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3/10/2013 Ankit Govil

Real Estate

Industry Analysis The recent trend in the real-estate sector in India is to become more and more organized. Earlier due to lack of proper funding, lack of laws for its development and the ignorance among the masses of the need of good real estate were the main reasons for this sector being relatively unorganized. But after the amendment of certain laws concerned to real estate and also willingness of the banks for funding the projects this sector is starting to grow as it should. Increasing number of real estate developers in the country now have residential and commercial projects worthy of being called world class. The developers are mainly concentrating on the Tier-I cities and slowly realizing the space constraint are moving towards Tier-II cities in the country. The real estate sector in the countries globally is well organized with supportive laws and excellent funding. They have developed most of their prime cities with excellent residential and commercial projects and are trying to look for places outside these cities for development. The Mayor of London, Ken Livingstone, said his primary motivation for initiating and lobbying for the city's bid to host the Olympics was to develop the East End of London, neglected for over thirty years and develop the whole of London. The cities which are developed are looking towards the hospitality sector for further development by developing world class hotels. Dubai is already famous for its world class hotels.

DLF Universal Limited

Introduction

DLF Limited (Delhi Land & Finance) is the largest commercial real estate developer in India. It is based in New Delhi. DLF builds residential, office and retail properties. Today DLF has become a fore-runner in developing residential and office real estate in Delhi and has presence in over 30 cities across 18 States all over India. This largest real estate developer in India has 266 million square feet worth of developed and under development projects spread all over the country. DLF is also into insurance with the name DLF Pramerica. It also is into the development of infrastructure like expressways and also in the construction of Multi level car parking which is highly technologically advanced and a one of its type automated project. DLF has also constructed golf courses and five star hotels. DLF owns and operates the luxurious Aman Resorts across the world and also has an alliance with Hilton Group for development and management of hotels in India. DLF group is the largest owner of wind power plants in India with an installed capacity of 228.7 MW. DLF is also the title sponsor of the super successful Indian Premier League (IPL) and has become increasingly popular after its association with the IPL.

General Information

DLF Limited (Delhi Land & Finance) the largest commercial real estate developer in India was founded by Raghuvendra Singh in 1946 and is based in New Delhi. DLF builds residential, office and retail properties. When the government of Delhi introduced the Urban land ceiling act wherein it prevented the possession of the land in the cities in the hands of only a few developers DLF started development of residential and commercial projects in the satellite city of Gurgaon. This development was responsible for the emergence of Gurgaon as the BPO hub of the country. The company's US$ 2 billion IPO in July, 2007 was India's biggest IPO in history. The promoter and promoters group hold 88.26% of the total no. of shares of the company. Total Public shareholding in the company is the remaining i.e. 11.74% of the total no. of shares of the company. The total no. of employees of the company is 5,542. Dr. Kushal Pal Singh, popularly known as K. P. Singh, is the Chairman of the Board of DLF Limited. He is the promoter of the company right from its inception. Mr. Rajiv Singh is the vice-chairman and Mr. T.C. Goyal is the managing Director of the company and also has a board of directors consisting of full time and independent directors.

Financial performance of the company

Consolidated Finances Total income Expenditure Net expenditure after deducting various other Expenditures

Q4 FY12 Rs. Crs. 2747 1819 212

Q3FY12 Rs. Crs. 2396 1214 258

FY12(audited) Rs. Crs. 10,223 5274 1201

FY11(audited) Rs. Crs. 10,145 5808 1604

This report shows that DLF is experiencing lower profits over the previous financial year. This can be attributed to several factors like the depreciation of the rupee increasing the cost of importing material or other services. Also the interest rates have also increased increasing the cost of projects. Also the GDP is growing at a slower pace. Inflation has also increased which is deterring the consumers to invest in property. The staff has also increased over the previous vear adding to the cost of salary payments. DLF usually profited from a higher margin on the luxury and the super luxury apartments. But due to the slow growing economy there are a few takers for these type of residences. In the affordable housing sector DLF is struggling to make a mark and make profits from it due to lower margins.

SWOT Analysis

Strength: - The strength of DLF lies in the fact that despite the recession it is still the leader in real estate development in India. Also it is headed by a very capable person Mr. K.P.Singh who has been a pioneer in real estate project and has also diversified the business considerably into various sectors. Also it has a great brand value and became well known more after its association with the IPL. They have gone a step ahead in branding by branding a six hit in the IPL matches and naming it DLF Maximum.

Weakness: - The main weakness of DLF is that it is more concentrated in developmental projects in and around Delhi and has just recently spread out its operations in other cities like Mumbai. In a city like Mumbai a market leader like DLF has to become involved in developing the infrastructure of the city.

Opportunities: - DLF has traditionally been in the residential and commercial development but the demands for SEZs have increased and it is the sector which presents great potential. Since it is a market leader it may not be difficult for it to seek foreign help to enhance the execution rate of the projects. Also due to its huge land reserves it can experiment with certain innovative project and see the demand for them.

Threats: - The biggest threat that it faces is the foreign companies entering the market and partnering with the smaller Indian companies and pumping more money and better technology to take real estate to a new level. Also since the company was recently removed from the BSE Sensexs 30 scrips its share prices have plummeted and the company is thinking about selling its flagship Aman resorts and it is also thinking about not renewing the title sponsorship contract with IPL to fund the projects. This decision would affect the brand value of the company and may also challenge its leadership in real estate.

