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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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COMPETITION & STRATEGY: Analysis of DLF Limited in the Real Estate Industry 2
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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COMPETITION & STRATEGY: Analysis of DLF Limited in the Real Estate Industry 3
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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COMPETITION & STRATEGY: Analysis of DLF Limited in the Real Estate Industry 4
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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COMPETITION & STRATEGY: Analysis of DLF Limited in the Real Estate Industry 5
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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COMPETITION & STRATEGY: Analysis of DLF Limited in the Real Estate Industry 6
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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COMPETITION & STRATEGY: Analysis of DLF Limited in the Real Estate Industry 7
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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COMPETITION & STRATEGY: Analysis of DLF Limited in the Real Estate Industry 8
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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COMPETITION & STRATEGY: Analysis of DLF Limited in the Real Estate Industry 9
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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COMPETITION & STRATEGY: Analysis of DLF Limited in the Real Estate Industry 10
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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COMPETITION & STRATEGY: Analysis of DLF Limited in the Real Estate Industry 11
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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COMPETITION & STRATEGY: Analysis of DLF Limited in the Real Estate Industry 12
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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COMPETITION & STRATEGY: Analysis of DLF Limited in the Real Estate Industry 13
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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COMPETITION & STRATEGY: Analysis of DLF Limited in the Real Estate Industry 14
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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COMPETITION & STRATEGY: Analysis of DLF Limited in the Real Estate Industry 15
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
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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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COMPETITION & STRATEGY: Analysis of DLF Limited in the Real Estate Industry 17
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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COMPETITION & STRATEGY: Analysis of DLF Limited in the Real Estate Industry 18
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-gundecha8/13/2019 Report Lasst Yeat
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COMPETITION & STRATEGY: Analysis of DLF Limited in the Real Estate Industry 21
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)
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