HSBC downgrades DLF to reduce from hold

MUMBAI: HSBC has downgraded shares of real estate developer DLF to 'reduce' from 'hold' citing stating that performance parameters in the quarter ended June remained disappointing. The brokerage also said that the recent run up in the stock captures large part of the valuation upside from restructuring of the business but ignoring the persistent cash drain from the rest of the business.

"While gross residential bookings maintained a flattish trajectory of Rs 4.7 billion, substantial cancellations resulted in net bookings of only Rs 2.05 billion. These cancellations are a clear testimony of persisting weakness in real estate markets and excesses of investor-driven demand in earlier periods," it said in a note.

HSBC said the residential demand in the National Capital Region ( NCR) markets continues to remain weak and developers remain reluctant to take price cuts, which will prolong the weakness.

"We believe this will weigh on DLF’s ability to show substantial pick up in its sales momentum. Also, as projects move close to completion, the pace of construction costs will increase and in the absence of new sales, cash flow will remain weak," said HSBC.

The brokerage has rolled forward its target price on the stock to Rs 130 from Rs 125 earlier.