of the company For commercial office/retail space, we have discounted rentals using 14.1% WACC for the forecasted period and terminal value using the cap rate of 10% From the NAV, we have deducted the current net debt to arrive at the final valuation of the company. Base Case Assumptions Discount rate 14.1% Annual rate of inflation-sales price 5% Annual rate of inflation-cost of construction 6% Other costs marketing, SGA, employee cost (as % of sales) 5% Tax rate (%) 33% In the exhibit below, we highlight our sales price and construction cost forecasts. Our pricing assumptions are moderate, and at a 0-10% discount to the current prevailing prices. Base Property Price And Construction Cost Assumptions Location Prices Cost Rs/sq ft Rs/sq ft Gurgaon 6,750-19,000 2,000-4,500 Bengaluru 4,500-7,500 2,000-2,500 Delhi Metropolitan Area 9,000-22,500 4,00-5,500 Chennai 4,050-6,750 2,000-2,500 Hyderabad 4,500-5,500 2,000-2,200 Chandigarh 4,500-5,500 2,000-2,200 Kolkatta 4,500-5,500 2,000-2,200 Others 3,500-5,500 2,000-2,200 Page 9

10 1% increase in average base sale price impacts our NAV positively by 1.9% Every 100bps increase in sale price inflation impacts our NAV positively by 6.2% 100bps increase in cost inputs decreases our NAV by 4.6% 100bps increase in discounting rate impacts our NAV negatively by 3.7% NAV sensitivity analysis Sensitivity to our assumption of property prices Our model is sensitive to changes in the assumptions regarding property prices. For every 1% change in the base property prices, the NAV will change by approximately 1.9%. NAV Sensitivity To Change In Average Sale Price % change in sale price NAV/share (Rs) Change in NAV (%) (19.6) (9.8) Sensitivity of NAV to changes in sales inflation In our base case, we have assumed an annual sale price inflation of 5%. For every 100bps increase in the annual sale price inflation, the NAV will increase by approximately 6.2%. NAV Sensitivity To Change In Sales Inflation Sales inflation rates (%) NAV/share (Rs) Change in NAV (%) (11.5) (6.1) Sensitivity of NAV to changes in cost inflation In our base case, we have assumed cost inflation at 6%. For every 100bps increase in construction cost inflation, the NAV will change by approximately 4.6%. NAV Sensitivity To Change In Cost Inflation Cost inflation rates (%) NAV/share (Rs) Change in NAV (%) (4.6) (9.4) The combined impact of a 100bps increase in sales price inflation and cost inflation will be an increase in NAV of 1.6%. Sensitivity of NAV to changes in discount rate In our base case, we have assumed a discount rate of 14.1%. For every 100bps increase in the discount rate, the NAV will fall by 3.7%. NAV Sensitivity To Change In WACC WACC rates (%) NAV/share (Rs) Change in NAV (%) (3.7) (6.8) Page 10

