Monday, December 21, 2009

[Investors] DLF Event Update ; Marginally negative, Wait for REIT listing ; REDUCE ; Target: Rs 300


In order to create a larger entity with strong leased asset portfolio, DLF Cybercity Developers Private Limited (DCCDL), 100% subsidiary of DLF Limited, will be integrated with Caraf (promoter company). DLF will hold 60% stake in the combined entity while promoters will hold remaining 40%. DCCDL currently has leased assets of 6.7mn sqft while Caraf holds leased properties of 9.4mn sqft. The integration shall therefore create an entity with leased portfolio of 16.1mn sqft and rental revenue of Rs.9.7bn. We believe integration will also eliminate any perceived conflict of interest between promoter entity and DLF. Having a larger entity with strong leased portfolio will also enable DCCDL to get better valuations (lower cap rate) through REIT listing.

Given the current portfolio as well as future development portfolio of both the entities, we believe the ratio is marginally in favour of the promoters. We value Caraf at Rs.25.5bn and DCCDL at Rs.51.2bn (details in table 2 below). However, DLF shareholders will now get valuation upside from the REIT listing of DCCDL due to reduction in cap rate (we have assumed 10% cap rate for our valuation).

Though we believe this is a step in the right direction, we believe the valuations of DLF are factoring in strong recovery in the real estate market. We maintain our NAV estimate of Rs.340. Maintain our reduce rating on the stock with target price of Rs.300.

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