PREFACE

This project has been a unique experience for all of us. Rather than only surfing
through the internet, we preferred to read company’s balance sheet and other
analyst’s presentation on the company. It helped us to get better understanding of
the topic with a wider perspective from their mammoth experience on the subject.

As such, the topic is a very complicated in itself, but with persevered efforts, we
finally got an ocean of information. Our main motto in this project is to explain
that “What is the current performance of the company w.r.t its peers and their
business model and we have succeeded in getting as much as information we
could.

Thus, we won’t hesitate to say that our search finally reached a consummate end.

Analysis Of DLF
1
 INDEX
SR NO TOPIC PAGE
NO
1 History of Real Estate Industry 3
2 Company Profile
3 Business Model
4 Key Financial Data
5 Competitors Analysis
6 Revenue Model
7 Investment Policy
9 Future Outlook of DLF
10 Industry Outlook of Real Estate Industry
11 Recommendations 42

Analysis Of DLF
2
 INDIA’S REAL ESTATE SECTOR

Overview
With around 1.1 billion people, India is the second most populous country after China
and it is expected to overtake it by 2030. Its economic transformation over the past
decade has pushed up real GDP growth to an average of 6 per cent per annum since
1992.

India is emerging as an important business location, particularly in the services sector. Its
favorable demographics and strong economic growth make the country an attractive place
for property investors, given that demand for property is determined chiefly by business
development and demographic trends.

Historically, the real estate sector in India was unorganized and characterized by various factors
that impeded organized dealing, such as the absence of a centralized title registry providing title
guarantee, lack of uniformity in local laws and their application, non-availability of bank
financing, high interest rates and transfer taxes, and the lack of transparency in transaction values.

In recent years however, the real estate sector in India has exhibited a trend towards greater
organisation and transparency, accompanied by various regulatory reforms. These reforms
include:

 Government of India support to the repeal of the Urban Land Ceiling Act, with nine state
governments having already repealed the Act
 Modifications in the Rent Control Act to provide greater protection to homeowners wishing to
rent out their properties
 Rationalization of property taxes in a number of states
 The proposed computerization of land records
The trend towards greater organisation and transparency has contributed to the
development of reliable indicators of value and the organised investment in the real estate sector
by domestic and international financial institutions, and has also resulted in the greater availability
of financing for real estate developers. Regulatory changes permitting foreign investment are
expected to further increase investment in the Indian real estate sector. The nature of demand is
also changing, with heightened consumer expectations that are influenced by higher disposable
incomes, increased globalization and the introduction of new real estate products and services.

Demand Drivers

These trends have benefited from the substantial recent growth in the Indian economy,
which has stimulated demand for land and developed real estate across the real estate
industry. Demand for residential, commercial and retail real estate is rising throughout
India, accompanied by increased demand for hotel accommodation and improved
infrastructure.

Analysis Of DLF
3
m

Additionally, the tax and other benefits applicable to Seas are expected to result in a new
source of real estate demand.

Residential Real Estate Development

The growth in the residential real estate market in India has been largely driven by rising
disposable incomes, a rapidly growing middle class, low interest rates, fiscal incentives
on both interest and principal payments for housing loans, heightened customer
expectations, as well as increased urbanization and growing number of nuclear families.

According to National Council of Applied Economic Research (NCAER), income classes

with annual incomes between Rs. 2 million and Rs. 5 million per year, Rs. 5 million and Rs.
10 million per year, and in excess of Rs. 10 million per year are expected to increase in size by 23
per cent, 25 per cent and 28 per cent, respectively, from fiscal 2005 to fiscal 2010. These
higher income households are expected to be the target customers for the luxury and super
luxury residential developments.

The residential sector is expected to continue to demonstrate robust growth over the
next five years, assisted by the rising penetration of housing finance and favourable tax
incentives.

Commercial Real Estate Development

The recent growth of the commercial real estate sector in India has been fuelled by
increased revenues of companies in the services business, particularly in the IT and
ITES sectors. Industry sources expect the IT and ITES sectors to continue to grow and
generate additional employment, which they expect will result in increased demand for
commercial space.

Within the IT and ITES sectors, the Indian off shoring operations of multinational companies
4
Analysis of DLF
are expected to increase demand for commercial space. The trend for these companies has been
to set up world class business centres to house their growing work force. India continues to lead
the AT Kearney Offshore Location Attractiveness Index by a significant margin.

Retail Real Estate Development

The organized retail segment in India is expected to grow at a rate of 25 per cent to 30
per cent over the next five fiscal years. The growth of organized retail is expected to be
driven by demographic factors, increasing disposable incomes, changes in shopping
habits, the entry of international retailers into the market and the growing number of
retail malls.

The major organized retailers in India currently include Tata-Trent, Pantaloon,

Shopper’s Stop and the RPG Group. While organized retail has so far been limited to
larger cities in the country, retailers have announced major expansion plans in smaller
cities and towns. The growth of organized retail in India will also be affected by the
reported entry into the sector of major business groups such as Reliance, Bennett &
Coleman, Hindustan Lever, Hero Group and Bharti. International retailers such as
Metro, Shoprite, Lifestyle and Dairy Farm International have already commenced
operations in the country.

Hospitality Industry

The hotel industry in India has grown as a result of a growing economy, increased business
travel and tourism.

Further, investments in the premium segment of the hotel industry are expected to be between
Rs. 20 billion and Rs. 23 billion in the aggregate over the next five years.

