INDIA DAILY September 26, 2011 India 23-Sep 1-day1-mo 3-mo Sensex 16,162 (1.2) 2.0 (11.4) Nifty 4,868 (1.1) 2.5 (11.0) Contents Global/Regional indices Daily Alerts Dow Jones 10,771 0.4 (4.5) (9.7) Nasdaq Composite 2,483 1.1 0.1 (6.4) Company FTSE 5,067 0.5 (1.2) (11.1) DLF: Progress on one-offs; launches put off Nikkie 8,404 (1.8) (3.8) (12.4) Hang Seng 17,634 (0.2) (10.0) (20.5) • Asset sales - one in the bag; a few more close to closure KOSPI 1,676 (1.3) (5.8) (19.8) • But no launches up to date in 2QFY12E which could raise the bar for Value traded – India 2HFY12E Cash (NSE+BSE) 146 136 138 • Retain NAV-based target of Rs270/share Derivatives (NSE) 2,000 1,703 1,143 Eros International: Time for a valuation check Deri. open interest 1,426 1,468 1,428 • Eros' valuations have caught up with structural and cyclical drivers • Reiterate ADD with FY2013E TP of Rs270; expect earnings upgrades Forex/money market Sector Change, basis points 23-Sep 1-day 1-mo 3-mo Pharmaceuticals: Rupee at 50: Few to benefit Rs/US$ 49.4 1 329 440 • INR could see further depreciation bias according to our Economy 10yr govt bond, % 8.3 1 8 6 team Net investment (US$mn) 22-Sep MTD CYTD • Ranbaxy and Jubilant likely to report substantial translational losses FIIs (253) 233 286 • SUN, Divis have negligible debt and minimal hedges and therefore MFs 44 (162) (282) stand to benefit the most Top movers -3mo basis Change, % Best performers 23-Sep 1-day 1-mo 3-mo IDEA IN Equity 96.6 1.6 0.7 28.8 UTCEM IN Equity 1162.0 0.6 9.7 21.3 MM IN Equity 775.6 (1.0) 10.1 15.3 GRASIM IN Equity 2348.8 1.5 12.2 12.4 BJAUT IN Equity 1548.6 0.4 3.0 11.6 Worst performers IVRC IN Equity 36.8 (2.3) 14.7 (45.8) EDSL IN Equity 217.1 (2.1) 9.0 (45.3) CRG IN Equity 150.0 (0.1) 9.5 (41.8) HDIL IN Equity 100.1 (3.3) 4.4 (37.9) IBREL IN Equity 74.6 (2.3) (3.1) (31.0) For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. BUY DLF (DLFU) Property SEPTEMBER 23, 2011 UPDATE Coverage view: Cautious Progress on one-offs; launches put off. Recent news reports and the sale of land Price (Rs): 198 parcel in Gurgaon indicate DLF’s intent and progress on asset sales in line with its target Target price (Rs): 270 to sell Rs60-70 bn over the next 2-3 years, which could drive a meaningful reduction in BSE-30: 16,162 D/E ( to 0.6X from 1X). However, with no launches scheduled for 2QFY12E, the risk to FY2012E sales target of 10-12 mn sq. ft has increased. We retain BUY led by a 36% potential return to our March 2013E based NAV of Rs270/share. Company data and valuation summary DLF Stock data Forecasts/Valuations 2011 2012E 2013E 52-week range (Rs) (high,low)398-173 EPS (Rs) 9.1 11.9 15.7 Market Cap. (Rs bn) 338.6 EPS growth (%) (14.5) 31.3 31.8 QUICK NUMBERS Shareholding pattern (%) P/E (X) 21.8 16.6 12.6 Promoters 78.6 Sales (Rs bn) 95.6 110.9 138.0 • DLF could raise Rs61 FIIs 14.9 Net profits (Rs bn) 15.4 20.2 26.6 bn through asset MFs 0.1 EBITDA (Rs bn) 37.5 47.6 62.1 sale in FY2012-13E Price performance (%) 1M 3M 12M EV/EBITDA (X) 15.1 11.9 9.0 Absolute 12.2 (8.7) (45.9) ROE (%) 5.4 7.5 9.2 • No launches in Rel. to BSE-30 10.0 3.0 (32.9) Div. Yield (%) 1.0 1.3 1.5 2QFY12E till date Asset sales – one in the bag; a few more close to closure • FY2013E D/E could decline to 0.6X if all Recent news reports raise the question of what is ‘non-core” assets: in our view, the sale of these sell-off deals take assets (along with the land parcel sale in Gurgaon) indicate clear intent and progress in reducing place debt. According to various media reports, DLF is in talks to sell over Rs60 bn of assets in FY2012- 13E, in line with its target of raising Rs60-70 bn over the next 2-3 years. In FY2012E, DLF already raised Rs1.7 bn through land sales in 1QFY12 and a further Rs4.4 bn by selling a 28 acre land parcel in Gurgaon to M3M while talks to sell its stake in Noida IT Park to IDFC for Rs4.4 bn are already in advanced stages and likely to get concluded by end-September 2011. Other deals in the pipeline are (1) IT SEZ in Pune (decision regarding permission for the deal to be declared by Board of Approval), (2) Amanresorts baring Delhi Hotel (have received non-binding bids) and (3) Mumbai NTC Mill Land sale. DLF is also in talks with Shiv Nadar controlled HCL Group to sell its stake in DLF Pramerica though that deal