Hot Property

Retail Investors with a horizon of over one year can consider subscribing to DLF’s public issue. The company, which hopes to raise Rs 9,625 crore on the higher end of the band, will use the issue proceeds for land acquisition, development of existing properties and debt repayment.

BUSINESS : DLF is India’s largest real estate company and owns development rights to 574 million sq ft of real estate, of which, 51% is in the National Capital Region (NCR) and 23% is in Kolkata. The company builds and sells residential, office and retail properties. It also proposes to enter hotels, special economic zones (SEZs) and multiplexes. Last fiscal, the company delivered 10.3 million sq ft of property to end users and entered into sale agreements (including advance sales) for about 20 million sq ft. DLF currently has 44 million sq ft of projects under execution, of which, 61% is office space, 22% is retail space and the remainder is residential. One encouraging factor for the company is the advances received from customers — these rose from Rs 590 crore in FY05 to Rs 2,404 crore by end FY07.

FINANCIALS : The company recorded a total income of Rs 4,034 crore in FY07, up 224% over FY06. Net profit stood at Rs 1,941 crore in FY07, up 10-fold over the previous year. Close to 60% of DLF’s FY07 sales were from asset sales to group companies. Debts added up to Rs 9,932 crore by the year end and the company saw an interest outgo of Rs 308 crore, up from Rs 169 crore in FY06. Around Rs 2,500 crore from the issue proceeds will be used to retire part of the company’s debt.

VALUATIONS : Based on last year’s figures, DLF has a trailing P/E multiple of 48. DLF’s valuation is not based on its past cash flows, but on its expected future income. The company’s USP is the land holdings it has in Gurgaon, which were acquired at a lower price, much earlier. This allows DLF a substantial margin on the finished products it sells. Assuming a 20% growth in volumes and a selling price of Rs 6,000/sq ft, the company’s forward P/E multiple works out to 15-16. While DLF got a price of Rs 7,500/sq ft on FY06 sales, most of it was commercial and was in the NCR. Future sales will have a higher share from other areas and will also have a greater share of residential property, which is likely to lead to lower average rates. The company can also benefit from upside in the new businesses it is entering into, such as hotels and SEZs. The fact that DLF is the largest real estate player in the country will also fetch some premium for the company. A slowdown in the real estate sector can impact earnings due to lower sales and prices. Sales have fallen in some cities in recent months, but this should not be a major concern for long-term investors. Rising incomes and a growing economy should ensure strong demand over a longer period of one year or more. This makes DLF a good pick for an investor with a similar horizon.