11 Income Statement: Consolidated Year ending March (Rs mn) FY15 FY16 FY17 FY18E FY19E Net Sales 76,487 99,256 82,212 84,215 88,551 Growth (%) (7.8) 29.8 (17.2) Material Expenses 32,845 45,579 34,658 35,214 37,091 Employee Expenses 3,488 3,152 3,283 3,509 3,684 Other Operating Expenses 9,916 10,548 9,939 9,265 9,377 EBIDTA 30,237 39,977 34,333 36,228 38,399 EBIDTA (%) EBIDTA Growth (%) (14.1) Other Income 4,934 6,714 7,193 7,171 7,257 Depreciation 5,448 7,659 5,725 6,377 6,514 EBIT 29,724 39,032 35,801 37,022 39,142 Interest 23,039 26,798 29,798 30,575 30,139 Exceptional items (1,967) 4, PBT 6,685 10,267 10,295 6,447 9,003 Tax 1,581 5,642 2,293 2,256 2,701 Minority Interest (333) (253) Share of associates loss/(profit) 34 1, RPAT 5,402 3,308 6,934 3,479 5,705 EO items (net of tax) 260 1,967 (4,293) - - APAT 5,663 5,275 2,642 3,479 5,705 APAT Growth (%) (36.0) (6.8) (49.9) EPS EPS Growth (%) (36.0) (6.8) (49.9) Balance Sheet: Consolidated Year ending March (Rs mn) FY15 FY16 FY17E FY18E FY19E SOURCES OF FUNDS Share Capital 21,556 19,538 19,538 19,538 19,538 Reserves 270, , , , ,290 Total Shareholders Funds 291, , , , ,828 Minority Interest 1,747 1,118 1,088 1,048 1,003 Long Term Debt 244, , , , ,942 Short Term Debt Total Debt 244, , , , ,942 Deferred Taxes (15,108) (19,993) (19,993) (19,993) (19,993) Long Term Provisions & Others TOTAL SOURCES OF FUNDS 523, , , , ,780 APPLICATION OF FUNDS Net Block 185, , , , ,966 CWIP 57,302 36,365 37,365 38,365 39,365 Goodwill 12,058 10,627 10,627 10,627 10,627 Investments, LT Loans & Advances 6,234 9,704 9,704 9,704 9,704 Inventories 176, , , , ,155 Debtors 15,864 16,561 14,831 16,151 16,982 Cash & Equivalents 27,477 33,714 34,219 16,340 8,962 ST Loans & Advances, Others 166, , , , ,637 Total Current Assets 386, , , , ,736 Creditors Other Current Liabilities & Provns 124, ,747 98, , ,619 Total Current Liabilities 124, ,747 98, , ,619 Net Current Assets 261, , , , ,117 Misc Expenses & Others TOTAL APPLICATION OF FUNDS 523, , , , ,780 Page 11

12 Cash Flow: Consolidated Year ending March (Rs mn) FY15 FY16 FY17E FY18E FY19E PBT before minority 6,266 9,534 6,372 6,447 9,003 Non-operating & EO items (1,405) (2,481) (7,811) (7,342) (7,309) Taxes (6,398) (6,399) (2,230) (2,256) (2,701) Interest expenses 23,039 26,154 30,134 30,575 30,139 Depreciation 5,448 7,778 5,849 6,377 6,514 Working Capital Change (6,582) (3,738) (10,189) (4,193) (4,752) OPERATING CASH FLOW ( a ) 20,368 30,848 22,124 29,607 30,894 Capex (8,386) (5,594) (6,500) (6,500) (6,500) Free cash flow (FCF) 11,982 25,255 15,624 23,107 24,394 Investments 9,369 (3,629) 7,453 7,171 7,257 INVESTING CASH FLOW ( b ) 984 (9,223) Share capital Issuance Debt Issuance 22,859 21,113 9,500 (15,500) (5,500) Interest expenses (31,771) (33,219) (30,134) (30,575) (30,139) Dividend (6,564) (8,787) (1,938) (2,082) (3,390) FINANCING CASH FLOW ( c ) (15,474) (19,980) (22,572) (48,157) (39,029) NET CASH FLOW (a+b+c) 5,878 1, (17,879) (7,378) Closing Cash & Equivalents 30,298 29,122 34,219 16,340 8,962 Key Ratios: Consolidated FY15 FY16 FY17E FY18E FY19E PROFITABILITY (%) GPM EBITDA Margin APAT Margin RoE Core RoCE RoCE EFFICIENCY Tax Rate (%) Asset Turnover (x) Inventory (days) Debtors (days) Payables (days) Cash Conversion Cycle (days) Debt/EBITDA (x) Net D/E Interest Coverage PER SHARE DATA EPS (Rs/sh) CEPS (Rs/sh) DPS (Rs/sh) BV (Rs/sh) VALUATION P/E P/BV EV/EBITDA OCF/EV (%) FCF/EV (%) FCFE/Market Cap (%) (1.6) (7.3) (3.6) Dividend Yield (%) Page 12

13 RECOMMENDATION HISTORY DLF TP Date CMP Reco Target 16-Sep BUY Dec BUY Apr NEU May NEU May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period Page 13

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