DLF is India’s largest real estate company engaged in the development of residential, commercial, and retail properties.
As of 30 June, 2008, the company has 755 million square feet of land bank, of which around 63 msf is under construction, expected to be developed in the next 2–3 years. The company is also diversifying into various other businesses such as infrastructure, hotels, and insurance.
DLF’s Q109 results suggest a delay in new projects launches, which is likely to further intensify as we expect the slowdown in housing demand to continue. We expect the current high interest rate scenario to remain largely unchanged for the next six months.
The shift in focus towards the mid-income housing segment is likely to pull down the consolidated margins owing to relatively less profitability in this segment, compared with the luxury and super-luxury housing segments.
We expect consolidated EBITDA margins to decline by 159 bps from 66.5% in FY08 to 64.9% in FY09 and further to 62% in FY10.
Furthermore, we expect the ROE to decline from the present 65% to around 35– 40% in the next two years.
Our DCF-based NAV of Rs414 suggests a potential upside of 6% from the current market price and incorporates a substantial decline in real estate prices. We initiate coverage with a HOLD rating.