TOPIC:FUNDAMENTAL ANALYSIS OF DLF LTD. NAME:MUZAMIL QAYOOM BASU. SECTION:RS 1903. ROLL NO:B-47 REG NO:10906968.
SUBJECT:SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT. COURSE CODE:MGT 521
ASSIGNMENT ON: DLF –STRATEGIC ANALYSIS
INDEX INTRODUCTION ANALYSIS OF THE EXTERNAL ENVIORNMENT DLF'S STRENGTH AND WEAKNESS DLF'S IPO LAUNCH IN 2007 GDP,GOVERNMENT POLICIES. DLF'S STRATEGIC DECISION HYBRID MODEL AND SHAREHOLDING PATTERN AND EFFECT OF
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ANALYSIS OF THE INDIAN ECONOMY WITH RESPECT TO REAL ESTATE 26 MACRO ANALYSIS OF DLF WITH RESPECT TO REAL ESTATE SECTOR. 30 PORTERS 5 FORCE MODEL ANALYSIS 31
It has a 62-year track record of sustained growth. though complementing each other in cases of opportunities of mixed land use. DLF has a strong management team running independent businesses.Super Luxury. DLF has more than 319 msf of land resource targeted towards residential business. The Office SBU took DLF across the country. The group has over 231 msf of completed development and 423 msf of planned projects. Luxury and Mid-Income. and has pan India presence across 32 cities. ethics and customer service and to thereby contribute to and benefit from the growth of the Indian economy. mitigates any down-cycles in the market. The product offering involves a wide range of products including condominiums. predicated on the customer demand for office space at different geographic locations. The company has a unique business model with earnings arising from development and rentals. DLF holds 74% and Hilton holds 26% equity in the JV. The Retail Mall's and Commercial Complexes SBU is a major thrust area for DLF. DLF Hotels has also entered into a JV with Hilton to set up a chain of business hotels and service apartments across India. customer satisfaction. segments and geographies. and innovation. DLF's mission is to build a world-class real estate development company with the highest standards of professionalism. Its exposure across businesses. DLF's primary business is development of residential. duplexes. commercial and retail properties. The business of DLF is organized on a SBU basis. Currently. market capitalization and developable area.INTRODUCTION
The DLF Group. Currently. is India's largest real estate company in terms of revenues. The Homes SBU caters to 3 segments of the residential market . row houses and apartments of varying sizes.
. Nearly 17 msf of ongoing projects forms a strong portfolio for DLF offices. SEZ and hotel businesses. earnings. The company has 12 msf of retail projects and commercial complexes under construction. DLF has also forayed into the infrastructure. DLF is actively creating new shopping and entertainment spaces all over the country. DLF has 214 msf of developed area under homes and residential plots.
environmental and legal requirements. Mission & Values DLF Vision To contribute significantly to building the new India and become the world’s most valuable real estate company.
Vision. ethics. quality and customer service DLF Values
• • •
Sustained efforts to enhance customer value and quality Ethical and professional service Compliance and respect for all community. DLF Mission To build world-class real-estate concepts across six business lines with the highest standards of professionalism.
projects and lands across India. 2006:
.DLF's Presence The following map illustrates the locations of our developments. as of November 30.
A unit increase in expenditure in this sector has a multiplier effect and the capacity to generate income as high as five times. which is double the profitability for a construction project undertaken in the US. If the economy grows at the rate of 10% the housing sector has the capacity to grow at 14% and generate 3. A Mckinsey report reveals that the average profit from construction in India is 18%.
. can be gauged from the fact that it is the second largest employer next only to agriculture and its size is close to US $ 12 billion and grows at about 30% per annum. Further. One Rupee invested in this sector results in 78 paise being added to the GDP of the State. the housing sector has been growing at an average of 34% annually. ANALYSIS OF EXTERNAL ENVIORNMENT
ASSESSMENT OF CHANGES IN THE ENVIORNMENT ANALYSIS OF REAL ESTATE SECTOR
Real estate is one of the fastest growing sectors in India. banks are giving loans to builders. while the hospitality industry witnessed a growth of 1015% last year. The relaxed FDI rules implemented by India last year has invited more foreign investors and real estate sector in India is seemingly the most lucrative ground at present. Lease rentals have been picking up steadily and there is a gaping demand for quality infrastructure.2 million new jobs over a decade.
