DLF- No plans to go slow

DLF intends to move ahead with its new launches despite a cautious outlook for the overall real estate sector. We believe DLF will meet our FY09 earnings estimates, though we are sceptical about management meeting its delivery guidance for the year. We maintain our Buy rating at a target price of Rs650.

1Q09: in-line performance
DLF's 1Q09 results were largely in line with our expectations. We had estimated strong top-line growth but a decline in margins, given the company's strategy of targeting the price-sensitive midincome housing segment. While top line (Rs38.1bn, 24% yoy growth) was 3% above our estimate, gross margin (68.4%) surprised us on the downside by 265bp. Hence, EBITDA of Rs23.4bn was 1% below our forecast. Interest expense was in line, but a lower tax rate led to an in-line PAT of Rs18.6bn (23% yoy growth).

Strategy is to build now, reap later
DLF describes the current macroeconomic scenario as challenging for the entire sector. Management believes that underlying demand remains strong and the slowdown is mainly because customers are detering purchases. Thus, DLF intends to proceed with its new launches so that it can reap the benefits when demand rebounds. We, however, believe management's strategy will be tested only in the longer tem; our near-term earnings forecasts depend more on bookings for projects currently under execution.

Delivery target seems aggressive
Management guides that DLF will deliver 27m sq ft in FY09. We find the target aggressive, as the company delivered only 3m sq ft in 1Q09. We agree deliveries tend to be lopsided, but the 6m sq ft target for the mid-housing segment, which represents 82% of 1Q09's closing work-in-progress (WIP), appears stretched. Our FY09 estimates are conservative, as we assume yoy sales growth of only 27% and earnings growth of just 21%. DLF has already achieved 21% of our FY09 top-line forecast and 20% of our EBITDA and PAT estimates. We believe a strong 2H09, driven by festive season sales, will offset the drop in margins. We maintain FY09F EPS at Rs55.6.

Buy at a target price of Rs650
DLF remains one of the top picks in our sector universe due to its low leverage, proven execution skills and capital-raising ability. We believe DLF's strategy of driving growth by focusing on the mid-income housing segment is sound (see our report, Mass-housing strategy paying off, dated 4 July 2008). DLF trades at 9.4x FY09F EPS. We maintain our Buy rating and target price of Rs650, which is derived from DCF-based NAV (discount rate of 16%; capitalisation rate of 11-13%).