Report Lasst Yeat

8/13/2019 Report Lasst Yeat

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Submitted to:

Prof. Rishikesha T. Krishnan

Submitted by:

Group #6

Akshay Uday Shenoy [1211165]

Dheeraj Kumar [1211180]

Romil Harish Lodaya [1211195]

Preetam Pal [1211210]

Siddharth Agarwal [1211226]

11th

March 2013

COMPETITION & STRATEGY:

Analysis of DLF Limited inthe Real Estate Industry


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COMPETITION & STRATEGY: Analysis of DLF Limited in the Real Estate Industry 1

Table of Contents

1. Introduction ____________________________________________________________ 2

2. Current Company Strategy ________________________________________________ 2

3. Competitive Positioning & Generic Strategy __________________________________ 3

4. Elements & Basis for Growth Strategy _______________________________________ 4

5. Brief Value Chain Analysis ________________________________________________ 6

6. SWOT Analysis__________________________________________________________ 7

7. Resource-based View ____________________________________________________ 8

Appraisal of DLFs Resources & Capabilities__________________________________________ 8

Detailed Analysis of DLFs Resources________________________________________________ 9

Detailed Analysis of DLFs Capabilities_____________________________________________ 12

DLFs Comparative Advantage____________________________________________________ 13

8. Financial Insights_______________________________________________________ 14

9. Conclusion: Recommendations____________________________________________ 15

10. General Document References __________________________________________ 20

Appendix: Exhibits _________________________________________________________ 21


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1.Introduction

The real estate industry in India is growing rapidly, and is a significant contributor to India s

economy. The market size of the real estate industry is around $40-45 billion. Moreover, real estate is a

major growth driver for the Indian economy, considering the fact that it is linked with 250 ancillary

industries. There are four major verticals of real estateresidential, commercial complexes, offices and

retail. Our industry analysis(using the Porter Five Forces Framework) brought us to the conclusion that

the real estate industry is moderately attractivein the Indian context. The major players in this industry

are DLF, Unitech, Sobha Developers, Godrej Properties, and Oberoi Realty to name a few. We have

done our analysis on DLF Limited, which is a market leader in the real estate industry.

In this report, we have analyzed DLFs current strategy, business segments (in terms of

competitive positioning), generic strategy and the basis for its growth strategy. Next, we have explored

the aspects of value chain analysis (looking at its sales and marketing activities, as well as project

execution process), SWOT analysis and done an in-depth analysis of the resource-based view. Here, we

have covered the key resource tests, a detailed understanding of DLFsresources and capabilities (using

the VRIO Framework), and a discussion on the comparative advantage that DLF enjoys. We have also

inserted a section with brief financial insights with respect to DLF. Keeping in mind all aspects of the

analysis, as well as DLFsvision and mission, we finally came up with some feasible recommendations

for DLF to grow its business in the competitive environment.

2.Current Company Strategy

DLFs vision looks at contributing significantly to building the new India and becoming the

worlds most valuable real estate company. The DLF mission is to build world-class real estate concepts

across all business lines, with higher standards of quality, professionalism and customer service.

Keeping this vision and mission in mind, DLFs current strategy can be analyzed in terms of the following

points:

DLF already has a sizeable land bank in the NCR region (especially in Gurgaon); now, DLF is planning

to increase its land reserves in other strategic locations as well (this aspect is discussed in

subsequent sections).

As mentioned earlier, the increasing disposable income in Tier-2 and Tier-3 cities has made DLF

focus on these cities to expand their core business lines nationally.

It is further diversifying into Special Economic Zone (SEZ) development, since the government is

planning for more SEZs (especially in cities like Jaipur, Indore, and other Tier-2 cities).

It is trying to enhance its execution capabilities by hiring better resources, and it is paying special

attention to customer satisfaction and relationship management.


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It is additionally diversifying its business into other segments like hotel developmentand infrastructure

development.

3.Competitive Positioning & Generic Strategy

DLFs primary business is to develop properties in the retail, commercial and housing space.

Apart from the developmental business, another key area of their business is the rental space of

commercial properties. These properties include offices, IT parks, Special Economic Zones (SEZs), retail

malls, and even hospitals. On account of its wide range of businesses, DLF has tried to establish itself

across Indiaits strength being the northern belt of the country (Exhibit 1depicts the locations of DLFs

developments, projects and lands across India). Developmental projects account for approximately 77%

of their revenues. The figure that follows depicts DLFs generic strategy, namely that of focussed

differentiation. It also depicts the breakdown indicating what we imply by focus (geographic and luxury

segments), and what we imply by differentiation (premium construction) in DLFs case. These elements

are further analyzed in sections that follow.