According to an industry report, the majority of segments in the Indian hotel industry
have shown robust recent growth in room rates as well as occupancy rates. With
increased demand and limited availability of quality accommodation, the average room
rates in metropolitan markets have grown by approximately 50 per cent over the last
two years, the exceptions being Bangalore, where the rates have more than doubled,
and Kolkata, where they have risen only marginally notwithstanding strong growth in
occupancy rates. The general increase in room rates and occupancy rates is expected to
contribute significantly to the demand for new hotel developments.
Special Economic Zones (SEZ)

SEZs are specifically delineated duty free enclaves deemed to be foreign territories for
purposes of Indian custom controls, duties and tariffs. There are three main types of SEZs:
integrated SEZs, which may consist of a number of industries; services SEZs, which may
operate across a range of defined services; and sector specific SEZs, which focus on one
particular industry line. Regulatory approvals have been received for SEZs proposed to be
developed by a number of developers. SEZs, by virtue of their size, are expected to be a
5
Analysis of DLF
significant new source of real estate demand.

Infrastructure Development Projects

Central and state governments in India are increasingly focused on infrastructure

development. A significant portion of infrastructure development is expected to be
undertaken through public-private partnerships, thereby increasing the flow of private
capital into infrastructure projects. Key areas of infrastructure development include
transport, power, telecommunications, ports, pipelines, sanitation, water supply and
irrigation.
Applying this average to the biggest urban agglomeration areas in the country, it follows
that in 2030 Mumbai will have a population of roughly 35 million and Kolkata and
Delhi just under 30 million in 2030. This could still be considered a conservative
estimate as it puts urbanization in India then only at China’s level today. Assuming that
the growth of India’s industrial activity and high-end services grow at an above-average
pace, the rural exodus could speed up sharply, similar to the development in China.

There are two clear outcomes following from this. Firstly, India’s cities must gear up
to a dramatic increase in size. Their infrastructure (schools, roads, airports, seaports
etc.) and housing capacities will need to expand massively. Secondly, the accelerated
rate in urbanization throws into particularly sharp focus the possibility that established
centres (i.e. Tier I cities) are already straining the limits of their capacities, leading to above
average expansion in the second-tier cities.

The most important office locations are in the Central Business Districts (CBD). It
has only been in the last few years, as space has become more limited in the CBDs and
new higher quality offices with lower prices have been built in peripheral locations that
demand has shifted from downtown areas out to the new locations called Secondary
Business Districts (SBD). Most recently, additional development areas, with a
Mixture of office, retail and residential, has been built. Just like other global locations, the most
important locational factors are the availability of staff, ease of access by car and public transport
and regional growth potential. In Indian cities it is also important to access the technical
infrastructure provision (e.g. electricity, telephones and water supply) to ensure that it meets
requirements.

The most transparent and liquid office markets are that of Delhi, Mumbai and Bangalore.
It is worth noting, however, the enormous potential of the growing markets in the Tier II and Tier
III cities, such as Pune, Hyderabad or Chennai.

Growing Satellite Business Destinations

With commercial space in the CBDs and SBDs in the metros getting saturated, the
surrounding non-metro areas are getting investor attentions. In northern part of the
6
Analysis of DLF
country, the business activities of Delhi NCR are getting extended to the adjoining areas
of Rajasthan adjacent to Delhi NCR like Bhiwadi, Neemrana (in Alwar district) has
attracted a lot of domestic and foreign industrial investments. Similarly in Southern
India, the adjoining areas of Bangalore like Hosure district of Tamil Nadu have
provided space for extension of the industrial areas. However, the Mumbai and
Chennai, by virtue of its geographical conditions of being surrounded by sea, face
constraint in terms of expansion.

7
Analysis of DLF
 Company Profile

DLF Limited (BSE: 532868), (NSE: DLF) is India's biggest real estate developer. The DLF

Group was founded by Raghuvendra Singh in 1946 and is based in New Delhi, India. [3] DLF
developed residential colonies in Delhi such as Shivaji Park (their first development), Rajouri
Garden, Krishna Nagar, South Extension, Greater Kailash, Kailash Colony, and Hauz Khas. DLF
builds residential, office, and retail properties.
With the passage of Delhi Development Act in 1957, the local government assumed control of
real estate development in Delhi and banned private real estate developers. As a result DLF
began acquiring land at relatively low cost outside the area controlled by the Delhi Development
Authority, in the district of Gurgaon, in the adjacent state of Haryana. In the mid-1970s, the
company started developing their DLF City project at Gurgaon. Its plans include
hotels, infrastructure and special economic zones-related development projects.[4]

The company is headed by Indian billionaire Kushal Pal Singh. Kushal Pal Singh, according to
the Forbes listing of richest billionaires in 2009, was the 98th richest man in the world and the
world's richest property developer. The company's US$ 2 billion IPO in July, 2007 was India's
biggest IPO in history.[5] In its first quarter results for the period ending 30 June 2007, the
company reported a turnover of Rs. 3,120.98 Cr. and profits after taxes of Rs. 1,515.48 Cr.

History
In the early 1940s to 1950s, Raghuvendra Singh procured real estate around Delhi. The wealth
generated was multiplied over the decades through investments like Punjabi Bagh, Rajouri
Garden, Krishna Nagar, South Extension, Greater Kailash 1 & 2, Kailash Colony, Hauz Khas,
and Panchsheel. In the 1970s and 1980s DLF purchased 3,000 acres (1,214 ha) of land from
farmers in Gurgaon for $2000 per acre.