Apart from the huge demand. The importance of the Real Estate sector. as an engine of the nation’s growth. In the next three or four or five years this contribution to the GDP is expected to rise to 6%. Private equity players are considering big investments. The Real Estate industry has significant linkages with several other sectors of the economy and over 250 associated industries. A significant demand is also likely to be generated as the outsourcing boom moves into the manufacturing sector. India also scores on the construction front. Five per cent of the country’s GDP is contributed by the housing sector. Market analysis pegs returns from realty in India at an average of 14% annually with a tremendous upsurge in commercial real estate on account of the Indian BPO boom. and financial institutions are floating real estate funds. Indian property market is immensely promising and most sought after for a wide variety of reasons.
Ajmera Realty. Property developers. rise in the number of young working population. DLF. DLF.FACTORS THAT AFFECTED REAL ESTATE SECTOR DURING RECCESION
Real estate sector is second to only the agriculture sector where employment generation is concerned. Its steady climb was primarily due to a sharp fall in revenues of other developers. recent financial crisis followed by economic slowdown have placed huge strain on this sector. the credit freeze stemming from the collapse of Lehman Brothers prompted investors and speculators to withdraw investments from this sector. The sectoral ranking. Collectively. Unitech and Housing Development & Infrastructure (HDIL).”
. However. "If there is a lack in demand. second." Also. revealed that top three companies within the sector had retained their positions from the previous year. were left stranded with minimal cash flows and huge debt obligations surfacing in the near term. only four retained their position among India's top 500 companies. managing director of Unitech. There are several factors that have influenced the real estate sector's performance. demand in the real estate industry was the lowest. the projects eventually close down. There have been major changes in the list of market leaders as compared to last year. Sobha Developers climbed up three positions to number four. currently the interest rate is at 11–12 per cent. There is a lack in demand because most people take mortgage loans. though witnessed >20% fall in revenues. no developer could sustain the revenues base recorded in FY’08. the negative impact of the financial crisis affected all top real estate companies equally. Out of the 10 companies in the previous year. This also leads to higher EMIs. According to KP Singh. based on consolidated revenues. This was largely as majority of the homes were taken on loan and an unexpected rise in the interest rate had its obvious impact. JMC Projects and Indiabulls Real Estate. In fact. Chairman. Ansal Properties & Infrastructure. While all sectors of the economy were under tremendous pressure. and easy availability of home loans. maintained their first. FDI investment. who raised funds through external sources. “We have changed our strategy from maximisation of realization to that of volumes in order to improve operational cash flows. income level. This means. it is indeed interesting to note the performance of companies in this sector during the economic slow down. Parsvnath Developers. The current challenging economy along with the sluggish demand had a significant impact on the top-line of most of the realty developers in the country. This can be further proved by the fact that the real estate sector contributes a good 5% towards the country’s gross domestic product (GDP). and third positions respectively in the ET sectoral list. With this industry being one of the primary contributors to the GDP over the past few years. Overall average revenues for these developers fell by 28% from the previous year. which should actually not exceed seven per cent. despite a 58% decline in revenues. According to Sanjay Chandra. Some of the companies that witnessed a substantial dip in revenues include Omaxe. Some of these factors include the unemployment rate.
increased activity in the real estate sector should be expected. Thus. over the next 10-15 years. which debuted the market in July 2007 entered the bear phase and remained below its issue price. The retail industry is also likely to utilize an additional 220 million sq ft by next year.A closer look into the financials elucidate that developers faced stiff margin pressure.4 million dwelling units.11x in 2007 and 13. By 2010. Valuations of the companies have bottomed out. Recently. According to the Tenth Five-Year-Plan. This indicates that the companies faced higher liquidity pressure which consequently led them to unwind inventories at lower rates. the markets have seen immense recovery with the realty index gaining 88% from its previous low in 2008.69x this year as compared to 21. Average net margins of the four developers slipped by a colossal 890 bps to 39.36x in 2008. The BSE realty index is trading at a Price/Book value of 2. easing liquidity and aggressive government initiatives to pull back the sector.7%. the service class is likely to actively participate in property absorption. Various private players are considering investment in the sector as banks are now readily giving loans due to a rise in the consumer confidence index. “Now that property prices have dropped and the risk of job layoffs has diminished. Real estate prices have been sky rocketing for several years and a sharp correction has been long overdue. Players like Unitech and DLF have lost more than 75% of their values.and lower-income groups. resulting from the drop in real estate prices. Religare Capital Markets. This will create immense opportunities for real estate companies. leading to a strong recovery in residential demand. there is a shortage of 22. The companies which have huge land bank and are primarily funded through external sources have been wiped out of the market and are yet recovering from losses incurred.” says Suman Memani. it is expected that nearly 150 million square feet of office space across urban India would be utilised by the IT sector. In conclusion. 80 to 90 million residential units will have to be constructed with a majority of them catering to middle. with early signs of recovery currently reflected by the drop in unemployment rate.
