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[Lavanay]

1.DLF declared its Q3FY08 numbers, which were higher than our estimates. For the quarter, EBITDA margins were stable at ~70%, and profits for the first 9 months of FY08 stood at Rs57 bn - 93% of
our full-year estimate for FY08, mostly due to higher sale to DAL.

2. The highlight of the quarter was DLF’s successful entry in the midincome residential segment. DLF sold 3,000 apartments in the first two months of launch itself. The company is pricing its projects aggressively (25-30% below market price), and targeting volume growth whilst maintaining margins at 35-40%. DLF expects to launch 2 more projects and to sell 6,000 apartments in Q4 FY08.

3.  DLF has shifted its focus from land acquisition to execution and will look to upgrade its landbank rather than add to it. DLF expects to have a delivery capability of 25 mn sq ft and order intake
volume of 50 mn sq ft in FY09.

4. Overall, we view these developments as being highly positive and will revisit our estimates post the company’s conference call. We maintain our NEUTRAL rating and TP of Rs770.

Q3FY08 results – Another quarter of strong performance--

Revenues in Q3 grew 7.2% QoQ while PAT grew 6.3% QoQ. The company posted a profit of ~Rs21.4 bn, including Rs1.6 bn for its stake sale in 8 projects to private equity investors in Nov07. The contribution to PBT from sale to DAL was higher at ~58% against 42% in 2Q FY08. The EBITDA margins remained stable at 69.5%. Area under execution grew 9% QoQ to 59 mn sq ft.

Mid income housing - a (large) step in the right direction--

The highlight of the quarter was DLF’s successful launch of 3 projects totalling ~9 mn sq ft in the mid-income residential segment. DLF sold 3,000 apartments (4.5 mn sq ft) across Chennai, Kolkata, Kochi, and Indore in the first two months of launch itself. The company expects to
achieve double this sale volume in Q4. DLF is pricing its projects 25-30% lower than most of its competitors, and targeting doing large volumes whilst maintaining margins at 35- 40%. We believe this to be positive in an environment in which prevailing high prices have impacted affordability. The company is also restricting resale for a period of 1 year from the date of booking, to avoid speculative demand in its projects.

Landbank in place – changing gears to execution--

Land acquisition during Q3 was 26 mn sq ft while expected change to product mix added another 27 mn sq ft. DLF’s current landbank stands at 748 mn sq ft, and management believes that it now has 95- 98% of its landbank for the next 10 years’ development in place – and does not plan to add much to the landbank, barring upgrading to higher value projects. The company is now focusing on execution, and has plans to deliver 25 mn sf and 30 mn sf of space in FY09 and FY10, respectively.

DLF office trust listing--

DLF is still awaiting final regulatory approval for the Singapore business trust listing. Management has confirmed that any profits made by DAL promoters on the Singapore listing will be completely passed on to DLF and its shareholders.

Forging ahead--

We see both the quarterly numbers and DLF’s apparent focus on execution as being highly positive. We will revisit our estimates after the conference call on Feb 1st. Maintain our NEUTRAL rating and
target price of Rs770.

Report card--

PE ratio       305.78          01/02/08
EPS (Rs)      2.66                  Mar, 07
Sales (Rs crore) 1,676.51        Dec, 07
Face Value (Rs)      2   
Net profit margin (%) 28.38        Mar, 07
Last dividend (%)  100                 22/10/07
Return on average equity  62.15      Mar, 07