At that time, the Haryana government did not allow private companies to develop the land. Years
later, when Rajiv Gandhi became Prime Minister, he ensured that the Haryana Government
changed the local law and allowed private companies to develop land. Gurgaon underwent a
private real estate boom which is continuing to this day. The boom includes world-class office

8
Analysis of DLF
buildings, apartments, golf courses, shopping malls, 5-star hotels and a private expressway
linking Gurgaon to Delhi Airport.

In 1985, dlf started developing the 3,000 acres (12 km2) it had acquired from farmers. In 1999,
DLF developed its first A-grade office spaces for rent in Gurgaon.

Recent history
Until the mid-1990s, most of DLF's operations were in Gurgaon and the Delhi metropolitan area.
With its increased assets, DLF has been trying to increase its operations all over India. A major
investment made by DLF was a INR 700 Crore (INR 7 billion) buyout of NTC Mill Land
in Mumbai. Some of DLF's other development initiatives include a US$ 2.1 billion investment
in Tamil Nadu, a multi-billion dollar business park in Bangalore,[9] a US$ 1.7 billion investment
in Madhya Pradesh's real estate and infrastructure sector,[10] and a INR 10 billion investment plan
for developing special economic zones in Orissa.

Joint ventures
Laing O'Rourke is a UK-based construction company that built Dubai International Airport and
London's Millennium Tower. It will construct all DLF's landmark projects. Nakheel of Dubai are
partnering with DLF for developing townships in India.WSP Group Plc is also partnering DLF,
providing management and consultancy to the built and natural environment. Feedback Ventures
is providing consultancy for faster project execution. DLF has also teamed up with Hilton
Hotels to jointly develop hotels in India.

Sponsorship
DLF is currently sponsoring Indian Premier League (IPL), a Twenty20 format cricket league in
India. DLF Group has paid US $40 million to be the title sponsor of the tournament for 5 years.

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Analysis of DLF
 Overview

 Largest Real Estate Company in India

 6 decades of trust and experience
 Delivered 238 million sq Feet of development till date
 423 Million Sq Feet of Planned development
 Present across categories of projects- Residential, Commercial and Retail
 Offers a wide range of homes from premium to luxury and leisure homes
 High quality benchmarks
 Pan India Presence
 Extensive arrangements with India's top designers/ architects
 Finest network of experienced contractors and suppliers like LOR, L&T, Shapoorji
Pallonji, BL Kashyap
 Close working relationships with financing institutions
 High-caliber in-house team well positioned across the country

Vision, Mission & Values

DLF Vision
To contribute significantly to building the new India and become the world’s most valuable real
estate company.

DLF Mission
To build world-class real-estate concepts across six business lines with the highest standards of
professionalism, 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, environmental and legal requirements.

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Analysis of DLF
 Other Businesses

Wind Power Projects by DLF

DLF group is the largest owner of wind power plants in India with an installed capacity of 228.7
MW. DLF has initiated its wind power portfolio in March 2008. Currently the group owns wind
farms in the states of Gujarat (150 MW), Rajasthan (34.5 MW), Tamil nadu (33MW), and
Karnataka (11.2 MW). These projects reduce about 4.7 tonne of CO2 emissions on annual basis.
The wind power projects in the states of Gujarat and Karnataka are already registered for carbon
credits at UNFCCC and generating over 3 Lakh CERs (Certified Emission Reductions) annually.

Project Locations

 150 MW wind power project in Kutch, Gujarat.

 11.2 MW wind power project in Gadag, Karnataka.
 33 MW wind power project in Osisan and Ratan Ka Baas, Rajasthan.
 34.5 MW wind power project in Elavanthi and Panapatti, Tamilnadu

11
Analysis of DLF
DLF's Presence
The following map illustrates the locations of our developments, projects and lands across India,
as of November 30, 2006:

12
Analysis of DLF
Logo Our Ethos

The pyramid symbol and the mission line 'Building India’ is collectively referred to as the DLF
Logo.

The company's name is represented in black capital letters. The typeface represents the solidity
of the enterprise; emphasizes accountability, responsibility as being a strong and integral part of
the Group's ethos.

The pyramid depicts nine smaller pyramids; each composes itself into a larger pyramid all-
encompassing in nature and presentation. The pyramid itself and the component pyramids
convey cohesion, interdependence, support and foundation, to a common purpose and to achieve
greater heights.

The words ’BUILDING INDIA’, is in capitals like the company’s name, and at once conveys
DLF’s mission and vision. It is an intrinsic reflection of the Group’s commitment and its 60-year
heritage.

