Analysts differ on DLF recast call

DLF, the country’s largest realtor by market capitalisation, on Thursday
announced the splitting of its commercial realty business into two verticals — development and annuity. It will also absorb DLF Assets by merging its holding company, Caraf Builders and Constructions Pvt Ltd, with DLF Cyber City Developers (DCCDL), a wholly owned subsidiary of DLF.

Though analysts are unhappy that the exact valuation of the unlisted DAL has not been disclosed, the restructuring has brought mixed reaction from brokerages. Here are some brokerage calls after DLF’s analyst conference.

MORGAN STANLEY RESEARCH
RATING: Equal weight
TARGET: Rs 391
ANALYSTS: Sameer Baisiwala, Arunabh Chaudhuri
VIEW: We believe that the DAL restructuring plan will likely disappoint the market and the stock could correct near term. We remain Equal Weight.
WHAT’S DISAPPOINTING: Overall corporate structure gets complex (eg, DLF promoter holdings at two levels, listed company and DCCDL); future liability of SC Asia (60%) shifts to DLF; in practice DAL remains unfinished agenda (DLF will transfer 7 msf of pending assets over next few years, DAL will need to pay off pending receivables); transfer of lucrative assets (NTC and Mall of India) to partly owned company; and adverse valuation ratio (as per our understanding).

IIFL
RATING: Buy
TARGET: Rs 444
ANALYSTS: Bhaskar Chakraborty, Avi Mehta
VIEW: Downgraded DLF’s NAV. The proposed integration will
consolidate majority of the
group’s rental assets under DCCDL and enable DLF to be the sponsor
of DAL in a Singapore listing. While the rent-yielding assets of both entities have been equitably valued, the developable assets in DCCDL have been valued at Rs 450 crore, lower than our estimates. Our own assumptions yield exchange ratio of 70:30 (against declared ratio of 60:40), indicating DLF would have lost out on about Rs 540 crore of equity value. We downgrade DLF’s NAV to Rs 444/share, increasing weighted average cost of capital to 15% (13% earlier). DLF would also continue to carry DAL receivables on its books, to be paid off in future.

CENTRUM BROKING
RATING: Sell
TARGET: Rs 305
ANALYST: Adhidev Chattopadhyay
VIEW: Our assumptions indicate that a fair merger ratio would be 68:32. The 60:40 ratio announced leads to a value erosion of Rs 420 crore (or Rs 3/share) for DLF shareholders. We believe the variance can be attributed to assets of DCCDL being valued conservatively. We maintain Sell with a target price of Rs 305/share.

CONCERNS: DLF’s lack of disclosures regarding valuation and rationale for assumptions continues to be a concern. Also, DAL will not be fully consolidated into DLF post-merger and will become a subsidiary of DLF through DLF’s 60% equity stake in DCCDL.

ENAM SECURITIES
RATING: Neutral
TARGET: Rs 430
ANALYSTS: Chirag Negandhi, Nitin Idnani, Gaurang Shah
VIEW: This structure also preserves the DAL REIT structure, paving the way for DLF to list its office trust on the Singapore exchange (upon revival of the market), putting in place an exit structure for its commercial assets in the future.

CITIGROUP
RATING: Buy/Low risk
TARGET: Rs 464
ANALYSTS: Ashish Jagnani, Vidhi Sodhani
VIEW: A long-term positive. We see DLF-DAL integration as a consolidation exercise of its leased asset portfolio. This will create potentially the largest yielding asset portfolio of about 10-14 msf (being DLF’s 60% share) over the next 2-3 years and provide DLF with a steady annuity business. However, there may be a short-term increase in leverage. That said, we believe this integration should yield long-term dividends and remove an existing overhang on the stock. We also see potential for near-term plans to list DAL as a future trigger.