Figure 1.Diagrammatic representation of DLFs generic strategy

Developmental Business

Housing: The key thrust areas in the housing industry for DLF are super luxury, luxury and

premiumhomes. As referred to earlier, it operates primarily in the northern beltin cities such

as Delhi, Gurgaon, Lucknow, and Mullanpur (New Chandigarh), as in Exhibit 2. DLF is also now

attempting to make its presence felt across India by developing more properties in other

metros like Bangalore, Hyderabad, Chennai, and Kolkata as well as other smaller cities like

Indore and Kochi. The major projects launched in other areas are as shown in Exhibit 3. Most of

the projects outside the NCR region are in the premium and mid-range segment. Besides thecorrection of prices in DLFs core operating segments, the expansion into the mid-range

Focused Differentiation

Geography

Segments

Premium construction


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segment has deflated the average sales price from Rs. 6,517 per square foot to Rs. 3,900 per

square footobserved in Exhibit 4.

Commercial Spaces: Most of the commercial complexes developed by DLF are primarily in the

NCR region, other than a few projects across India. The DLF website sets forth that they are

credited with introducing and pioneering the revolutionary concept of developing commercial

complexes in the vicinity of residential areas, which gave them a distinct competitive

advantage.

Rental Business

DLF has exhibited strength in the Grade A - Office Leasing market with numerous projects.

Further, DLF is in the forefront when it comes to developing retail malls this is currently a key focus

area. They are also into leasing of IT parks and spaces in IT parks. Once again, most projects in theleasing space are in the NCR region. Yet, a few projects and SEZs in cities like Pune, Chennai, Hyderabad

and Kolkata have shown their inclination to expand across India.

Thus, DLF is primarily into the developmental business with a focus on high-end properties,

both in the residential and commercial space, in the NCR region. This gives them a competitive

advantage over others. Moreover, expansion into other businesses (such as leasing of retail malls and IT

parks) and other major cities in India has helped them to mitigate business cycle risks, apart from

forming the basis of their growth strategy.

4.Elements & Basis for Growth Strategy

DLF is today one of the biggest players in the real estate market. To sustain its position and expand,

it would be important to calibrate its strategy based on the future demand and supply projections in the

industry (housing, commercial and retail) and the segments it caters to.

Housing

According to various industry reports, the demand for housing is set to grow tremendously in the

next few years, especially in seven major cities in India (NCR, Mumbai, Bangalore, Chennai, Pune,

Hyderabad and Kolkata). The total additional demand projected by independent research (Cushman

and Wakefield) is 2.1 million units in these cities. Of this additional demand, 59% or 1.3 million units

would be from the mid-range segment, followed by the high-end segment at 23% (on account of the

increasing number of NRIs and HNIs) and the low-end segment at 17%. The demand-supply gap

projected, on the basis of this research (for seven major cities), is 54% (Exhibit 5).


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Approximately 70% of the demand projected would be from the mid-income group households,

and the current inventory pipeline is expected to service the same. The demand for high-income groups

is projected to be 1,14,360 units. This is the chief segment in which DLF operates, and hence would be

profitable in the near future with the probability of price increases. Further, Bangalore is poised to

generate the largest demand-supply gap, which would lead to a rise in prices. Bangalore is followed by

Ahmedabad and Hyderabad. But, a majority of the gap would come from the mid-income segment.

Alternative Considered:An Economic Times article dated 2nd March 2013 alludes to the fact that

real estate players must move into affordable housing. The article talks about the Indian government

having granted infrastructure status to affordable housing a step that creates distinct incentives and

tax benefits for the sector. However, the primary reason for not recommending this, in the specific case

of DLF, is that the idea does not go in line with DLFs competitive positioning and strategy (of operating

in the luxury segment). Adopting such a measure might thus result in unprofitable diversification.

Commercial Spaces

Demand for commercial spaces is closely related to macro-economic factors including, but not

limited to, the Euro crisis, subdued domestic growth and policy reform delays leading to slower growth

in corporate earnings. Despite these factors, construction activity is expected to continue, but the

absorption rateis projected to reduce. This is also seen in the demand-supply gap depicted in Exhibit 6.

On account of this lower absorption rate, the vacancy rate is bound to increase from 20% to 24% in

2014. This would, in-turn, have a downward effect on the rentals. In spite of this, the capital value of

commercial space is forecasted to increase because the commercial value of these properties has notrisen after the correction for the 2008-09 crisis. Also, consolidation and relocation of premises by

companies is going to emerge a vital factor in the distribution of demand for offices. Many companies

are moving from smaller head offices in major cities to larger regional offices in smaller cities. This may

fundamentally result in a plateau effect, or slowly-growing demand in larger cities.

DLF has developed a competitive advantage in leasing commercial spaces by creating a unique

reputation amongst IT companies. 49% of the demand here comes from the IT, BFSI and real estate

sectors. DLF should continue to focus on these sectors, and attempt to expand into other segments

(Exhibit 7). This can prove to be a source of significant competitive advantage for DLF say, by getting

into long term contracts with companies in other sectors. Gurgaon is now seen as an IT hub in thenorth. This augurs well for further investment in Gurgaon, specifically in the case of DLF. A caveat here

is that the recent increase in crime rates can drive away companies from the city, which may act as an

adverse force for DLF.