Business Strategies The main source of income that was identified by DLF was renting and leasing of commercial spaces. This was because rent was a relatively stable and continuous flow of income compared to the busty nature of flow of income from sales. But now keeping a part of the land under construction for leasing it is concentrating more on the sale of the property. The cost of construction has gone up tremendously by about 40%. The company has devised 2 new strategies to counter the declining margins of the company. Their first strategy is a very basic one and is applicable to land they own which is not under construction. This land they would sell directly as plots to individuals or to other companies at slightly higher rates. This is justified by the high value of the virgin lands remaining and being available. Thus they would save up on the cost of constructing at steep costs and aiming to recover it by excellent sales. The second strategy is applicable to the land they own which is under construction. According to this strategy they plan to impose an escalation charge on the buyers. This is because in the duration from starting of the project and till its status today they price of essentials for construction has escalated. Prices of raw materials have increased by 40%. In order to protect its margins it has devised the new escalation charge which will be based on RBI index of steel, cement etc. also they will engage an independent auditor who will decide the escalation in the cost of these things and would subsequently add it to the sale side after the construction. Also since the main operations of the company are concentrated in and around Delhi it wants to increase its presence across India. DLF has huge amounts of land reserves with it. So now it is trying to buy land in strategic locations across India. Also it is trying to consolidate its position in the other sectors like SEZs by leveraging its position in real estate. Last but not the least it is also looking seriously into the hospitality sector which is relatively untapped in India by construction of five star hotels in the cities like Mumbai and Chennai.

Porters Competitive Framework Threat of new entrants: Profitable markets that yield high returns will draw firms. This results in many new entrants, which will effectively decrease profitability. But in real estate sector entry barriers are high because the working capital requirements are high. Moreover, the existing firms have the advantage over others due to learning curve advantages. This can be seen in the case of DLF which started in 1946 and developed DLF city in 1985 and in 2008 they opened up the first luxury mall. The gestation period is very long so investors will not be induced to invest. Threat of established rivals: 25% of the market share is held by the DLF in the real estate sector. This shows that the competition is high in this sector with DLF, Unitech, and Ansals being the major players. This may prove to be a threat to upcoming players, as the established players are deep rooted in the industry. Though this threat shall not be faced by DLF as it holds the major market share. The bargaining power of suppliers: It is low. Due to the increase in the number of contractors or service providers, margins have been stagnant despite strong growth in volumes. The number of suppliers is large so if one will increase the cost than there will be a shift from one contractor to another. The bargaining power of buyers: It is low. The country still lacks adequate infrastructure facilities and citizens have to pay for using public utilities. It is very difficult to predict the direction and magnitude of price movement on real estate. One can only assume that forces of demand and supply would always apply and price movement would follow accordingly. Threat of substitute product: There are no substitutes to the basic product so there is not any threat of substitute products.

PEST Analysis Political: - Historically India did not have organization in this sector. This was due to nominal laws and high property taxes. But recently laws protecting people giving their houses on rent, repealing of the Urban land ceiling Act and rationalizing of the property taxes have had significant effect on the growth of this sector in the country.

Economical: - the lack of organization and lack of support from the government had prompted the banks to not lend support to this sector. But with the enactment of several laws and also the demand for good real estate has got the banks to support the various projects with finance at competent interest rates. This has lead to increase in no. of project seeing the light of the day.

Social: - According to the National council of Applied Economic Research the income classes earning between Rs.2 million-5 million, earning between Rs.5 million-10 million and in excess of 10 million is expected to increase by 23%,25% and 28% respectively. This means that the society will have more no. of people demanding better residential real estate which has also led to its growth.

Technological: - With the increasing no. of foreign players entering the market the technological aspect of construction has received a boost and better projects are being developed in comparatively lesser time than before.

Competitor Analysis The nearest competitor of DLF mainly on market capitalization is Unitech group Ltd. It was established in 1972 as a soil testing company but got into real estate soon. Since then with good real estate projects under its belt it started growing. Pricing in real estate is dependent on the location, type of construction and trust on the developer that the project will meet all the expectations of the customers. Unitech is a company which is into residential, commercial and various other types of constructions and is a well known brand. Since it is the nearest competitor of DLF the pricing is almost same as it. DLF is mainly into luxurious housing but Unitech recently launched its new project UniHomes which are affordable housing destinations. The quality of the projects undertaken by Unitech is excellent and comparable to the best in the world. Providing residential complexes from the uber luxurious to the more affordable housing Unitech has it all. But the experience and the creativity that DLF has has put it in front of Unitech in the race of being the best. Unitech has done brilliant projects but only after DLF has done them too. So its neck to neck in terms of quality but in terms of pioneering something its DLF. Unitech has done projects all over India. It has Land reserves of nearly 12,450 acres spread across major centers of economic activity in India. It has launched affordable housing projects in many cities including the Tier-II cities in India. Unitech has been in partnerships with internationally acclaimed architects and design consultants including SOM (USA), BDP (UK), Maunsell AECOM (HK), MEA Systra (France), Callison Inc. (USA), FORREC (Canada), SWA and HOK (USA) for various projects. It was also involved in joint venture with LG, Hyundai, Singapore consortium and Carlsen.