13
Analysis of DLF
 Business Model

Corporate strategy

 Business organized on vertical basis: Homes, Office, Retail, Hotels, etc., each
independent of the other
 Same structure is followed not only at the corporate level, but flows down to the
regional/local level
 DLF, at the corporate level, plays the role of an aggregator of businesses where stiff,
competing interests of different SBUs and businesses get aligned, resulting in sum of
parts being worth more than parts
 Going forward, DLF plans to monetize subsidiaries/assets to unlock the embedded value
 With core businesses reaching stable operating performance, focus is to aggressively
ramp up new businesses like hotels, infrastructure, SEZs, etc.
 Key focus on execution of projects.
 DLF will look into making small ‘pure’ investments in non-real estate businesses.
 The compensation structure within the mid / senior level employees allows for
participation in the success of various projects/businesses

14
Analysis of DLF
ORGANIZATION STRUCTURE

Geographic spread

15
Analysis of DLF
Business Model
Business Areas
DLF Group is India's largest real estate company in terms of revenues, earnings, market
capitalization and developable area. It has a wonderful and consistent track record of growth,
customer satisfaction, and innovation. DLF has registered its presence across 32 cities across the
country. The primary business of the group is residential, commercial and retail properties.
However, recently DLF has recently ventured into the infrastructure, SEZ and hotel businesses
too. DLF has a only one of its kind business model with earnings arising from development and
rentals. The company opts for a business model based on development and sale of properties
instead of only lease-based approach.

Business model allows pre-sale of property prior to breaking ground, leading to positive cash
flows.

Robust business model is mix of development & rental earnings. It faces low risk due to
multiple businesses and segments within businesses, across geographies.

It acquires a domain of expertise & assets with buy-out of Aman Resorts business.

The company has adopted a new business model for its commercial and retail properties,
compared to the earlier build and lease model. DLF has outsourced a substantial part of its
construction activity to the DLF Laing O'Rourke joint venture.

Laing O'Rourke is a UK-based construction company that built Dubai International Airport and
London's Millennium Tower. It will construct all DLF's landmark projects. Nakheel of Dubai are
partnering with DLF for developing townships in India. WSP Group Plc is also partnering DLF,
providing management and consultancy to the built and natural environment. Feedback Ventures
is providing consultancy for faster project execution. DLF has also teamed up with Hilton Hotels
to jointly develop hotels in India.

Sponsorship

DLF is currently sponsoring Indian Premier League (IPL), a Twenty20 format cricket league in
India. DLF Group has paid US $40 million to be the title sponsor of the tournament for 5 years.

Other Businesses
Wind Power Projects by DLF
DLF group is the largest owner of wind power plants in India with an installed capacity of 228.7
MW. DLF has initiated its wind power portfolio in March 2008. Currently the group owns wind
farms in the states of Gujarat (150 MW), Rajasthan (34.5 MW), Tamil nadu (33MW), and
16
Analysis of DLF
Karnataka (11.2 MW). These projects reduce about 4.7 tonne of CO2 emissions on annual basis.
The wind power projects in the states of Gujarat and Karnataka are already registered for carbon
credits at UNFCCC and generating over 3 Lakh CERs (Certified Emission Reductions) annually.

Project Locations

150 MW wind power project in Kutch, Gujarat.

11.2 MW wind power project in Gadag, Karnataka.

33 MW wind power project in Osisan and Ratan Ka Baas, Rajasthan.

34.5 MW wind power project in Elavanthi and Panapatti, Tamilnadu

Homes

Large Integrated township:

DLF pioneered development of large integrated townships decades ago with the development of
the 3,000 acre DLF City, Gurgaon. Townships include residential, commercial and retail
properties in a modern city infrastructure, complete with schools, hospitals, hotels, shopping
malls and recreational hubs. DLF has inked JV with Nakheel LLC of the UAE, who have to their
credit the development of The Palms and Al Burj, among other outstanding architectural
projects.

17
Analysis of DLF
Offices:

DLF is the founder and pioneer of “Grade A –office leasing market”in India. It offers a well-
balanced mix of commercial office space including IT/ITES facilities, multi-tenant corporate
office buildings and integrated commercial complexes.

18
Analysis of DLF
RETAIL –MALLS and COMMERCIAL COMPLEXES:

DLF enjoys the benefits of a portfolio of premium locations across the country and rush by large
retailers. DLF envisages introducing a new retail infrastructure to cater to the need for shopping
malls and commercial centre across al segments and all places in India. DLF has plans for
delivering 1 msf of luxury malls, 4 msf of shopping malls and 3 msf of neighborhood malls
annually.

19
Analysis of DLF
HOTELS

PRESENCE OF AMAN RESORTS

20
Analysis of DLF
LARGE SEZs:

•Manesar SEZ: Signed agreement with Haryana government, land acquisition in progress
•Ambala SEZ: Signed agreement with Haryana government for Ambala SEZ

INFRASTRUCTURE

Significant portion of infrastructure development is expected to be undertaken through public-

private partnerships. DLF intends to benefit from Laing O’Rourke’s construction expertise and
participate in the construction of infrastructure projects including roads, bridges, tunnels,
pipelines, harbors, runways and power projects. DLF Laing O’Roukeplans to not only deliver
DLF developments on a pan-Indian basis but also to contract for external clients on a selective
project-by-project basis. Leverage infrastructure projects to get access to large land banks e.g.,
adjoining new road projects.MOU signed with FraportAG for development and management of
airport projects in India.

JOINT VENTURES

Laing O’Rourke
•50:50 JV with LOR, a leading UK based construction company with expertise in construction of
infrastructure projects including roads, bridges, tunnels, pipelines, harbors, runways and power
projects
•Created an opportunity to exploit new sources of revenue
•JV has commenced development of 16 projects covering a total area of 40 msf
•DLF-LOR has submitted tenders for construction of various infrastructure projects including
roads, laying of railway tracks, airport terminals and a port

WSP
•50:50 JV with WSP for engineering and design consultancy and project management services
•WSP’s experiences include world class projects such as Freedom Tower at Ground Zero, New
York; the Mall of the Emirates, Dubai; and major developments at Heathrow and Stansted
Airports in London
•WSP to bring specialist staff and expertise from their global operations to support local
professionals.