Retail

With the recent policy amendments in relation to FDI in single and multi-brand retail, this sector

looks very promising. Further, the value, speciality, luxuryand lifestylesegments in the retail space have

key implications in terms of the strategy that DLF should adopt, taking into consideration its existing

capabilities. According to research conducted by Jones Lang LaSalle, there has been a growth in this


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space, but quality is still lacking. Classifying the malls into poor, moderate and superior grade malls

allow us to gain an insight into the vacancy ratios for these malls. Research shows that poor quality

malls have high levels of vacancy. A majority of these poor quality malls are located in Mumbai and

Delhi, where the vacancy ratio is touching 40%. This can also be attributed to the sheer number of malls

in Mumbai and Delhi. Vacancy ratios exhibited in other cities such as Chennai, Bangalore and

Hyderabad are less than 10% - most malls are classified as superior grade malls. The national average

vacancy ratio of superior grade malls currently stands at approximately 7%. DLF, which primarily

operates in the segment of superior grade malls, has improved its vacancy ratio from 7% in 2011 to 5%

in 2012 (which is better than the national average). This shows that DLF enjoys distinct competitive

advantage in this space. In 2011-12, DLF was able to earn three times the lease revenue per square foot

in its retail business (Rs. 1,811 per square foot) as compared to its commercial business (Rs. 634 per

square foot). The retail sector in India is in its growth phase, making this business possess the potential

to be one of the key drivers for the future growth for DLF. However, research shows that the vacancy

rate in superior grade malls is higher in the lease model (as against the developmental model). In effect,DLF should carefully calibrate and attempt to explore the developmental model for its retail business

and test its profitability.

5.Brief Value Chain Analysis

The value chain analysisof DLF would be more or less similar to that of other real estate players

in the industry. The first step is to identify land and acquire it to increase the land bank, which is a

critical firm resource. Once land is finalized, the project conceptualization and design aspects come

into the picture. Next, the sales and marketing team look into the formulation of marketing strategy,

competitor analysis, advertisement campaigns, sales pitching for new customers, and relationship

management in terms of old customers. The team also handles collection of down payments, and

procedures to give their customers possession (post project execution). The sales and marketing

team is thus actively involved before and after project execution. The project execution dimension

starts with excavation, then proceeds to structure formation, and finally to finishing work like

plastering, carpentry, plumbing, making electrical provisions, and allied work areas.

Figure 2.DLFs value chain analysis

Landidentification,

acquisitionand land bank

creation

Project design,conceptualizat

ion andproject

planning(seeking

approvals)

Sales andmarketing

Projectexecution

Post-salesmanagement /

facilitymanagement


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Figure 3.DLFs sales and marketing functions

Figure 4.DLFs project execution steps

6.SWOT Analysis

At this juncture, a brief SWOT (StrengthsWeaknessesOpportunitiesThreats) Analysis may

be useful. DLFsbiggest strength is its huge land bank, which it has acquired at strategic locations.

The DLF brand name, exposure across sub-sectors, and superior positioning across various profitable

segments are its other major strengths. DLFs debt-equity ratio is 0.83 as on 31stMarch 2012, which

may be deemed high compared to some other prominent industry players such as Prestige Estates

Projects (0.53), Unitech (0.26), Sobha Developers (0.11), and Oberoi Realty (debt-free as on 31st

March 2012)an area of concern. DLFs major business heavily lies in the Gurgaon region, which is

also a point of concern for DLF, and may be considered a weakness. After the green flag to FDI in

retail by the Government of India, there is a lot of scope for foreign players in this space to operate

in the Indian market. This is one of the prime opportunities for real estate players like DLF, who

already have their presence in the retail segment construction business. Increasing disposable

income of those living in Tier-2 and Tier-3 cities is also providing avenues for good business

opportunities. Thus, DLF can enhance its presence in these cities .The current economic downturn is,

Plan formarketingstrategy

Liasoningand

advertisement

Sales pitchCollection of

payment

Possesionand post-

salesservices

Excavation Structural work Finishing work


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however, a major threat for DLF. The downturn has certainly been accompanied by property prices

going down, and it is hence affecting DLFs margins severely.

Figure 5.SWOT Analysis of DLF

7.Resource-based View

Appraisal of DLFs Resources & Capabilities

The appraisal of a firms resources and capabilities can be looked at using the key resource

tests, to begin with. The VRIO (Value Rarity Imitability Organization) Framework is applied in

the following sub-section. Table 1on the following page summarizes our resource and capability

appraisal for DLF. A brief discussion accompanies the table.

From the table below, it can be noticed that land bank and brand are two of the most critical

resources possessed by DLF. This is substantiated from the discussion below on these two heads.