could face regulatory hurdles as per press reports. Assuming transaction margins of 10-50%, FY2012E Net-D/E can go down to 0.69X-0.64X and FY2013E Net- D/E can go down to 0.62X-0.57X versus 0.97X at end-1QFY12. DLF has a further.6 mn sq. ft more of operational IT Parks and IT SEZs in non-Gurgaon areas. But no launches up to date in 2QFY12E which could raise the bar for 2HFY12E After launching two plotted developments in 1QFY12 at Gurgaon and Indore, DLF has not launched any projects in 2QFY12E (till date). This indicates (1) that 2QFY12E sales would likely be weak given that of sales of 2.3 mn sq. ft in 1QFY12, only 1.1 mn sq. ft was from existing stock and (2) the sales target of 10-12 mn sq. ft for FY2012E would be at risk and require 6-8 mn sq. ft sales in 2HFY12E which could be a tough task in a challenging macro environment. Retain NAV-based target of Rs270/share We maintain our BUY rating with a target price of Rs270 /share at-par with our March 2013-NAV. The positives that we find in DLF are that it has (1) a relatively wide geographical spread, (2) lower regulatory risk versus most Mumbai firms and (3) a relatively balanced portfolio between residential and commercial segments. Key risks include (1) delay in approvals, (2) further inflation- led cost impact and (3) adverse environment causing delay in selling “non-core” assets. For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. DLF Property Better visibility on asset disposal along with progress this quarter After raising Rs1.7 bn through assets sales in 1QFY12, media reports indicate that further plans to sell assets worth Rs67.4 bn in FY2012-13E are gaining momentum. At end-1QFY12, DLF had raised Rs 32.7 bn from asset disposal since inception of the plan. DLF has set a further target of Rs 60-70 bn through asset disposal over the next 2-3 years though it seems likely that a few of the deals could get concluded in FY2012E itself. At end-1QFY12, DLF had gross debt (including preference capital) of Rs245 bn with a D/E of 0.97X. Assuming different transaction gross margins (10% - 50%) FY2012E Net-D/E can go down to 0.69X-0.64X and FY2013E Net-D/E can go down to 0.62X-0.57X if the planned transactions take place in FY2012E itself. DLF’s Rs60-70 bn asset-sale plan is more visible and gaining momentum DLF proposed and concluded assets sales in FY2012 Total deal value DLF's share Expected Asset sales in FY2012 Buyer DLF's share (%) (Rs bn) (Rs bn) timelines Status (as per news reports) Deals concluded in FY2012 Contiguous land parcels Not disclosed 100 1.7 1.7 1QFY12 Concluded in 1QFY12 28 acres land in Gurgaon M3M Developers 100 4.4 4.4 Sep-11 Deal concluded in Sept 2011 Subtotal 6.1 6.1 Expected to get completed in 2QFY12E IT Park in Noida (DLF' stake) IDFC 70 5.0 4.0 Sep-11 Expected to conclude by end-September Expected to get completed in FY2012E Decision pending with the BoA which has met IT SEZ in Pune Blackstone 67 13.4 9.0 Dec-11 on Sep. 19, 2011 and the decision is yet to be made public Amanresorts (a) Not decided 100 16.0 16.0 Dec-11 Received non binding bids Mumbai NTC Mill Land (b) Not decided 100 25.7 25.7 Mar-12 Bankers yet to be appointed Stake sale in DLF Pramerica HCL Group 74 N/A N/A N/A Likely to face regulatory hurdle Subtotal 55.2 50.7 Total in FY2012E 66.2 60.8 Notes: (a) Baring Aman resorts in Delhi (a) Though press reports indicate a deal value of Rs20 bn we estimate it at Rs16 bn (b) Assuming deal happens at a 20% discount to IBREL's Bharat Mills and Poddar Mills transactions (c) IT SEZ in Pune: Total deal value estimated from value of DLF's share Source: News sources, Company, Kotak Institutional Equities estimates FY2013E Net-D/E can come down to between 0.62-0.57X FY2012E and FY2013E Net Debt and Net-D/E assuming 100% debt repayment under various assumptions of transaction margin 1QFY2012 FY2012E FY2013E Transaction gross margin 10% 20% 30% 40% 50% 10% 20% 30% 40% 50% Consolidated Net Debt (Rs bn) 245 185 185 185 185 185 179 179 179 179 179 Consolidated Net-D/E (X) 0.97 0.69 0.68 0.66 0.65 0.64 0.62 0.61 0.60 0.58 0.57 Source: News sources, Company, Kotak Institutional Equities estimates Status of various deals as per press reports #1 - 28 acres land in Gurgaon to M3M for Rs4.4 bn DLF has sold a 28 acre plot in Gurgaon to developer M3M for Rs4.4 bn.