UBS Investment Research has recommended buy rating on DLF with a 12-month target price of Rs 750.

Initiate coverage with a Buy rating

We initiate coverage of DLF with a Buy rating and a 12-month price target of Rs750. DLF is India’s largest listed real estate company and we think it is well positioned to maintain its position in the near term because of the rapid roll-out of its large portfolio of IT/ITES special economic zones, and mid-range and luxury residential projects across India, aided by execution ramp-up.


Key share price drivers

We believe DLF’s key drivers over the next few years will be: 1) volume growth and lower cap rates in office space—recent events suggest IT SEZs can be capped below 8-8.5%; 2) volume growth in middle-income residential—73% of the 40,000 apartment launches over FY08-10E in the middle-income range; 3) execution and delivery—DLF has 49.2 msf under development, rising to 103.6 msf in FY10E.

Earnings depend on sale vs rental model

We forecast a FY08-10 EPS CAGR of 91%, with growth dependent on the timing of asset sales to DLF Assets (DAL) and other investors. We estimate DAL will buy 50-60% of assets sold over 2008-10, funded by IPO proceeds and borrowings. We project 155.9 msf in launches and 84.8 msf in sales in 2008-10.

Valuation: activity generation key to valuation

We value DLF at a 10% premium to its forward NAV. Of our NAV estimate, office comprises 56%, residential 30% and retail 14%. We believe the premium to NAV is justified as: 1) our valuation excludes hotels and SEZs; 2) comparable Asian stocks trade at a premium to NAV; 3) there is visible generation of activity to generate cash flow, and 4) NAV could increase. Key sensitivities are: 1) caprates; 2) property prices; and 3) discount rates.