With the largest and most valuable landmark and a widely recognized and trusted brand, DLF is

poised to succeed in the short to medium term subject to the firms capability to leverage them

effectively. On the capabilities side, almost all the capabilities are critical from the point of view of

organizational efficiency and goal efficacy. DLF has an edge over its competitors by maintaining

these capabilities. Capabilities such as procurement, engineering and marketing and sales are

Strengths

- Huge land bank

- Brand name

- Broad exposure across sub-sectors

- Well-positioned across various

profitable segments

Weaknesses

- Huge debt burden

- Geographical concentration heavily tiltedtowards Gurgaon

Opportunities

- New economic policies like FDI in retail

- Rapid urbanization, implying increasedhousing demand

- Increasing scope in Tier-2 and Tier-3 cities

Threats

- Economic crisis can lessen the demand inhousing, retail and commercial sectors

- Decline in property values can affect thefirm's margins

SWOT


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important to maintain its strong brand. DLFs comparative advantage is also discussed towards the

end of this section.

Table 1.Key resource tests for appraising DLFs resources and capabilities

Resources &

Capabilities

Extent of Competitive

Advantage

Sustainability of Competitive Advantage Appropriability Final

Verdict

Scarcity Relevance Durability Transferability Replicability

Land Bank High High High High Low High Highly

critical

Capital Medium High High High Low High Critical

Technical

Expertise

Low High Medium High High Medium Crucial

Brand High High Medium Low Low High Highly

Critical

Human

Resources

Low High Low High Medium Medium Crucial

Procurement Medium High Low High High High Critical

Engineering Low High Low High High Medium Critical

Financial and

Risk

Management

Medium High Medium Medium Medium Medium Critical

Marketing and

Sales

Low Medium Low High High High Critical

Government

Relations

High Medium Low Low Low HIgh Crucial

Detailed Analysis of DLFs Resources

Owned or controlled by DLF, the resources which give the firm competitive advantage can

be summarized in Table 2on the following page.

In the subsequent sub-sections, we would go over each resource one-by-one and justify howthey are critical to long term success of DLF and if the firm can use it to its advantage.


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Table 2.Summary of resource analysis for DLF

Type Resource Data / Facts for DLF VRIO Analysis

Tangible

Physical

Land bank Total of ~350 msf; 56% in Super

Metros, 20% Metros

Valuable, rare,

inimitable, exploitable

Tangible

Financial

Capital High net worth of ~14500 cr;

total assets of ~36000 cr

Valuable, not rare

Intangible

Technology

Technical expertise JV with Laing ORourke, WSP

Group, DuPont & Nakheel

Valuable, not rare

Intangible

Reputation

Brand Highest market cap; Industry

market leader

Valuable, rare,

inimitable, exploitable

HumanResources

Civil engineers,architects, salespeople,

legal advisors

In-house & external training tobuild employee skills; Dedicated

& well-aligned Legal Department

Valuable, not rare

Land Bank

Arguably the most important resource in the real estate industry is the land bank. In addition

to merely the size of holdings, it is also important where the land is located. DLF has one of the

largest land banks in the country although most of it located in the NCR region of Gurgaon and New

Delhi. DLF has 1.2mn square meters1

of land under construction and a total of 6.5mn square meter2

under control giving it a clear advantage over competitors.

The only downside is that most of this land is concentrated in the NCR region. Parsvnath

Developers, another major real estate developed in North India, has a more widespread land bank

and operations spanning a total of 44 cities in 15 states.3

VRIO:According to VRIO analysis, land bank is one of the most critical resources. It is valuable given

the scarcity of land in big cities, rare from the point of view of prime plots, inimitable as it is a natural

and fixed resource and exploitable given DLFs capabilities.

Capital

DLF is the largest real estate developer in India and this fact is reflected in the market cap of

its stock which is almost 4.5 times its nearest rival, Oberoi Realty. On the balance sheet side, DLF has

a networth of almost INR 15,000cr, significantly larger than most competitors like Oberoi, Prestige,

Sobha and Godrej. One cause of concern is the high level of debt; DLF has a debt of almost INR

12,000cr far exceeding its peers. In addition, the debt-to-equity ratio at 0.83 is also far higher than

the comfortable level.

1

Q1 2013 BMI Industry Report2Ibid.3Ibid.


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VRIO: Capital is extremely essential and valuable resource. But it is not rare because there are

various avenues of raising capital given a firms credentials.

Technical ExpertiseTechnical expertise is one of the most important resources in the real estate industry

especially for players like DLF who differentiate themselves from their competition. Most of the

design and landscape consultation for DLF is done by major players like Hafeez Contractors, Arcop

Consultants and Geyer Coburn Hutchins (GCH). Such differentiation is very valuable in capturing the

premium market segment in real estate industry.

A joint venture with Laing O Rourke for the development of 16 projects covering a total of

40mn sq ft has also allowed DLF to bring in technical expertise from foreign market into India.

Another joint venture with WSP has been signed to bring in engineering and design consultancy

apart from project management services.

VRIO: Technical expertise is, once again, a very valuable resource without which DLF will find it

difficult to differentiate from its competitors. But, it cannot be considered rare because, no matter

how big a firm is, it cannot employ all valuable technical experts.

Brand

Along with other tangible and intangible resources, reputation is a very critical resource. DLF

has a very strong market reputation evident through its market cap. In addition, The Confederation

of Real Estate Developers Associations of India (Credai), represents majors like DLF and Parsvnathalong with 5000 other members.4In addition, DLF is the market leader in real estate with sales of

about INR 3500cr, larger than sum of the next two competitors, Sobha and Omaxe.

