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Chris Wood cuts India exposure; DLF replaces Godrej Properties in portfolio

File photo of Christopher Wood, global head of equity strategy at Jefferies
Global investor and global head of equity strategy at Jefferies has cut his weightage on India by 2 percentage points in his Asia Pacific ex-Japan relative-return portfolio. Besides India, weightage of Indonesia, Thailand and Vietnam has also been cut by one percentage point each. On the other hand, exposure to Korea has been increased by 5 percentage points, Wood wrote in his weekly note to investors, GREED & fear.

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Among the Indian basket of stocks, Wood has replaced his investment in Godrej Properties with DLF, which has found favour with other brokerages as well. Recently, analysts at Morgan Stanley had upgraded DLF to ‘overweight’ with a price target of Rs 269.

DLF, according to Morgan Stanley, has restructured its business model and balance-sheet to become a more focused development and rental company. From here, the spotlight will shift towards monetisation of its Rs 100 billion in unsold completed inventory, leading to positive free cash flow generation (around Rs 5 – 6 billion per annum) and, potentially, further deleveraging, Morgan Stanley had said.

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Significantly higher contribution from rent-yielding asset portfolio, better monetisation opportunity in the large concentrated land bank in the Devco, improved pricing benchmark in New Gurgaon/Phase V and REIT listing that has helped benchmark valuation for DLF Cyber City Developers Ltd’s (DCCDL's) large portfolio are some of the reasons, Morgan Stanley feels, have triggered an improvement in DLF’s net asset value (NAV) quality.

Over the past few years, DLF has significantly improved its balance sheet through equity dilution. The company has reduced its total debt of Rs 270 billion in 2017 to Rs 164 billion in 2019 (including its share in DCCDL net debt). In addition, it has been able to fund capex to be able to increase its rental income to Rs 32 billion as compared to Rs 25.7 billion in 2017.

“From here, DLF’s balance sheet can further improve thanks to positive free cash flow visibility from next year onwards. DCCDL should be able to fund its multi-year capex through internal accruals, implying no incremental burden on its balance sheet. We have raised our March 2021 NAV estimate to Rs 359 per share (from Rs 287 for March 2019),” wrote Sameer Baisiwala, an equity analyst tracking the company at Morgan Stanley in a recent co-authored report with Pooja Bhatia, their research associate.

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Meanwhile, Wood remains bullish on the Indian real estate sector and expects long-term end user demand to make a comeback. 

“Amidst all the current bearish focus that the government’s affordable housing programme continues to generate both supply and demand. Supply is rising because of tax breaks provided to developers to do affordable housing while demand comes from the subsidies provided electronically to the house buyers who met the qualifying income criteria. The other point to note is that India’s commercial real estate market continues to boom where yields, while down from the peak, are much more attractive at around 8 per cent,” Wood wrote.

At the bourses, DLF has been on an uptrend over the past two months, up nearly 51 per cent since October. On a year-to-date (YTD) basis though, Godrej Properties has been the best performing realty counter with a gain of nearly43 per cent, while DLF has gained 23 per cent. The S&P BSE Sensex has gained 12 per cent during this period, while S&P BSE Midcap and S&P BSE Smallcap indices have lost around 5 per cent and 10 per cent, respectively.