Buy DLF Ltd for the Target Rs1,940 by Motilal Oswal Financial Services Ltd
Growth to be led by the annuity portfolio
DLF remains focused on ramping up the annuity portfolio, which would drive growth as we expect rental income CAGR of 14% during FY26-28E. The company remains on track to reach its INR100b annual rental milestone by FY30/FY31. In the residential segment, it reported a robust 42% pre-sales CAGR over FY20-26. However, pre-sales declined by 5% YoY to INR201b in FY26 due to the high base and market absorption ceiling given a single-region play. Since operations are concentrated in Gurugram and diversification to other major regions remains very slow, we expect the overall pre-sales CAGR to be 5% in FY26-28. Nonetheless, DLF has among the best NOCF-to-collections in the sector; we expect strong OCF generation over the next 2Y, which would keep the balance sheet sturdy (already net cash) with net cash at INR87b in FY28E. We value the residential business at its NAV and the annuity portfolio at a 7.5-8.0% cap rate on FY28E. We reiterate our BUY rating with an SoTP-based TP of INR775.
Regional concentration to limit pre-sales growth over the medium term
DLF witnessed a significant increase in the scale of residential operations, with the 42% pre-sales CAGR to INR201b during FY20-26. While it has a sizeable legacy low-cost land bank offering 188msf development potential, >70% of this is in Gurugram, which has seen significant market expansion in the last 2-3 years. Hence, despite DLF’s ability to maintain a higher pace of supply in Gurugram, anticipation of moderate growth in the region and a demand ceiling would limit its growth. Further, since diversification in new regions remains slow, we expect muted pre-sales CAGR of 5% to INR222b in FY26-28.
Annuity portfolio scaling up well; rental income CAGR at 14% in FY26-28E
The company has a sizable ~50msf operational rental portfolio comprising a mix of office and retail assets (DLF + DCCDL + Atrium Place). The rental income CAGR of 13% during FY21-26 was mainly on the back of new asset additions and rental escalations. The portfolio occupancy remains high at 95% (FY26), which is among the best in the industry. More additions are underway, which would lead to the portfolio size increasing to 74msf once the developments are complete. The management guided an INR82b exit rental in FY27 while retaining the mediumterm target of INR100b. We expect INR78b/INR85b rental income in FY27/28E.
Healthy cash flows from the Devco business to keep the B/S sturdy
Strong scale-up along with collections growth led to sharp deleveraging of the Devco business in the past 5Y with consolidated net cash at INR83b as of FY26. DLF has among the best cash conversions among peers with NOCF-to-collections of 53% (FY23-26 average). The company has an INR438b cash surplus yet to be realized from projects already launched, while upcoming launches would be a further addition. We expect an FY26-28 collections CAGR of 8%, to INR154b, while cumulative net cash flows post-tax worth INR167b are expected in FY27/28. Accordingly, we project a net cash of INR87b as of FY28.
Valuation and view
We value DLFU at its NAV and currently do not assign a growth premium to this since the potential of its sizable landbank is already being captured in our estimates. Further, delta to valuations would be through new project additions in MMR and/or other markets. Hence, we believe the company’s valuation at 0% NAV premium is justified. We value the commercial portfolio at a 7.5-8.0% cap rate on FY28E. We reiterate our BUY rating with an SoTP-based TP of INR775
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