VRIO:Brand is an important piece of a firms image. For DLF, it is a ll the more crucial as they are

differentiators and need to attract large contracts through a higher bargaining power. Brand is

classified as a critical resource by the VRIO framework. It is valuable, rare, inimitable and is capable

of being exploitable by the organization. Trademark laws protect brand making it rare and

inimitable. Also, DLF is capable of leveraging the brand to its benefit.

Human Resources

Human resources form an important part of DLF. Although a lot of operations such as design

consulting, landscape consulting and the actual construction are outsourced, some critical

operations such as sales and marketing and legal advisory are in house. In the third quarter of the

current fiscal year, gross sales of about 210,000 sq m (2.27 msf) have been made as against 150,000

sq m (1.59 msf) in the last quarter5, a testimony to the strength of human resource with DLF.

4

Ibid.5DLF Q3FY13 Analyst Presentation, Feb 14, 2013, http://www.dlf.in/dlf/wcm/connect/91c32cb4-5454-4614-

91c9-e0063063038e/AP-Q3FY13.pdf?MOD=AJPERES&CACHEID=91c32cb4-5454-4614-91c9-e0063063038e


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VRIO: Similar to technical expertise, human resource is valuable but not a rare resource.

Competitors of DLF have built similar human resource capabilities through selective hiring and

intensive training.

The following table further develops the analysis of DLFs resources, by understanding the

importanceand relative strengthof its resources.

Table 3.Importance and relative strength of DLFs resources

Resources Importance DLFs Relative Strength Comments

Land Bank 9 9 Has the largest land bank and is

valued the highest in industry

Capital 8 6 Capable of raising debt, need to

rein in debt in short term

Technical Expertise 6 5 Has several JVs with foreign

partners for bringing in expertise

and technology

Brand 9 8 Has arguably the most famous

brand

Human Resources 7 7 Has hired and trained a strong

marketing and sales team; sold

2.27mn sq ft in third quarter of

current fiscal year

Note: All scales range from 1 to 10 (1 = very low, 10 = very high)

Detailed Analysis of DLFs Capabilities

Complementing the powerful set of resources, DLF has built a strong set of capabilities.

Some of DLFs capabilities include procurement, engineering, financial & risk management,

marketing & sales, and government relations.

In spite of the rising costs of raw materials6(almost 10% per annum in line with inflation),

the profit margin of DLF has not plummeted (33% of sales in FY10 to 30% of sales in FY127). This can

be partially attributed to efficient procurement of raw materials. In the current fiscal year, DLF has

1.2mn sq meters under construction. This is only possible by the strong engineering capabilities

developed by DLF. In addition, DLF, as mentioned earlier, has joint ventures with other firms aiming

to bring in expertise in the firm. Financial and Risk Management has been one of the core strengths

6Crisil, Housing Sector Analyst Report

7DLF Annual reports


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of DLF. DLF has been able to raise a massive amount of INR 12,000cr as debt without exceeding

reasonable interest burden. DLFs debt is rated an investment grade of A by Crisil8.

Once again, the following table further develops the analysis of DLFs capabilities, by

understanding their importanceand relative strength.

Table 4.Importance and relative strength of DLFs capabilities

Capabilities Importance DLFs Relative Strength Comments

Procurement 7 8 In spite of rising costs of raw

materials, the profit margins

have not dipped immensely

Engineering 8 6 Has a massive 1.2mn sqmeters under construction

currently

Financial and Risk

Management

9 6 Has been able to raise debt at

reasonable costs; Crisil rates

DLF debt at A

Marketing and Sales 9 7 Has sold 2.27mn sq ft in third

quarter of last fiscal year

Government Relations 6 6 Large number of projects

quickly executed

Note: All scales range from 1 to 10 (1 = very low, 10 = very high)

DLFs Comparative Advantage

DLF has a very clear cut and strong advantage over its competitors. The biggest and

strongest resource supporting this is the land bank. DLF owns over 350mn sq feet of land, mainly in

the NCR region of Gurgaon and New Delhi. Although the land bank is concentrated, it is valued much

higher than its competitors as evident from the total assets of DLF and major competitors. Though

direct data for competitors is not available, it is clear, from the wide difference in the asset values,

that DLF leads the pack by a large margin. The nearest competitor, HDIL, has total assets of about

INR 12,000cr as against DLFs INR 21,000cr9.

The DLF brand is arguably the most recognized brand when it comes to premium housing

and office space. With sales exceeding the sum of the next two competitors and construction on one

of the largest area of 1.2mn sq meter of area under construction, DLF has been able to leverage the

strong brand that it has built over the years. Most other competitors like Sobha and Prestige Group

8

http://www.moneycontrol.com/news/business/crisil-downgrades-dlf-debt-rating-shares-fall_641846.html9http://www.moneycontrol.com/stocks/top-companies-in-india/total-assets-bse/construction-contracting-

real-estate.html


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hold an enviable position only in some parts of the country and, unlike DLF, are not looking to

expand any time soon.

