Motilal Oswal has recommended buy rating on DLF with target price of Rs 674. Target price is at a 25% premium to estimated NAV of Rs 539 per share.

Uniquely positioned in emerging, profitable segments:

DLF has a sizable presence across several key cities (Delhi NCR, Mumbai, Bangalore, Chennai, Kolkata, Chandigarh, Goa etc) and clear market leadership position in commercial, retail, and lifestyle/premium apartments. These segments are highly profitable and have significant entry barriers. We estimate DLF’s market share at 16% in commercial offices and 8% in retail space absorption in India over the next 2 years.

Better placed to face the macro challenges:

Commercial, retail, luxury and premium housing account for 67% of DLF's estimated Gross Asset Value (GAV). Middle income housing segment accounts for just 24% of DLF’s GAV (56% of the development area). This segment is more susceptible to emerging macro concerns and challenges, and thus even 50% lower absorption v/s estimates would impact GAV by 11%.

Net cash and cash equivalents of Rs 312 billion in FY10:

Adjusting for securitized value of lease rentals, we expect net cash at Rs 17.7 billion in FY08 (v/s net debt of Rs 84 billion in FY07), Rs 216 billion in FY09 and Rs 311.8 billion in FY10. We estimate DLF’s adjusted net profit (adjusted for securitized value of lease rentals) to increase from Rs 26.6 billion in FY07 to Rs 88.8 billion in FY08 (up 234%), Rs 122.6 billion in FY09 (up 38%) and Rs 124 billion in FY10 (up 1%). This provides DLF with strong value creation possibilities (through land bank ageing and integrated development), which is unprecedented.

Recent landbank additions are positive:

DLF’s current land bank stands at 13,055 acres (addition of 2,800 acres since filing of RHP) and total developable area at 612 million sq ft (addition of 43 million sq ft). Recent land bank addition of 2,800 acres has been done at Rs 19.3 billion (average cost of Rs230 per sq ft, assuming FSI of 1x). For DLF, land cost stands at Rs 154 billion, i.e. an average of Rs 252 per sq ft, which provides competitive advantages.

Price target Rs 674 per sh (25% premium to NAV):

Our target price for DLF at Rs 674 per sh is at 25% premium to our estimated NAV of Rs 539 per sh. We believe such business models should be valued as going concern and would continue to trade at premiums to NAV.

Target price is at 25% premium to NAV

We believe DLF, India’s largest real estate company, is the best proxy for playing the promising domestic real estate opportunity. We are excited about DLF’s dominant presence in emerging segments of premium apartments, commercial offices and retail, which are highly profitable businesses with strong entry barriers. Thus, DLF is relatively better placed to face the challenging macro environment, which, in our opinion, will encourage lower risk premiums going forward.

DLF provides the best exposure to all segments of Indian real estate:

DLF has a presence in 31 cities in India - Delhi NCR, Mumbai, Bangalore, Chennai, Kolkata, Chandigarh, Goa etc. Such geographical diversification provides the company with tremendous depth and breadth, and allows it to plug into growth pockets across the country. DLF has the richest quality landbank, with almost 45% of landbank in Tier I cities. Also, almost the entire land bank is within the city master plan, which would enable faster conversion.

DLF has a clear market leadership position in commercial, retail, and lifestyle/premium apartments. We estimate DLF’s market share at 16% in commercial office and 8% in retail space absorption over the next two years. With a large development area of 612 million sq ft, the company has also drawn plans for a leadership positioning in middle income housing segment.

Post the cash flows from the recent IPO, we estimate DLF’s net debt at Rs 27 billion in FY08 and net cash of Rs 110 billion in FY09. Adjusting for the securitized value of lease rentals, we estimate net cash at Rs 18 billion in FY08 and Rs 216 billion in FY09. This provides the company with strong financial leveraging possibilities, which is unprecedented. We believe that large companies such as DLF, which have holding power, are best positioned to take large bets by acquiring large tracts of contiguous land, which could create value through ‘land bank ageing’ and ‘integrated development’. We believe this strategy will generate better returns, which would lead to continuous upgrade in NAVs and allow for higher asset turnover. Successful implementation of monetization strategies will lead to lower capital costs and create conditions for building integrated property business models, comprising property development, re-development, acquisitions, divestitures, leasing and management. Such business models create long-term, value-added ongoing enterprises and they should trade at a premium to NAV. We have, therefore, assigned a 25% premium to our estimated NAV for arriving at a price target of Rs 674 per sh.