. associate vice president. DLF. The relaxed FDI regulation has invited several players to invest in the real estate market.
Kolkata. The estimated market share at ~16% in commercial offices and ~8% in retail space absorption in India over the next 2 years. which would lead to continuous upgrade in NAVs and allow for higher asset turnover. leasing and management
. and lifestyle/premium Apartments. comprising property Development. assuming FSI of 1x). Chandigarh. Mumbai. Middle income housing segment accounts for just 24% of DLF’s GAV (56% of the development area). Bangalore. acquisitions. WEAKNESS. OPPORTUNITY AND THREATS.3b (average cost of Rs230/sq ft. luxury and premium housing account for 67% of DLF's estimated Gross Asset Value (GAV). retail.e. DLF’S STRENGTHS. which provides competitive advantages. Better placed to face the macro challenges: Commercial.055 acres (addition of 2. Recent land bank addition of ~2. are best positioned to take large bets by acquiring large tracts of contiguous land. retail. and thus even 50% lower absorption v/s estimates would impact GAV by ~11% DLF huge land bank DLF’s current land bank stands at 13. which have holding power. Successful implementation of monetization strategies will lead to lower capital costs and Create conditions for building integrated property business models.
Uniquely positioned in emerging.800 acres has been done at Rs19. i. an average of Rs252/sq ft. For DLF.
Large companies such as DLF. Goa etc) and clear market leadership position in commercial. re-development. This segment is more susceptible to emerging macro concerns and challenges.800 acres since filing of RHP) and Total developable area at 612m sq ft (addition of 43m sq ft). Chennai. These segments are highly profitable and have significant entry barriers. divestitures. land cost stands at Rs154b. which could create value through ‘land bank ageing’ and ‘integrated development’. profitable segments: DLF has a sizable presence across several key cities (Delhi NCR. It is believed that this strategy will generate better returns.
OPPORTUNITIES. which is more sensitive to prices and higher interest rates. thus exposing it to significant price movements in the region. NCR region still accounts for 42% of the development area for the company. which could render sales and earnings estimates for DLF unrealizable. we have assumed ‘NO’ price increase in the NCR region for apartments during FY08-17 and for commercial and retail during FY08-FY12. Given the sharp acceleration in real estate prices over the past three years. retail and premium Apartment segments is relatively less vulnerable to the emerging macro challenges. Also. From FY13. It can invest more in power generation projects like hydroelectric or wind power. we have assumed a price CAGR of 5% in commercial and retail space in NCR. Competitors may try to get more market share through improved techniques. 2. any further tightening measures and policy changes by the government (with regard to mortgage applications and approvals.
Macroeconomic risks: Any weaker-than-expected GDP growth for the domestic economy could negatively affect sentiment of buyers. project financing. leading to elusive demand. there exists a real probability of a price correction in certain pockets. and concentration in Gurgaon: Conservatively.DLF due to its predominant positioning in the commercial office.
. THREATS 1. Other than NCR we have assumed stagnant prices for all projects and all verticals (residential. 3. Also. commercial and retail) for FY08 and FY09. and property pre-sales) to curb speculation And overinvestment could adversely affect the bottom lines and cash flows of property developers and sentiment of home buyers
Real risk of decline in property prices. We believe that a significant part of the concerns pertaining to the sector are getting compounded in middle income housing segment. 1. Expansion of business in other parts of India. Investment in raw material-backward vertical integration.
The Tata group has Tata Housing and Tata Realty while Mahindra’s venture is called Mahindra Life space Developers. While it has entered the real estate business. Godrej’s venture goes by the name of Godrej Properties. a well known player in the textile business.DLF’S COMPETITORS
New rivals Bombay Dyeing. There has been a precedent with groups like Tata. A prominent case is that of Bombay Dyeing. it does not have a separate company in place.
. and 3} Leveraging its real estate capabilities in related areas be it special economic zones or hospitality.
