Edelweiss - DLF IPO

The Indian real estate sector is on a strong growth path with likelihood of a 33% increase in total constructed area over the next five years. The country has investable real estate assets of USD 50-80 bn (6-10% of its GDP) compared with 40-50% in most developed countries. We expect the investable assets to increase to 20-25% of GDP over the next ten years. DLF is the best way to get exposure to India real estate, given its size, quality, and credentials. We consider the company a default play on the Indian real estate as well as growth story going forward.

DLF's land bank of 10,255 acres is among the largest in India. The company owns titles and development rights of ~90% of this land bank and has paid for 67% of the land cost. Around 80% of this land bank is in the metros and a significant portion of the balance is within master plans, making DLF unique among all other large-size real estate companies. It has locked in the land at a cost of INR 235 per sq. ft. DLF added another 554 acres to its land bank recently and intends to continue adding to its land bank over time.

DLF has developed 224 mn sq. ft. of land (including plots, residential, commercial, and retail properties) till date across the country, which is reflective of its pan-India presence. Currently, it has ~44 mn sq. ft. of land under project execution and is expected to deliver over 30 mn sq. ft. of projects annually. It has also managed to lease 11.2 mn sq. ft. of commercial properties. To strengthen its execution capabilities, DFL has tied up with WSP Group plc for engineering designs, Laing O'Rourke plc. for
construction, and Feedback Ventures for project management. These tie-ups along with the company's high quality and broad-based management team will enable it to grow rapidly.

Currently, we have valued DLF's existing land bank only and assumed execution period of 15 years for its residential business (versus management expectation of 10 years). We estimate the value of land for sale at INR 436 bn and the value of its rental business (commercial and retail) at INR 460 bn. Thus, we arrive at an NAV of INR 512-517 per share. The IPO at the price band of INR 500 to 550 is at 2 to -6% discount to its NAV.


Upsides to DLF valuation could arise from: a) the 554 acres of land not included in the land bank plus purchase of new land in the next few years, b) tie-up with Hilton to develop hotels on a pan-India basis (evaluating 22 sites), c) construction JV with Laing O'Rourke and d) venture into large SEZs and MoUs with Nakheel for two large projects.


Thus, the IPO provides option value to the new growth initiatives that DLF
has undertaken, which are not included in its current land bank. Further,
the company has an existing stock of more than 10 mn sq. ft. in commercial
space (including plots) on its own books, which gives it visibility on the
profit front. We believe that over a period of time, DLF could trade at P/E
multiples rather than on NAV basis, as its project visibility starts
yielding regular profits.

*We recommend subscribe to the IPO.*

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