21
Analysis of DLF
 Key Financial Data
Balance Sheet Analysis:

The Company’s Balance Sheet as on 31st March, 2011 reflected a healthy position with a net
worth of 26,332 Crores and net debt to equity ratio of 0.81. The net worth of the Company
witnessed a decline of Rs 4,101 Crores from FY’10, primarily as a result of the reduction in
share capital due to the planned exit of third party Compulsorily Convertible Preference Shares
(CCPS) and Redeemable Preference Shares (RPS) investors. Gross debt increased to Rs 23,990
Crores from Rs 21,677 Crores, attributable in part to the capital expenditure incurred on the
rental business and the aggregation of select land parcels. Net fixed assets grew to Rs 17,872
Crores from Rs 16,558 Crores primarily as a result of deliveries of leased properties which also
led to a reduction in the Capital Work-in-Progress to Rs 10,312 Crores from Rs 11,129 Crores.
Stocks increased to Rs 15,039 Crores from 12,481 Crores mainly on account of the new 350
acres land parcel in Gurgaon that was purchased in FY’10. Cash and bank balance increased to
Rs 1,346 Crores from Rs 928 Crores in FY’10. Sundry Debtors and Loans & Advances remained
largely unchanged.
The current liabilities and provisions stood at Rs 13,101 Crores, up from Rs 8,777 Crores. The
increase was on account of the capitalization of the new 350 acres land parcel in Gurgaon and
the absorption of higher costs due to input price inflation.

P & L Comparision:
  2011 YoY 2010 YoY 2009 YoY 2008 CAGR
Net sales 9560 29% 7423 -26% 10035 -30% 14433 -13%
Expenses 6439 52% 4236 -9% 4670 -3% 4814 10%
depreciation 631 94% 325 36% 239 166% 90 91%
EBIT 3122 -2% 3187 -41% 5366 -44% 9619 -31%
EBITDA 3753 7% 3512 -37% 5605 -42% 9709 -27%
EBITDA
Margins 39%   47%   56%   67%  
Interest Cost 1706 54% 1110 100% 555 79% 310 77%
PAT 1640 -5% 1720 -62% 4470 -43% 7812 -41%
                 
Residential 7 msf   12 msf          
Leased 4 msf   1 msf          
Gross Debt 24192   21677   16358   12260  
Sale of non
core 1270   566          

22
Analysis of DLF
P&L analysis

NET SALES
 Net sales dropped in FY2008, FY2009 and FY2010 due to global economic slowdown.
The real estate sector was the worst hit post the collapse of Lehman Brothers and the
recession in the U.S. The worst hit was the commercial and retail vertical. The
residential vertical also saw severe slump.
 2011 however saw partial revival on the back of DLF shifting focus towards affordable
housing and focusing more on volumes rather than value and marginal increase in
average realization
 In 2009, DLF merged DLF Assets (DAL) into itself. The year 2009 showed massive
decline in sales due to decline in revenue recognition in DAL as 50% of DLF sales used
to come from DAL.
 DLF on its part has also been reducing the yearly sales guidance every year due to
deteriorating market conditions. DLF reduced guidance from 18 mn sq feet to 12 mn sq
feet for FY11. In FY12, DLF has reduced sales guidance to just 10 mn sq feet.
 In the global slowdown, most of the real estate companies cut prices to boost sales.

EXPENSES
 Growth in expenses due to increased raw material and construction costs.
 Raw material includes mainly cement, steel and sand. Also the labour costs have
increased adding to expense.
 2011 saw massive jump in expenses due to onetime cost reset due to high prices
 Expensive land costs

MARGINS
 The company has been clocking in EBITDA margins to the tune of 40% now from the
high margins of 60 – 70% due to increased in expenses and a shift from premium housing
to affordable housing
 Low commercial and retail sales have also impacted the margins of DLF

INTEREST COSTS
 DLF has seen interest cost increase by 6 times from 2008 to 2011. The increase in
interest costs is attributed to the high debt in the books of the company.
 DLF’s debt has increased from Rs 12,260 cr in FY08 to Rs 24,192 cr in FY11.
 DLF has taken huge debt on books for acquiring large land banks at premium valuations
and also venture into non core areas like power, SEZ’s and hotels
 RBI’s tightening to monetary rates resulting into expensive borrowings

SALE OF NON CORE ASSETS

 In order to reduce its debt DLF has decided to sell its noncore assets.
 DLF has decided to sell noncore assets to the tune of Rs 6000 to 7000 cr in the next 2 -3
years via which it will repay debt
 Till date the company has sold noncore assets of around Rs 2000 cr
23
Analysis of DLF
PROFITS
 There has been a severe drop in profits of the company due to high interest and
depreciation costs and falling revenues
 Higher expenses and dropping sales targets impact profits of the company

Ratio Analysis
Ratios 2011 2010 2009 2008
D/E 0.911 0.712 0.676 0.620
D/capital ratio 0.477 0.416 0.403 0.383
EPS 9.704 10.178 26.248 46.992
 
 
ROA 27% 40% 9% 21%

ROE 76% 82% 21% 49%

ROC 28% 34% 9% 21%

CA/CL 2.540 3.113 4.043 3.654

quick ratio 0.115 0.115 0.162 0.301

int coverage ratio 1.172 2.256 0.935 3.084

 
accounts receivable
turnover 57.246 39.275 48.478 145.788
Days receivable outstanding 6.376 9.293 7.529 2.504

Explanation
1. Debt Equity Ratio
As the company grows it needs to take more debt to grow faster. The ratio is inching
closer to 1:1. This is because cost of debt is less than cost of equity.