Financial and Risk Management is another important aspect to succeed in real estate industry.

Through its superior human resource and capital management, DLF has been able to build a strong

position in the market. But, there are few concerns on this front. With an uncomfortably high level

of debt-equity ratio at 0.83, albeit lower than the industry average of 1.6610

, DLF will have to reach

out to other avenues to raise more cash. Other firms such as Oberoi Realty and Prestige Group have

been able to manage their debt better. Oberoi Realty has no debt while Prestige Groups debt-to-

equity ratio is about 0.5.

8.Financial Insights

The first cause of concern is the sharp decline in DLFs net sales figures. Clearly, net sales for

2011-12 and 2010-11 are over 30% below 2007-08 boom levels. This understandably shows up in the

net sales growth and EBITDA growth for the companyboth of which have followed a rather similar

trend over the period of discussion. The most disturbing financial metric here is the net profit

margin, which has shown a consistent and sizeable fall from 55% (2007-08) to 12% (2011-12).

Fundamentally, these figures together tell us a story of declining financial performance.

Table 5.Summary of key financial metrics considered for DLF

Financial Metrics Units 2011-12 2010-11 2009-10 2008-09 2007-08

Net Sales Rs. Million 96,001 95,252 73,830 99,291 1,40,412

Net Sales Growth Per cent 0.8 29.0 (25.7) (29.3) 433.7

EBITDA Growth Per cent 4.2 6.7 (36.8) (39.5) 523.4

EBITDA Margin Per cent 41.2 39.8 48.0 56.3 66.8

Net Profit Margin Per cent 12.0 17.1 22.9 44.9 55.0

Source : CRISIL Research

While the return on capital employed for DLF has fallen from about 18% (2007-08) to about

11%-12% (2011-12), a similar trend has been observed in the industry a decline from 23% to 10%

over the same period. Nevertheless, the drop is reason to worry for a market leader like DLF. It is

important to make a mention here that DLFs revenue recognition practices have been an area of

dispute.

The Housing Sector Analyst Presentation (2010-11) by CRISIL Research makes another

interesting pointdebt is not a problem, cash flows are. In the specific case of DLF, the report Debt

10Capitaline, Key financial ratios, Industry - Const-Hsg-Med/Sm; Accessed on Mar 10, 2013


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Equity Ratio (as at March 2012) of 0.83 is not substantially higher than industry aggregates (it is, of

course, higher than certain competitors). However, the decline in Net Cash Flow from Operations

from approximately Rs. 1,50,000 lakh (2010-11) to about Rs. 40,000 lakh (2011-12) is an adverse

signal for the company. DLFs interest costs have undoubtedly increased as well. A way of looking at

this isthe core problem is with DLFs operating cash flow; the insufficiency of operating cash flow

creates a situation where the company has to (in net terms) take on additional debt, as in 2011-12.

This effectively means growing interest costsfor instance, we can see that interest payments have

increased from about Rs. 1,65,000 lakh (2010-11) to about Rs. 1,90,000 lakh (2011-12). The

unavoidable result is a vicious circle.

9.Conclusion: Recommendations

This section is written taking into consideration market conditions, implementability and

resource availability. In order to make the recommendations as specific and structured as possible,

each recommendation is organized in the format Recommendation Reasons Challenges. This

basically allows us to outline the key reasons and challenges accompanying each recommendation.

The recommendations are intended to flow naturally from the analysis thus far, and have been tied

in with opportunities. Finally, the section concludes with a Summary of Recommendations table

(Table 6), to give a snapshot of the recommendations proposed (along with the logical arguments).

Divestment of Non-Core Assets

Recommendation

DLF should look to improve its balance sheet by divesting its non-core assets. In this regard,

it has been working on selling its luxury chain of hotels, Aman Resorts, for quite some time now. It

would be advisable to sell off its windmill units in Gujarat, Rajasthan, Tamil Nadu and Karnataka as

well11. If the deals on windmills finally go through, DLF will stand to generate revenues worth $ 1.85

billion by 2014 as per industry reports.

Reasons

DLF has piled on huge debt on its books after the 2008-09 crisis. Because of the huge debt,

the cash outflow has significantly increased as seen from the cash flow analysis. Total outflow on

account of interest cost has risen to Rs. 1900 crore, which forms around 60% of their costs. On

account of higher borrowing, their interest costs have further gone up. Hence, it would be necessary

to reduce the debt burden.

11http://www.businesstoday.in/dlf-vadra
http://www.businesstoday.in/dlf-vadrahttp://www.businesstoday.in/dlf-vadra


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Challenges

Poor valuation by potential buyers has resulted in DLF not being able to sell its stake in Aman

Hotels till now, with a grim possibility that it might have to significantly bring down its price

expectations if the properties remain unsold in the near future. Thus, finding lucrative interested

parties is a big challenge DLF is facing.

