The real estate sector has been a casualty of the liquidity crisis as well as the demand slowdown, yet this realty stock has risen 25 percent in the last one year.
This year has been choppy for DLF yet its stock managed to gain 20 percent on a year-to-date basis. For global brokerage Morgan Stanley, the real estate giant is its top pick in the sector. The brokerage on Sunday upgraded the stock to 'overweight' and raised its target price to Rs 269 from Rs 210 earlier, implying a return potential of 25 percent.
According to Morgan Stanley, the company has a balanced portfolio of development and yielding assets and its power to monetize its land bank is on the rise, led by neighbourhood development. However, it remains predominantly leveraged to the NCR region. Morgan Stanley's updated model shows reasonable valuation, and it sees comfort in DLF's asset-based valuation.
"DLF has restructured its business model and balance sheet to become a more focused development and rental company. From here, the spotlight will shift towards monetization of its Rs 10,000 crore in unsold completed inventory, leading to positive free cash flow generation (Rs 500-600 crore per annum) and, potentially, further deleveraging," the brokerage said in its report.
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It also noted that the rental business (DLF Cyber City Developers) has gained scale, with prospects of low-/mid-teens growth from a current high base. Hence, the company is starting a new asset creation cycle for both its development and rental businesses and all this, along with reasonable valuation, has driven their rating upgrade to 'overweight' for the stock, Morgan Stanley stated.
The brokerage also believes that DLF's net asset value (NAV) quality has risen in the last few years, driven by significantly higher contribution from rent-yielding asset portfolio, large concentrated land bank in the Devco now has a more developed neighbourhood, giving visibility to monetization and a few recent land transactions in New Gurgaon/Phase V provide a pricing benchmark.
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Real estate investment trust (Reit) listing has also helped benchmark valuation for DLF Cyber City Developers' large portfolio. We have revised our model for updated project details, the brokerage explained. Morgan Stanley has raised its March 2021 NAV estimate to Rs 359 per share (from Rs 287 for March 2019).
The brokerage also lists a few possible risks for the company. It includes prolonged slowdown in DLF's home NCR market, including 1) Gurgaon; lower rental/higher vacancy for new rental assets under development, driven by oversupply 2) slow sales velocity in the completed inventory 3) rising interest rate cycle, hurting rental asset valuations, and 4) regulatory risks, including whistleblower complaint on qualified institutional placement (QIP) disclosures.
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