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Buoyant outlook intact

* Q3 key highlights: 1) Presales at Rs20bn increased 33% QoQ and 97% YoY aided by an all-round performance across product categories and new launches. 2) Surplus cash generation of Rs7.6bn (Rs17bn in 9MFY22) resulted in net debt declining to Rs32bn (down 20% QoQ). 3) RentCo revenue / EBITDA / PAT registered a growth of 5% / 2% / 13% YoY respectively while up 5% / 6% / 22% QoQ respectively, 4) investee company (housing the Mumbai land parcel at Tulsiwadi) related provision amounting to Rs2.2bn marred consol earnings during the quarter.

* Guidance: 1) FY22 presales guidance revised to Rs65bn as the developer sees the Q3 sales momentum sustaining in Q4. Notably the company aims to sustain a similar quarterly run-rate of Rs20-25bn ahead owing to the strong launch pipeline and majority land reserves monetization ready. 2) quarterly surplus cash generation pegged at Rs5bn is conservative given the fast churning ready inventory and strong traction in new launches. 3) pricing environment remains buoyant and the developer plans to raise subsequent launch pricing in Midtown Delhi project by Rs2-3k/sf. Notably, nearly all of the value increase in the med-term launch pipeline is attributable to higher pricing. 4) Vacancy trends in the office portfolio to trend down to single digits by Q1FY23 vs. 13% in Q3FY22.

* Reiterate our Buy rating and Dec’22 TP of Rs530: We retain DLF as our top real estate play - 1) identified launch pipeline of >35msf having a diversified product mix is set to drive record sales over the next 12-18 months. The strong response to new launches (Delhi launch achieving Rs15bn sales in first 3-4 weeks of launch while >90% sales to launch in independent units) underpins our view; 2) sizeable land reserves (>150msf) in core markets which are outperforming other Tier 1 cities and have witnessed highest consolidation and 3) offering a play on near REIT ready annuity portfolio of ~35msf of prime assets. Overall, we expect cash flow profile improving given fast churning ready inventory, higher share of low-midrise development aiding cash conversion cycle and enhanced dividend payout from RentCo as commercial assets normalize.

* All-round sales performance: Q3 witnessed a healthy mix of all categories contributing to sales. Independent unit launches and Delhi launch each accounted for Rs7bn in sales. In its uber luxury project – Camellias, DLF retained its normalized quarterly sales run-rate of 19-20 units amounting to a sales of ~Rs6bn. More importantly, it is worth noting that these record sales numbers are despite the backdrop of higher pricing, thus, reflecting strongly on the underlying demand prevailing in the Delhi / Gurgaon market.

* RentCo performance normalizing: Vacancy in the office portfolio has improved 1pps QoQ to 13%. The developer expects to see vacancy trends in the office space trending down to single digits by Q1FY23. On the retail assets, footfalls and rentals are expected to normalize by Mar’22.

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