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DLF: Correction overdone? - Views on News from Equitymaster

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DLF: Correction overdone?

Mar 7, 2008

We had recommended a ‘Hold’ on DLF in December 2007 at Rs 1,021 with a March 2010 target prices of Rs 1,380. The stock went up 20% from our recommendation to a high of Rs 1,225 but has then tanked to Rs 650 level mark largely due to broader market correction. In our report dated December 2007, we had mentioned that the valuation still remains a concern in the near term but had recommended to hold on the stock from a 3-year perspective.

A paradox could be seen here when asked, “With stocks markets correction underway can one see a correction in real estate prices too?” To this the general answer from most of the companies will be “When money goes out from stock markets a part of it is invested in real estate.”

However, at the current prices we are positive on DLF than any other real estate company mainly due to following:

  1. We believe that the residential prices could see some further correction mainly in metros but DLF’s presence in this segment is very little of the total land bank when compared to other players. So the overall impact on the NAV will be lesser to that extent.

  2. In the commercial and retail space, the company, in order to get higher volumes gives discount in prices to the customer and so the correction in prices is negated to that extent.

  3. The organised retail sector occupied about 14msqft in CY 2007, which is expected to go up to 16 msqft in CY2008. With large retail players like Reliance and Birla expanding their footprint across the country and global players too coming in, DLF with its proven execution skills will benefit from this surge in demand.

  4. The company as on 31-December-2007 had land bank of 748 msqft and has mentioned that it is not in a hurry to acquire further land. Rather, it is concentrating on hotels, resorts, AMC etc. thereby de-risking its business model to that extent.

  5. Lastly, the company has mentioned that it will list its REIT (DLF Offices Trust) by 1QFY09 and this will improves sales visibility in commercial and SEZ segment.

At the current price of Rs 655 the stock is trading at a PE of 10.4 times of our FY10 estimates (FY 10 NAV of Rs 1,380). We believe that at the current levels, the correction in the stock price seems to be overdone and investors with a 2-3 year time horizon can accumulate DLF at these levels.

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