DLF’S IPO LAUNCH IN 2007 The future grand plan after the IPO launch: DLF has outlined a three-pronged growth strategy: 1} Strengthening its pan-India presence. Golden Tobacco and Century Textiles. 2} Building up land reserves at strategic locations. Mahindra and Godrej having turned developers.
chief executive officer Rajiv Singh.500 crore -. Of this. Apart from the boom in retail malls and residential owning to rising disposable income. After being centered on Delhi for many years. is among the fastest growing markets in the country. the company would. developing existing projects and repayment of loans. commercial and retail projects and integrated townships spread over 3. instead of leasing out commercial projects. airports and the list goes on. is the developer's land acquisition and aggregation skills. The money raised through the IPO would go towards buying more land (Rs 3. Some key determinants of profitability for real estate companies apart from the land cost. indulge in outright sale to potential buyers including DAL. According to a newly devised strategy. SEZs which offer opportunities to create integrated townships.255 acres or about 574 million square feet (msf) of developmental area. the company now has a nation-wide presence across 31cities and towns. which is expected to grow at 20 per cent-plus annually from the current size of $40-45 billion. "About 90 per cent of the total land bank is available as large contiguous plots enabling large integrated development". relationship with the state authorities and reputation -.
. the national capital region. multiplexes. The company intends to focus on its core competence while partnering with leading global players such as Nakheel (SEZs). ESP (engineering and design). Laing O'Rourke (construction). some 44 msf of development is under progress and projects involving 524 acres is planned over the next few years. Going by the scale of development done so far.Rs 35 billion). where the company has over 50 per cent of its land holdings. Right from acquiring low cost land to creating a full fledged township to realize the true potential of the land. DLF is the largest real estate player in the country with land reserves of 10. 171 msf is located in or near developed urban areas while 404 msf is urbanisable. Feedback Ventures (project management) for better execution.000 acres in Gurgaon so far. Currently.The company will primarily be a developer and sell its properties retaining limited assets to be leased out. It has developed 29 msf of residential. there are several new vistas opening up for developers which DLF is planning to tap -. says.on all these DLF scores highly. DLF seems best placed to capitalize on the booming real estate market. hotels and serviced apartments. DLF has amply demonstrated its success in Gurgaon. One key advantage is that DLF's average cost of acquisition of land is fairly low at around Rs 274 per sf which will enable it sit out the cycles and not indulge in distress sale ever. And with its unquestionable capabilities as a successful developer.for instance. This model rests on the ground that DAL would be able to garner low cost capital by tapping the alternative investment market overseas and pay a higher capitalization rate for DLF's properties resulting in faster growth in revenues and better margins too. Even more.
to influence the direction of such trends provides it with opportunities to acquire strategic locations of their choice. 2006. which is a blend of ‘sale and lease’. The Company has an experienced. DLF is one of the first developers to foresee the need for townships on the outskirts of fast growing cities and is credited with the growth of Gurgaon. It is estimated that it will be able to develop over 118 million square feet of saleable or rentable area.893 acres in various regions across India.000acre township . highly qualified and dedicated management team. most of whom have over 20 years experience in their respective fields. in some cases. DLF encourages responsibility. developing and completing projects in a timely manner and conducting its business with transparency has created a relationship of trust with its customers and suppliers. it has been responsible for the development of 21 urban colonies aggregating 5.816 acres. autonomy and innovation among its employees with an attractive compensation package
Hybrid business model
DLF has a hybrid business model. The Company benefits from economies of scale and is able to purchase large plots of land from multiple sellers. DLF reputation for providing prompt payment to landowners upon the acquisition of its land. Since it was founded in 1946. The company is one of the early developers to focus on developing theme-based projects such as The Magnolias in DLF City. self -sustaining growth phase.
.372 acres representing approximately 102 million square feet of developed area or area available for development and it has made partial payments to acquire a further 2. The rental stream would enable the company a steady income source and also provide monetization opportunities. The company retains internationally and nationally renowned architectural. thus enabling it to aggregate land at lower prices. The company has the ability to anticipate market trends and. As of April 30. comprising an Asset base of 46m sq ft in the commercial and retail verticals. as well as an entire integrated 3. DLF land reserves under development aggregated 1. leading to a long-term. construction and consulting firms for all its projects. It is estimated DLF’s rental income to increase from Rs6b in FY08 to Rs43b by FY12.DLF City. Extensive land reserves are the most important resource for a real estate developer.Brand reputation Â DLF has a 60-year history of service excellence.
.SHAREHOLDING PATTERN: PROMOTERS INSTITUTION GENERAL PUBLIC 75657427 GRAND TOTAL 1702711913 NO.30% 4. OF SHARES 1502823120 124231366 % OF TOTAL 88.26% 7.
CHANGE IN TOTAL INCOME QoQ:
CHANGE IN OPERATING INCOME QoQ:
03052 33.42675 31/03/08 3.100798
.83347 36.86187 46.75022 50.221565 4.495604 5.752981 72.CHANGE IN NET PROFIT QoQ:
RATIO: EPS OPM NPM INTEREST COVERAGE 30/09/07 4.851037 5.88816
13.35313 30/06/08 4.51832 59.558407 52.117167 68.90027 7.49094 46.50185 63.77961 31/12/07 3.92742 30/09/08 3.
