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BW Businessworld

Dealing With Ground Realities

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DLF, India's largest real estate company has come a long way since its inception in 1946. From building housing complexes to India's first luxury mall to corporate offices, the company has been at the forefront of real estate development. And even though DLF has gone through a tough period due to the slowdown, which saw it posting a decline in profits, it remains the leader in its sector. So much so that its peers have ranked it India's most respected real estate company in the BW survey.

DLF scored 4,958.8 points, much ahead of second-placed Emaar MGF's 3,450 points. Delhi-based Unitech at No. 3, lags further behind with 3,344.1 points. In fact, DLF with 266 million square feet (msf) of developed and under-development projects topped in all the parameters of innovativeness, depth and quality of top management, financial performance and returns to shareholders, ethics and transparency, quality of product and services, people practices/talent management and global competitiveness.

In the past decade, DLF has diversified into many areas other than its core business of developing residential buildings. This includes hotel business, malls and also life insurance. However, post the global economic meltdown, DLF has restricted itself from expanding to non-familiar territories. It stalled some of its projects outside Delhi and is reportedly targeting divestment proceeds of Rs 1,600 crore over the next 12–15 months. It is also believed to be planning an exit from the hospitality business. According to a report by Angel Broking, the company received Rs 1,111 crore from the sale of assets in the first nine months of the current fiscal. Of course, with the real estate market failing to turn around, all realty firms are struggling with inventory and high debts.

Financially, the company is on slightly wobbly ground. In FY2009-10, consolidated revenues fell 26 per cent to Rs 7,422.87crore, and net profits fell 62 per cent to Rs 1,708.23 crore compared to 2008-09. And in the first three quarters of this fiscal (April to December), revenues fell 12.5 per cent to Rs 4,508.46 crore. Not a feel good factor at all. However, net profits stabilised, with a marginal growth of 4 per cent (to Rs 1,334.90 crore) over the same period last year. The stockmarkets, too, have not been kind to DLF. The latest bear run on the bourses hit the real estate major hard, with its stock falling 34 per cent from Rs 295.45 on 3 January 2011 to Rs 220.80 on 1 February.

No 2: (From left) Emaar MGF As Shravan Gupta, executive vicechairman, faces flak for the CWG, the company continues with its expansion plans

No 3: Unitech MD Sanjay Chandra is trying to boost revenues by building budget homes. And his appetite for risky gambles might drive him in future too

DLF is, however, strengthening and consolidating its commercial leasing business. The company's leasing volume stood at 1.62 msf during the third quarter of 2010-11 against 1.56 msf in the previous quarter. Its total lease portfolio stands at 22.39 msf. The company had 56 msf of projects area under construction at the end of the quarter.

Experts, however, believe that a lot will change over the next few months. Pranay Vakil, chairman, Knight Frank (India) says, "There has been a shift to the mid-income group, which comprises 65-70 per cent of the volume in terms of units. DLF is exploiting land resources and it can utilise large chunks of land for developing residential colonies for mid-income groups. Also, unlike luxury homes, mid-income houses can be developed in tier-II cities as well. However, equations will change in the sector as many loans will fall due in March that were taken in the past two years. This will create a lot of pressure to sell." Vakil also hinted at a rise in bank interest rates and how a weakening dollar might lead to lesser sales (NRIs might not find it profitable to invest in residential properties in India any more).

One irritant in front of the real estate giant is its huge debt volume. The company has dropped its plan to sell the wind energy business, for which it reportedly had an offer worth around Rs 1,000 crore. It plans to cut its debt, majority of which will be from the sale of non-core assets and refunds from various government authorities in the next one year. The company also hopes to get a refund of Rs 800 crore from the Delhi Development Authority in lieu of a planned convention centre project in Dwarka in Delhi, which was subsequently scrapped. It is also selling portions of its land bank to improve its debt position.

However, all the selling is done through DAL (DLF Assets), a subsidiary company, as DLF doesn't do direct selling to customers. So, it books profits by selling the product through DAL, which is not listed, and the negative impact is absorbed by DAL.

Experts are optimistic about the company's attempts to stabilise, though they have doubts about DLF's sales volumes. "In the short run there are some issues, particularly the huge debt. And though residential volumes and leasing volumes have been good, the target of selling 12 msf of space in the current financial year seems to be a big challenge for the company and will definitely be difficult to achieve," says Param Desai, analyst at Angel Broking. He, however, added that the company's strong land bank and quality of construction are good for long-term growth.

Also, the giant builder might miss its launch targets. The company had targeted to sell 12 msf of space in FY11, but during the third quarter DLF launched only 1.8 million sq. ft of projects. the company earlier hinted at delay in getting approvals behind slowing down of the new launches. It launched plotted developments, (Almeda-Phase I) spread across 100 acres in Sector 73, Gurgaon and sold 2 million sq. ft of plots during the same period.

DLF seems to be making its moves very cautiously. It is expanding and at the same time exercising restrictions. With the real estate market still showing no signs of turning around soon, DLF indeed has a tough road ahead. The company in the next fiscal will have to speed up its launches and sell its non-core assets at a reasonable value in order to fight back. However, with new strategies and a pan-India presence, it would do well to hang on to its core strengths. (Despite repeated attempts, DLF could not be reached for comment.)

(This story was published in Businessworld Issue Dated 14-02-2011)