Real estate firm DLF gains traction as a growth-value stock, say brokerages

Both residential and leasing trends point to strong showing in FY23

Healthy growth in 2022-23 (FY23), led by new launches in the residential segment, recovery in the annuity or rental business with higher leasing demand, and improved pricing, indicates strong visibility on revenue and margins for DLF. This, coupled with correction in stock prices, has turned the stock of the country’s largest listed real estate entity into a buying opportunity, say brokerages.

In a recent report, analysts at Sharekhan reiterated their positive view on DLF and expect an upside potential of 41 per cent. They bel­ieve that strong growth potential in residential and rental portfolios and recent correction in the stock offer good buying opportunities.

The DLF stock shed around 23 per cent from the start of February to lows in early March before recovering to some extent.

A key ingredient of the favourable outlook rests on the sales outlook of the company for FY23.

DLF, which is expected to end 2021-22 (FY22) with sales of Rs 6,000-6,500 crore, is targeting a Rs 2,000-crore run rate per quarter in the next financial year. 

Samar Sarda and Ashutosh Mittal of Axis Capital believe that the company is scaling up to achieve the previous peak sales (in 2009-10) over the next 12 months.

Sales growth in FY23 and 2023-24 (FY24) will be driven by launches in its core market (Delhi and Gurugram) and re-entering markets where DLF has had projects in the past, they add. 

The company is diversifying in non-core southern markets with the launch of a plotted development project in Chennai, mixed-use project planned in Tamil Nadu, and expected high-end residential launches in Chennai, says Sharekhan.

A positive from strong demand, higher prices, and robust margins are improving cash flows and lowering debt.

IIFL Research points out that the company’s recent launches are from its historical land bank offering healthy margins. The company has been net cash-positive for the past seven quarters and has brought debt down 30 per cent in the past two quarters.

DLF has reduced its debt by Rs 1,665 crore — Rs 770 crore in the third quarter (Q3) of FY22 — for its residential business and it now stands at Rs 3,220 crore. Although there will be an increase in construction costs, brokerages expect the firm to be debt-free by FY24. 

Axis Capital says the company is classic negative working capital in play (high pre-sales on fully paid-up land), which should be capitalised to commence new investments and drive growth from 2024-25.

The annuity (leasing) segment, too, is expected to look up in FY23 as the work-from-office trend gathers pace and there is pick-up in mall activity/consumption.

Says Adhidev Chattopadhyay, analyst, ICICI Securities, “While the Omicron-driven wave of the pandemic led to a slight delay in return-to-office plans, DLF remains confident of a strong leasing pick-up from FY23, with office portfolio occupancy levels expected to rise to over 90 per cent in the first half of FY23.”

While rental operating profit increased 6 per cent sequentially to Rs 870 crore in Q3FY22, ICICI Securities expects this metric to increase from Rs 3,400 crore in FY22 to Rs 4,050 crore in FY23. In addition to revival in the retail segment, a trigger could be the possible listing of a real estate investment trust comprising assets of rental arm — DLF Cyber City Developers. 

Amid these triggers, the fall in stock prices had turned valuations attractive, say analysts. At the current price, the stock is trading at just under 40x its FY23 earnings estimates.

In a report earlier this month, IIFL Research highlighted that the correction offered an attractive entry point, with DLF’s high quality land bank trading close to the book value. The key risks for the stock are a slowdown in real estate demand, especially in the Delhi-National Capital Region, as well as rising interest rates, which could hit demand.

Investors can consider the stock for the long-term portfolio on corrections.