3 per cent in 2005. the growth rate of urban areas was 2. According to Census of India 2001 estimates. It is estimated to reach 590 million by the year 2030 retaining its second position. Rapid urbanization is fostering real estate growth in India. Presently. Urban areas which constitute only 28.7 per cent of the population. It has declined from 13 to 5 in just five quarter
Analysis of the Indian economy with Respect to Real Estate Sector According to the United Nations Population Fund (UNFPA). India is getting urbanized at a faster rate than the rest of the world and by 2030 more than 40. Interest coverage has shown consistent decline. During the last sixty years. Same trend was also witnessed in the NPM earlier shown a decline but later shown a recovery. OPM has declined earlier from 63% to 52% but later got recovered. post independence the population of India has grown two and a half times. have been a major contributor to The GDP with a major share of industry and almost the entire services sector concentrated in the urban agglomerations. India’s ‘Mega-Cities’ of Mumbai and Delhi would be the world’s 2nd and 3rd largest cities by 2015. more than 28. With a rapid influx of migrants in these cities there is a corresponding increase in the demand for space.7 per cent of India’s area is urban as against the Global average of 48. Whereas urban India has grown by nearly five times. However. 30 per cent of the total population of India would be living in urban areas by 2011. as against the world average of 2 per cent.7 per cent of the country’s population would be living in urban areas.7 per cent.EPS is showing declining trend in the last five quarter. The urban population of India was Estimated to stand at 316 million in 2005 and is the second largest in the world after China.
MACRO ANALYSIS OF DLF Before recession
. India’s cities have been the driving force in shaping India’s socio-economic profile. The number of cities with one million plus population is further expected to double from 35 in 2001 to 70 by 2025.
The turnover now is decreased @33. Profit before tax remains same 45%
3. Real estate growth gives boost to steel and cement sectors 4. 4. 5.
. Encourage property development in Tier II and Tier III cities 5. Real estate is a growth engine for development of over 269 allied industries
Measures 1. 7. 1. sales in homes have picked up considerably.Rs.05% to rs 439. dlf-lor joint venture had announced 50:50 joint ventures with the UK based Laing O’Rourke.75 times in last 5 years. 6.
Contribution towards the Economy
1. Contribution to GDP of about 7% 2. Demand has recovered. Under the Interest Subvention Scheme Loan upto Rs. 6. Dlf lmtd was conferred the best global developer award for 2009 by euro money magazine at euro moneys fifth annual real estate awards. RBI policy for restructuring loans. 4. 7. Dlf has won the bid and has been awarded 350 acres of land by hsiidc in gurgaon. After recession.7 Lakh called as Shubh Griha project. 3.9 Lakhs. Net profit was up 11. Reduction of interest rates.3% 2. qoq in 2nd quarter. Reduction in excise duty on construction material like cement. The turnover was increasing tremendously @2. & property value is not above Rs. Corporate like Tata’s introduced Nano Housing for Rs. SBI introduced 8 % housing loan scheme for one year followed by the other PSU & Private Sector Bank as well. 3. 20 Lakh will get 1% lower interest. 2.
Porters 5 forces model analysis. Second largest employment generator in the country 3.74 crore versus rs 396 crore. 6.1. 10 Lakh. Profit before tax was increasing tremendously @5 times in last 5 years. 2.
Difficult to predict the direction and magnitude of price movement on real estate. This results in high entry barriers. Bargaining power of suppliers intra-industry rivalry bargaining power of buyers Substitute products
THREAT OF NEW ENTRANTS. 3. 4. High competition in the sector. Bargaining power of buyers is low.
THREAT OF ESTABLISHED RIVALS
1. Suppliers margins have been stagnant despite strong growth in volumes. 2. 3. 2. Forces of demand and supply would always apply.
1. Bargaining power of suppliers is low. Large number of suppliers is available. DLF.
BARGAINING POWER OF BUYERS. Established rivals are a threat to upcoming players. Decrease in profitability due to increase in number of entrants. 3. 4. Existing firm has an edge over the others due to more industrial experience. This leads to shift of contracts when a supplier tries to increase the price.Potential new entrants. 2. Real estate sector needs high working capital. 4.
BARGAINING POWER OF SUPPLIERS. UNITECH AND ANSAS are the major players in this sector. 2. Dlf has 54% of the market share in the real estate sector. 3.
No substitute to the basic product.
. So no threat of substitute products.4.
THREAT OF SUBSTITUTE PRODUCTS.
1. Price movement would follow accordingly.