2. Debt Capital Ratio

This ratio shows what is the debt percentage of the the total capital employed. The ratio is
close to 0.5 which means the company is moderately leveraged.

24
Analysis of DLF
 3. Earnings per Share
The EPS has drastically reduced as the PAT has not increased proportionally to the
amount of additional liabilities.

4. Return on Assets
This ratio indicates whether the co is utilizing its assets efficiently or not. The ratio had
decreased in 2009 due to lower EBIT and higher CA.

5. Return on Equity
The ROE tells common shareholders how effectively their money is being employed. At
present the company's D/E is close to 1 and gives a true sense of ROE. The ratio is low
in 2009 as equity is higher than debt.

6. Return on Capital
A more comprehensive evaluation of how well management is using the debt and equity
it has at its disposal. The ROCE has been steadily improving after 2009 where EBIT was
the lowest.

7. Current Ratio
The current ratio is used to determine the company's liquidity. The current ratio is
higher than the industry avg of 2:1. This means short term liabilities can be met with the
help of short term assets.

8. Quick Ratio
This ratio defines the company's most liquid assets which are cash + marketable
securities. The most liquid assets are not able to meet the short term liabilities of the
company. This shows that cash and bank have a minor share in current assets of the
company.

9. Interest coverage Ratio

This is the most serious problem for DLF. The interest payments on the debt is seriously
hurting the company's profitability. This ratio has considerably decreased which is a bad
song for DLF.

25
Analysis of DLF
 Competitors Ratio Analysis

  Unitech IBREL HDIL

             
Ratios 2011 2010 2010 2009 2011 2010
D/E 0.6 0.62 0.02 0.42 0.45 0.58
EPS 1.95 2.23 0.39 0.11 21.62 16.78
ROA 35.48 32.41 159.4 138.14 225.97 196.18
ROE 5.49 6.88 0.24 0.07 9.56 8.55
ROC 7.11 7.96 1.2 1.76 8.24 11.19
Current ratio 2.58 1.19 92.28 110.27 7.32 8.32
Quick ratio 1.23 1.23 92.27 110.26 2.33 1.79
Interest coverage
ratio 3.22 3.01 1.48 1.17 13.94 2.43

DLF Financial Data

  2011 2010 2009 2008

Debt 2399 2167 1632 1220
Equity 2633 3043 2415 1968
PAT 1640 1720 447 781
No. of shares 169 169 17.03 16.62
EBIT 2000 2504 519 956
Fixed Asset 1787 1655 791 481
Current Assets 3327 2730 3162 2660
Total assets 5114 4385 3953 3141
Current Liabilities 1310 877 782 728
Tax rate 30% 30% 30% 30%
Interest cost 1706 1110 555 310
Sundry debtors 172 162 216 198
Sales 9560 7423 10035 14433

26
Analysis of DLF
 Current Strategy
 Residential – Continue with strategy of volume moderation in high construction costs – low
margin projects; focus on high margin projects – luxury homes, plotted, etc

 Commercial Leasing – Increase average rentals and focus on leasing of semi-finished and
ready to occupy properties.

 Debt reduction – Strengthen operational cash flows, enhance momentum on non-core

divestments and moderate investments in land aggregation & capex

 Non- core asset divestment - Increasing overall target for asset divestments to Rs 10,000
Crs from Rs 4,500 Crs (ex wind power) previously (Rs 6,000 – Rs 7,000 Crs to be divested
over the next 2-3 years)

Company is continue to focus on achieving a stable business momentum with the key
business parameters unchanged and actions progressing as planned.

27
Analysis of DLF
FY 12 Outlooks

 Planned launches of 10 -12 msf

- Plotted developments in Indore, Gurgaon, Chandigarh, Lucknow ~ 10 m.s.f

- Group Housing projects in Gurgaon ~ 2 m.s.f

 Product mix skewed towards plotted development in order to reduce execution risks &
negate inflationary pressures.

 Introduction of contractual conditions .i.e. escalation clauses in an attempt to hedge inflation

risks

 Slew of approvals received / to be received in the short term – Indore, Gurgaon, Panchkula,
etc

 Confident of good off-take for new launches given the recent extra ordinary success of the
Mullanpur , Chandigarh plotted development launch in Q4 FY1

Debt Reduction Strategy

 Debt reduction plan impacted by -

1. Further investments in land aggregation and capex (Rent Co) ~ Rs 1,800 Crs in FY 11
2. Delayed approvals leading to slower new launches
3. Monies spent on Non-recurring items such as – one time government charges /
Preference Capital redemption, etc

 Longer term outlook –

Maintaining net debt free target in next 3 - 4 years

1. New and diversified product mix to generate faster cash flows from operations
2. Non-core asset divestments to gain momentum .i.e. > Rs 6,000 – Rs 7,000 Crs of asset
divestments expected in next 2-3 years
3. Land aggregation & Capex (Rent Co) in moderation – purely selective & strategic
(expected to be significantly lower than FY 11)
4. A robust, growing and stable annuity income to support majority of core debt (rent
securitization)

28
Analysis of DLF
 Valuation : Competitors Analysis

29
Analysis of DLF
 Revenue Model
Sales and other receipts:

Sales

1% 2%
1% 3%
1% 3%

Sale of land and plots

Revenue from constructed properties

Revenue from development charges

Revenue from development rights
41%
Royalty income
Revenue from windmills power
generation 11,047.26
Service receipts
Amount forfeited on properties
40% Rental income
Sale of gas
Sale of construction material

7%

41% of the revenue from sales is generated from constructed properties and 40% from
development rights. These are the major source of revenue from sales. Also 7% is generated
from development charges. Rest of the sales income comes from sale of land and plots, royalty
income, service receipts, etc.

