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Steady performance; growth largely priced in

In line Residential pre-sales; FY23 guidance unchanged

* DLFU’s pre-sales in 2Q was steady QoQ at INR20.5b (up 36% YoY) and in line with its quarterly run-rate (as per its FY23 guidance of INR80b). However, it was 7% below our estimate due to the timing of sales recognition.

* The management received a strong response to its 3.4msf of project launches in 2QFY23, which contributed INR13.5b to pre-sales. It also reported a pick-up in its Ultra Luxury project ‘Camellias’, which clocked INR4.7b of sales v/s INR3.5b in 1QFY23 and now commands INR60,000/sq. ft.

* Despite a strong response to its recent launches, the management reiterated its FY23 pre-sales guidance of INR80b, citing the uncertain economic environment.

* Collections improved by 14% QoQ to INR12.5b (down 17% YoY). It also realized INR4b of collections from One Midtown (Delhi). Surplus cash flows of INR1.3b were utilized to reduce its net debt to INR21b.

* Revenue fell 12% YoY and 10% QoQ to INR13b (21% below our estimate). EBITDA dropped by just 5% YoY to INR4.4b due to a 260bp improvement in margin. PAT grew 26% YoY to INR4.8b (26% below our estimate).

Strong Retail performance and Downtown Gurugram led to a growth in rentals

* Rental income for DCCDL’s portfolio rose 6% QoQ to INR9.9b, led by: a) commencement of operations at Downtown Gurugram; and b) 10% QoQ growth in Retail Rentals.

* Rentals from Downtown Gurugram stood at INR290m in 2QFY23. It further has 5.3msf of project under-construction across Downtown Gurguram (2msf) and Chennai (3.3msf), of which 1.6msf (30%) is pre-leased.

* We expect DCCDL’s Commercial portfolio to register 18% Rental CAGR to INR47b over FY22-24

Key takeaways from the management interaction

* Launches: In 3QFY23, DLFU will see another launch at Panchkula and a high rise project will be launched in 4Q. The management is confident of surpassing its sales guidance of over INR80b, but given the external environment, it retained its existing guidance.

* The new tower launch at One Midtown is scheduled for 1QFY24, but the management may bring it forward to 4QFY23. Current realizations are ~23,000/sq. ft., with DLFU’s adjacent completed project (Capital Green) commanding INR30,000/sq. ft. in the secondary market. It is also planning a Luxury high rise project in Chennai. DLF 5 (Crest 2) will be launched in FY24.

* Interest rate: The hike in interest rates was in line with its expectations. The management is closely watching these developments. So far, it has seen no impact on demand. Given the depreciation in the INR v/s the USD, it is planning to aggressively reach out to NRIs over the next few months.

Growth trajectory intact, but implied land value indicates DLFU is fairly priced; reiterate our Neutral rating

* While pre-sales were 7% lower than our estimate, we remain confident that DLFU will deliver better than its FY23 pre-sales guidance of INR80b. Hence, we retain our FY23 and FY24 pre-sales and cash flow estimates.

* Due to lower than expected revenue recognition in 2Q, we reduce our FY23 PAT estimate by 13%.

* While we remain confident on the growth trajectory in its Residential as well as Commercial business, a large part of it seems already priced into its valuation. Thus, the implied value of its land parcels remains the only key metric for a further upside in the stock.

* At current valuations, the surplus land in DLFU and DCCDL is valued at INR434b, which is in line with our estimated value of INR470b, assuming a 20/11-year development timeline for DLFU/DCCDL’s 151msf/25msf land bank, which is fair in our view. We reiterate our Neutral rating with an unchanged SoTP-based TP of INR385

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