DLF's inventory sales key to gains, firm to breach FY20 sales guidance

DLF has been on an uptrend over the past two months (up by 51 per cent since October), on expectations that monetisation of its inventory, steady gains from the rental business, and new projects will lead to higher cash flows and improve growth visibility. Strong September quarter results and the inclusion in the MSCI India Domestic Index also helped boost its stock returns.

Among key triggers has been the improvement in operational performance. On a sequential basis, sales in the residential segment were up 3 per cent, while rental income was up by 12 per cent. Brokerages believe the company is on track to beat its FY20 sales guidance of Rs 2,700 crore (residential) and rent income of Rs 3,800 crore.

Sales momentum should help the company double its quarterly cash flows from the residential business over the next two quarters, as compared to the run rate it was achieving in the past. Analysts at Morgan Stanley say the focus will shift to monetisation of Rs 10,000 crore of unsold, uncompleted inventory, leading to positive cash flow generation (about Rs 600 crore per annum) and further deleveraging. 

Revenue visibility in the medium term is expected to come from the 12-13 million square feet of new projects, which include projects in Phase V and Central Delhi projects with sales potential of over Rs 32,000 crore. Analysts at JP Morgan believe that two recent transactions over the last three months indicates a turnaround for New Gurgaon, which is an encouraging development from a medium-term valuation perspective, given DLF’s large embedded land holding of 100 million square feet in this area. 

In the rental business, analysts expect a mid-teen growth. The company is planning to add rent yielding assets to the tune of 9.1 million square feet, which should generate income of Rs 900 crore. Given the current income and growth rates, analysts believe valuation of the rental business could re-rate. The listing of the maiden real estate investment trust has set a benchmark that could help improve the valuation of the company’s rental assets. 

While there are growth triggers, given the sharp uptick, investors should await a correction before checking in to the stock.