30
Analysis of DLF
INCOME FROM INVESTMENT

Income From Investment

21% 22%

Current (Other than Trade)

Long Term (Trade Investments)
Profit or Loss from Partnership firm

57%

Income from Long term investment includes dividend from shares, and interest from debentures. It
contributes 57% of the income from investment. Other income is equally divided between Profit or Loss
from partnership firm and income from current or short term investment.

31
Analysis of DLF
OTHER INCOME

Other Income

1% 0% 0% 1% 2% 0% 2%

Bank deposits
Customers
Loans and deposits
Income-tax refunds
Exchange gain (net)
Profit on disposal of fixed assets
Unclaimed balances and excess
provisions written back
Miscellaneous income

93%

The above pie chart shows that maximum (around 93%) income is earned from loans and
deposits.

32
Analysis of DLF
EXPENSES

Expenses

11%

4%
29% COST OF LAND, PLOTS,
CONSTRUCTED PROPERTIES AND
7% DEVELOPMENT RIGHTS
ESTABLISHMENT EXPENSES
FINANCE CHARGES
GENERAL, ADMINISTRATIVE AND
SELLING EXPENSES
DEPRECIATION AND AMORTISATION
TAX EXPENSE
5%

44%

DLF’s expenditure includes cost of land, plots, constructed properties, development rights,
finance charges etc. Almost 44% of the total expenditure is incurred to meet interest charges on
loans and debentures. Being a real estate company, its major expenditure is towards purchase of
land and plots.

33
Analysis of DLF
 Investment Policies
Investments are classified as long term or current, based on management’s intention at the time
of purchase. Investments that are readily realizable and intended to be held for not more than a
year are classified as current investments. All other investments are classified as long-term
investments.

Trade investments are the investments made for or to enhance the Company’s business interests.

Current investments are stated at lower of cost and fair value determined on an individual
investment basis. Long-term investments are stated at cost and provision for diminution in their
value, other than temporary, is made in the financial statements.

Profit/loss on sale of investments is computed with reference to the average cost of the
investment.

34
Analysis of DLF
 Industry Outlook

Fitch Ratings says the 2011 outlook for the Indian real estate sector is stable, with a negative
bias. The overall demand environment improved during 2010, and is likely to remain stable
during 2011. The demand for residential units, driven by the high growth rate in the Indian
economy and rapid urbanization, is expected to be the main driver of the industry in the medium-
term. However, the absorption rate is likely to be slowed down over the near-term on account of
the strong increase in residential unit prices witnessed in the second half of calendar year 2010
(H2CY10). The withdrawal of teaser interest rates by lenders and the increase in interest rates
expected in H1CY11 are also likely to dampen residential demand during the same period.

Fitch expects that renewed hiring by the IT/IT-enabled services (IT/ITeS) sector since H2CY10
in India -- a major demand-driver for office space in the country -- is likely to give the
commercial real estate sector a boost in 2011. Oversupply in this segment, however, is a cause
for concern.

Regulatory measures by the Reserve Bank of India (RBI) will have a considerable impact on the
real estate sector during 2011. Any increase in risk weights on bank lending to real estate
companies would adversely affect the amount of funding available to the industry and cause
liquidity problems, as the majority of the companies are highly leveraged and their dependence
on debt refinancing is high. Major lenders have already acted or are likely to act on withdrawing
teaser rate schemes on the advice of the RBI. This coupled with the expected increase in interest
rates will dampen demand and further increase liquidity pressure on real estate companies.

During 2010, several real estate companies took advantage of the improvement in equity markets
and raised funds through initial public offers (IPOs) and qualified institutional placements, and
used some of the funds to reduce debt. However, real estate companies planning IPOs in 2011
may experience a lack of enthusiasm on the part of investors due to the lending scams uncovered
in Q4CY10, which involved many banks and real estate companies. Any failure to raise funds
through the equity markets would increase real estate companies' dependence on banks and
increase their vulnerability to the RBI's regulatory action.

Fitch believes substantial deleveraging to be key to improved credit ratings in this sector. The
likelihood of delivering taking place in 2011, either through a substantial improvement in sales
or recapitalization through equity offerings, is low.

35
Analysis of DLF
 Future Outlook of DLF

Your Company would continue to focus on enhancing growth in both the development and the
rental businesses, while targeting to reduce its overall debt by unlocking value in non-core assets,
cost optimization, process improvements and efficient management of working capital. On the
development business, your Company shall continue with its strategy of moderating its volumes
in projects which have high construction costs and moderate margins.

The focus in the current year would be largely on high margin projects comprising of plotted
developments and luxury homes with planned launches of 10-12 m.s.f. In commercial leasing,
your Company would focus on increasing average rentals and leasing of semi finished and ready-
to-occupy properties, with a target to achieve leasing volumes of 2.5-3 m.s.f. In retail leasing, the
Company has started construction of its mall at Noida in full swing.