Geographical Expansion & Focus on the Mid-Income Segment

Recommendation (with Reasons)

DLFs goal is to establish a national leadership position in all areas of its business. Based on the

above analysis, the key points of recommendation for the housing, commercial and retail businesses

are as follows:

A)Housing

1) Expand into the mid-income housing segment in cities such as Bangalore, Hyderabad and

Ahmedabad.

2) Concentrate on high-income, luxury segment housing in the NCR region.

3) Avoid expanding into the low-income housing segment.

4) Avoid expanding into cities (like Mumbai) which are experiencing overheating.

B) Commercial space

1) Since the capital value is projected to increase, the developmental business in this segment

is poised to be more profitable in the near futureand hence worth placing emphasis on.

2) Continue to focus on Grade Aoffice spaces (to maintain its image of differentiation).3) Focus on its strength in the IT sector for its leasing business.

4) Enter long term contracts with companies in other lines of business (say, a partnership with

Fortis Hospitals).

C) Retail

1) Evaluate the developmental model for its Mall business as against the lease model (for lower

vacancy ratios).

2) Continue to strengthen its position in superior grade malls.

3) Explore the possibility of expanding the retail business to other cities in India.

Challenges

There are certain challenges which DLF will face in adopting such a heightened focus on the

mid-range housing sector in other cities. It will face stiff competition from the existing local players;

for example, Sobha Developers and Prestige Constructions enjoy significant market shares in

Bangalore. These established players also enjoy the advantage of strategic pools of land banks in

these cities. Additionally, poor current land bank resources may be another hindrance for DLF in this

regard. Procuring land at this juncture can prove to be costly in many of these cities.


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New Technologies

Recommendation

We believe DLF can explore the area of developing capabilities for building green buildingsusing cleaner and more environment-friendly technologies. Also, it can implement pre-fabricated

building techniques, that is, designing and manufacturing the individual parts of the building in

factories and then assembling those parts at the construction site itself.5

Reasons

The primary reason behind shifting towards green buildings is the foreseeable growth in

demand for such constructions, especially in the commercial sector that DLF operates in, owing to

the government tightening its environmental regulations. As for pre-fabricated buildings, they

require much lesser time for construction (as per various estimates); for example, the new NCR-

based realtor, India Concept House, states that it will take them only 5-6 weeks to assemble a 1000

square feet building by this technique. This can have tremendous implications on the cash flows of

the companyif the company is able to scale this model.

Challenges

The main problem in this context is the dearth of suitable contractors (who have sufficient

expertise in such clean technologies). So, DLF has to look into investing in research and

development in this field, and look for any foreign help it can manage by leveraging its strong brand

and overall reputation. The issue with pre-fabricated buildings is that these buildings allow much

lower flexibility in terms of on-site design changes, and their costs are also higher compared to

traditionally-built structures. In effect, this would apply only to the high-income segment that DLF

operates in, owing to the lower price elasticity this segment exhibits.

Plotted Cities

Recommendation

DLF should concentrate on getting more intoplotted citieslike the DLF city project, which it

has successfully completed. Developments like Lavasa by HCC are another such example. There is

huge potential for such plotted cities with luxury housing - this is an area of strength for DLF.

Reasons

There are currently very few players into such plotted city developments in India. DLF

certainly possesses the financial ability to undertake such large projects. Moreover, this move will be

in line with its strategy offocussed differentiation.


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Challenges

The chief issue in this regard is that both land acquisition and government approvals for such

large-scale developmental projects are highly time-consuming. Further, it has to consider the strict

environmental regulations that are being implemented by the government, which might hamper the

profitability of such projects (owing to elevated costs).

Corporate Branding

Recommendation

Finally, DLF needs to urgently focus on improving its corporate governance procedures and

ensuring greater transparency in the deals it undertakes.

Reasons

It has already found itself in the midst of a political storm with activists like Arvind Kejriwal

accusing it of carrying out dubious deals with Skylight Realty (owned by Robert Vadra) since the year

2008. It is still to come out with a proper explanation that would negate these allegations. Again, it

was subjected to further disrepute by the Canadian investment-research firm Veritas, which stated

that DLF had inflated its sales figures by Rs. 11236 crore and its profit after tax (PAT) by Rs. 7233

crore via its dealings with DLF Assets Ltd. (dating back to 2009). Also, the Competition Commission of

India (CCI) had slapped a hefty fine of Rs. 630 crore on charges of its having abused its dominant

market position12

.

Challenges

This creates the need to step up its internal monitoring and governing policies, which can be

time-consuming. DLF can also increase its involvement in social issues like Corporate Social

Responsibility (CSR) activities to salvage the damage it has suffered (to some extent) with regard to

its reputation. This would however entail non-productive expenditure (yet its magnitude should not

be high enough to perturb a company operating at DLFs scale).

