DevCo becoming free cash flow positive FY19 onwards will be a key trigger for rerating (as for many years DevCo has lacked cash flows which led to debt mounting). We believe FCF generation will allay cash flow pressure on residential business and will also advance its plans for newer launches. Re-iterate Buy with SoTP-based target price of Rs 241.

Equity infusion of Rs 50-55 bn in the company (Rs 30-35 bn from fresh equity raise in FY19 and Rs 22.5 bn from warrants expected to be converted in FY20) is to be utilised towards repaying DevCo debt of `71 bn. With lower outlay towards construction and interest payments, and higher cash inflow due to improved sales traction, we expect DLF to generate positive FCF from FY19 (after many years). FCF generated by DevCo will also be utilised towards paring down residual debt.

10% rental business CAGR

Completion of 4.1 msf of commercial space will add Rs 3.7 bn to rentals over next 15 months. Rental growth is driven by steady escalations of 5% p.a. Rental renewals of expiring leases at Cyber City— e.g. current renewals are happening at >Rs 100 psf p.m. (vs. earlier rentals of `65-70 psf p.m.). Low supply of Grade A office space in Gurgaon market has seen sharp uptick in net leasing (up 28% y-o-y in H1), which lends strong visibility to rental resets at DCCDL.

~81% of valuation and ~45% of our target value emanates from rental portfolio — high comfort on valuation At CMP, valuation comfort comes from high contribution to equity value from its rental portfolio which is mainly backed by operational cash yielding assets with no execution risk. Steady double-digit growth in rentals over the next 5 years to provide further cushion to valuation.

Gurgaon’s residential volumes weak but unsold inventory trending down Gurgaon’s residential real estate has been one of the worst performing through the 2011-17 down cycle with absorption levels down 85% from its peak. Prices are down 20-25% and with mortgage rates at decade lows, we estimate affordability is at a multiyear high. NCR market is witnessing signs of revival with new launches up 35% y-o-sy in CY18. Growth in new launches was driven by Gurgaon market which accounted for 75% of total new launches in CY18. Improvement in infrastructure should give the market some fillip from end FY19 onwards. Strong demand is being seen for ready inventory as buyers remain wary of propensity of developers to deliver— this augurs well for DLF given its new strategy to sell only completed inventory.