As the government policy gets liberalized to allow foreign direct investment into the retail sector,
your Company expects traction in retail leasing going forward. The focus on execution in FY’11
shall continue and result in substantial deliveries in the coming years. This will lower the
outstanding construction commitments of your Company and help mitigate execution risks. The
overall divestment target for non-core assets for your Company has now been increased to
10,000 Crores, implying that between ` 6,000 – ` 7,000 Crores would be realized through
divestments over the next 2-3 years. The cash flow from divestment would be utilized primarily
for debt reduction. Besides this, your Company would utilize strengthened operational cash
flows to reduce its debt levels while moderating its investments in land aggregation and capex.

Real estate developer DLF has decided to develop its US$ 226.18 million Infopark project
spread over 54 acres comprising of an IT block, a luxury hotel, a retail chain, service apartments
and recreational facilities in three phases

36
Analysis of DLF
 OUTLOOK AND CONCLUSIONS

DLF could remain in a financially tight situation in terms of lower profits and stretched B/S for
next few quarters.

DLF new sales have stagnated for three years (F10-11; F12 DLF target) at 10-12 msf (Rs60-70
bn) and land under execution is flat for the last 6 quarters. As the older projects get delivered (4-
6 quarters), DLF will become more dependent on new launches for cash generation. In addition,
high input cost and higher interest expense will hurt earnings

Upsides to the risk includes significantly better local macro – sharp decline in inflation leading to
interest rate down cycle; substantial debt reduction from sale of non-core assets and significant
increase in new sales target by DLF

Downside risks include Macro worsens further, sluggish physical property markets, shortfall in
non-core asset sales, lower than expected pre-sales achieved

HEADWINDS FOR DLF

Stagnating pace of new sales over last three years – F10-12 – at 10-12 msf with roughly Rs60-
70 bn sales value. Revenue recognition for the development business is also broadly in the same
range of Rs55-65 bn. Given 3-4 years of development cycle, the company may not get
contribution from prior period projects and will likely become more dependent on new launches
for cash flows/profits.

Sharply falling new construction starts as well as flat (for the past six quarters) overall for land
under construction (Exhibit 3) indicate potentially declining contribution from older projects in

37
Analysis of DLF
the next 1-2 years. This will come into play as the older projects get delivered and land under
execution starts to decline.

38
Analysis of DLF
Inflation risk – Sustained high inflation in India has started to hurt developers in terms of rising
input cost. In particular, based on anecdotal evidence, labor cost has been rising at 18-20% pa.
High input cost coupled with low pricing power (in the current environment) imply possible
margin pressure in the quarters ahead.

Low launch visibility of two best projects – NTC Mills in Mumbai and Chanakyapuri in Delhi.
These have been delayed due to changes/uncertainty in FSI regulations and adverse court ruling,
respectively. Near-term launch of these projects to materially lift earnings are not expected.

Interest expense should increase – Given the sharp rise in interest rates (250-400 bps) in India
– deposit rate as well as lending rate (PLR) – in the last 18 months, DLF’s effective cost of
borrowings to rise in the ensuing quarters.

39
Analysis of DLF
Tight Balance Sheet – 80% net gearing as on June’11 DLF’s net debt is Rs 213 bln (as on
June’11), implying 80% net gearing ratio. To put this in context, this is 60% of the market
capitalization of the company. Its interest coverage (EBIT/Interest cost) is roughly 1.8, which
doesn’t leave too much cushion if the new sales slip. For debt reduction, the company is more or
less entirely dependent on the sale of noncore assets (IT parks/SEZs/Hotels). Net inflows (over
FY12-13) from sale of non-core assets, which we estimate would lower debt. In effect, DLF’s
balance sheet could remain tight for next few quarters, which would limit its ability to re-invest
and grow its NAV.

Potential sources of cash drain – DLF has suffered three administrative/court case reverses in
the recent few months – Gurgaon SEZ, SEZ related tax liability (Rs11.5 bln) and CCI order
(Rs6.3 bln). As of now, DLF is appealing each of these cases and there is no near term visibility

40
Analysis of DLF
on cash outflows (penalty) related to these cases. However, this is a cash flow risk that could
remain an overhang until it gets resolved.

CATALYST FOR THE COMPANY

Following are the key price drivers that investors need to watch

Inflation data – Whether it remains high for longer or starts its downward journey

Interest rate cycle – whether it has peaked, or has a couple more rate hikes to go.

New launches – especially Panchkula plots and Magnolias II.

Sale of non-core assets – Noida IT park, Pune SEZ and Aman Resorts.

41
Analysis of DLF
Recommendations from the group:

 As the current situation is very volatile, company is going to find it difficult to repay its
mounting debt though they are planning to sell their non-core assets.

 RBI is continuously increasing interest rate, as a result of this borrowing cost for the
company is increasing. Also, Sales will be affected as consumers will find it difficult to
borrow the money.

 Also, company is entangled in legal suites. So, it is denting their image in the market and
this is clearly reflected by the correction in their stock price.

 Since, the sales in premium housing category is declining, they should concentrate on
affordable housing, where, margin would be little lower.

 After analyzing the company, we as a group suggest that the company's PE is higher than
the average of the real estate sector, therefore, it is overvalued.

42
Analysis of DLF