12http://www.businesstoday.in/dlf-vadra


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Table 5.Summary of recommendations for DLF

Field Recommend-

ation

Reasons Challenges Priority Difficulty

/Effort

Non-core

Assets

Divest stakes

in Aman

Hotels, Wind-

mill projects

Get some liquidity

to improve debt-

ridden balance

sheet

Poor valuations,

possibility of

lowering of prices

High Medium

Becoming a

pan-India

player in the

housing

sector

Expanding into

new locations;

targeting the

mid & low

income

segments

High demand in

metros outside

NCR, possibility of

getting

infrastructure

status, cheaper

access to capital,

government

subsidies etc.

Strong incumbent

local players in the

new regions; poor

current land bank

in other cities;

Deviation from key

position in

targeting the low-

income segment

Medium-

High

High

New

Technologi

es

Adopting

green

techniques &

pre-

fabricated

buildings

Tightening

government

policies, growing

demand in

commercial

segment, faster

project completion

Dearth of

contractors with

such expertise,

higher costs, low

flexibility in

designs

Medium-

High

Low-

Medium

Plotted

Cities

Developing

planned

modern

townships (eg.

DLF City,

Lavasa)

Few current

players; ability to

invest in & execute

large projects; in

line with focused

differentiation

Land acquisition

problems, delayed

approvals and

environmental

issues

Low-

Medium

Medium

Corporate

Governance

Focus on

stricter

governance

and

transparent

business deals,

CSR activities

Maintaining brand

image against

recent allegations

on murky deals and

unethical

accounting

practices

Involves non-

productive

expenses

(however, not

significantly high)

Low-

Medium

Low


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10. General Document References

In addition to the specific references (inserted as footnotes in this report), we acknowledge the

aid of the following references in providing us inputs for analysis and presentation of our report:

Cover page image: http://www.track2realty.com/wp-content/uploads/2011/01/commercial-real-

estate-india.jpg

Annual Report of DLF Limited, 2011-12, DLF Website

Emerging Trends in Real Estate Sector, Grant Thornton - CII Report(2012)

Latest Analysis on Housing, CRISIL Research;

https://www.crisilresearch.com/industryasync.jspx?serviceIs=504 (login required)

India Real Estate Report, Business Monitor International

India Real Estate Sector Report, Global Investment House KSCC(January 2008);

http://www.menafn.com/updates/research_center/Global/Special_Ed/gih0108.pdf

India Realty Through the Looking Glass,JLLS Research

Charles F. Floyd and Marcus T. Allen, Real Estate Principles, Kaplan Publishing(2008)

Robert M. Grant, Contemporary Strategic Management, Blackwell Publishing(2008)

Other Web References

http://articles.economictimes.indiatimes.com/2013-01-09/news/36237779_1_residential-market-

new-units-cash-strapped-developers

http://articles.economictimes.indiatimes.com/2013-03-02/news/37390008_1_infrastructure-

status-industry-status-paras-gundecha

http://www.cushwake.com/cwglobal/jsp/newsDetail.jsp?Country=SA&Language=EN&repId=c5500

0002p

http://www.dlf.in/

http://www.dnaindia.com/money/report_booming-demand-for-luxury-homes-despite-plunging-

sales_1766145

http://www.moneycontrol.com/

http://www.nsdcindia.org/pdf/bldg-const-real-estate.pdf

http://www.unitechgroup.com/
http://articles.economictimes.indiatimes.com/2013-03-02/news/37390008_1_infrastructure-status-industry-status-paras-gundechahttp://articles.economictimes.indiatimes.com/2013-03-02/news/37390008_1_infrastructure-status-industry-status-paras-gundechahttp://www.dlf.in/http://www.dlf.in/http://articles.economictimes.indiatimes.com/2013-03-02/news/37390008_1_infrastructure-status-industry-status-paras-gundechahttp://articles.economictimes.indiatimes.com/2013-03-02/news/37390008_1_infrastructure-status-industry-status-paras-gundecha


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Appendix: Exhibits

Exhibi t 1.

Locations of DLFs developments, projects and lands across India, as ofNovember 30, 2006 (Source: DLF website)

Exhibi t 2.DLFs region-wise housing sales for 2011-12 ( Source: DLF Annual Report, 2011-12)


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Exhibi t 3.DLFs key on-going projects across India (Source: CRISIL Research)


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Exhibi t 4.DLF (Housing) sales for the Financial Year ending 2012(Source: DLF Annual Report,

2011-12)

Exhibi t 5.Demand-supply projection (residential) - 2015 (Source: DLF Annual Report, 2011-12)

Exhibi t 6. City-wise projected demand and supply (Source: Cushman & Wakefield Research)

Total Projected Supply/Demand of no. of Houses-(2012-2016 )

Total Projected Demand 1.3 Mn units

Total Projected Supply 1.16 Mn units

Total Shortfall 600000 units (54%)

Cities Projected Demand Projected Supply Gap % Gap

NCR 381000 334000 47000 14%

Mumbai 188708 140806 47902 34%

Hyderabad 199575 120940 78635 65%

Bangalore 338546 191708 146838 77%

Chennai 257796 159056 98740 62%

Ahemdabad 173794 101050 72744 72%


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Exhibi t 7. Commercial space lease activity split till 2011 (Source: JLLS Research)

Report Lasst Yeat

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