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DLF + Sobha Downgrade to Sell – Goldman Sachs

August 28, 2008

In a report released just a while ago, Goldman Sachs [GS] has downgraded DLF and Sobha Developers to a SELL as a way to book profits in the recent rally from trough of July-1st. GS believes that primary property prices and commercial rentals are yet to witness a significant correction. It may only be a matter of time before developers give in and bring prices down as end-users are bound to be affected by the recent monetary policy tightening.

DLF:
DLF is planning a slew of launches in Homes and Retail, although the management admitted that it expects a cautious outlook for the year ahead. It remains to be seen whether DLF can lease out office space at the same rate in FY2009 as it did in FY2008 and increase its area under construction, given the current tough market environment. GS believes property prices and rentals are yet to undergo a material correction and we believe this may happen before the year-end.

RNAV of DLF for FY09 is estimated to be at Rs 478 / share and the breakdown is as follows. in INR
Office Sales – 130
Retail Sales – 92
Residential Sales – 151
Office lease – 34
Retail Lease – 85
Hotels + Land Acquisition – 45
Net Debt (-58)

Due to challenging times for Developers, at a 15% discount to potential RNAV Goldman has set a target price of Rs 406 on the DLF stock.

Sobha Developers:
The Bangalore market, which accounts for 66% of Sobha’s NAV, is saturated, in GS’ view. GS does not assign much value to long-dated land banks as visibility on market dynamics is low. Further, Sobha’s high gearing relative to peers is not reassuring in the current tough market environment.

Residential projects in Bangalore, Trissur, Pune and Coimbatore should be key near-term revenue drivers, while the share of contractual income is likely to fall over time.

RNAV of Sobha Developers is Rs 492 calculated as below,
Residential Rs 126
Commercial Rs 8
Retail – 29
Open Land Bank – Rs 466
Contracts + manufacturing – Rs 92
Net Debt (-Rs92)

GS has set a Target Price at Rs 246 on Sobha Developers, 50% discount to RNAV due to major part of the NAV being arrived from Land Bank.

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