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Buy DLF, target Rs 254: Edelweiss Financial Services

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Edelweiss Financial Services has a buy call on DLF with a target price of Rs 254. The current market price of DLF is Rs 206.85. Time period given by the brokerage is one year when DLF price can reach the defined target. View of the brokerage firm on the company:DLF’s Q1FY19 new sales stood at Rs 6bn, while the company came close to breaking even on operational cash flow (pre-capex) front.

The company continues to focus on liquidating its about Rs 135bn inventory.

Due to adoption of IND-AS 115 w.e.f.

April 1, 2018, Q1FY19 financials are not comparable with previous quarters (no impact on our cash flow-based valuation methodology).

As investors are predominantly focused on cash flows and reported earnings do not represent actual operational performance, we maintain our earnings estimates for the erstwhile merged entity (despite demerger of DCCDL) as we await greater clarity regarding the adjustments/reconciliation between DLF and DCCDL numbers (post demerger).

Maintain ‘BUY’ with a target price of Rs 254. Cash flow improvement continues: Gross sales stood at Rs 6.7bn (Rs 9.5bn in Q4FY18), while net sales (adjusted for cancellation/up-gradation) stood at Rs 6bn (Rs 7.5bn in Q4FY18).

The company is targeting about Rs 20-22.5bn net sales in FY19 (Rs 10bn in FY18).

DLF has had negative cash flows in past six-eight quarters; however, aided by debt reduction (and consequent fall in interest costs) along with rising collections, it came near to breaking even on operational cash flow (pre-capex) front during the quarter (negative Rs 270mn).

While it invested about Rs 7.2bn during the quarter, it expects capex intensity to decline going ahead and to be able to generate free cash flows after few quarters. Adoption of IND-AS 115 impacted earnings/net worth: Following the adoption of IND-AS 115, DLF has shifted to the project completion method; consequently, it reversed profits of about Rs 54bn from its opening net worth owing to the write back of earnings recognised in prior periods for projects that were not completed at that point in time.

Due to the change in AS, the company’s Q1FY19 financials are not comparable with previous quarters. Outlook and valuation: Prospects brighten; maintain ‘BUY': We expect improvement in DLF’s operations to continue going ahead.

We believe the company will be a key beneficiary of the ongoing sector consolidation; also, its attractive rental portfolio and improving balance sheet will hold it in good stead going ahead.

Maintain ‘BUY’ with TP of Rs 254.




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