Competition & Strategy- Term 2- PGP 2013-15

DLF IN THE REAL ESTATE BUSINESS

Ajay R 1311213|Rakesh Mondal 1311247|Darshak Savla 1311258|Soumya H 1311268|Vaikam 1311278

Group 11
Section D

Contents
INTRODUCTION ...................................................................................................................................... 2
DLF GROUP ............................................................................................................................................. 2
BUSINESS MODEL ................................................................................................................................ 2
DEVELOPMENT BUSINESS ................................................................................................................... 2
(a)

Residential........................................................................................................................... 3

(b)

Commercial Spaces ............................................................................................................. 3

RENTAL BUSINESS ............................................................................................................................... 3

PROBLEM STATEMENT ........................................................................................................................... 3
ANALYSIS OF THE FIRM .......................................................................................................................... 4
RESOURCE BASED VIEW ...................................................................................................................... 4
LAND BANKS .................................................................................................................................... 4
CAPITAL ........................................................................................................................................... 5
BRAND ............................................................................................................................................. 5
GOVERNMENT RELATION ................................................................................................................ 5
TECHNICAL EXPERTISE ..................................................................................................................... 5
HUMAN RESOURCE ......................................................................................................................... 5
CAPABILITIES ....................................................................................................................................... 5
PROCUREMENT ............................................................................................................................... 6
CONSTRUCTION ............................................................................................................................... 6
SALES AND MARKETING .................................................................................................................. 6
FINANCIALS ............................................................................................................................................. 8
CURRENT STRATEGY OF DLF .................................................................................................................. 8
STRATEGIC RECOMMENDATIONS .......................................................................................................... 9
Corporate Rebranding ......................................................................................................................... 9
Partnerships in core businesses .......................................................................................................... 9
Alternate Sources of funding REITs and FDI ................................................................................... 10
Green Technology ............................................................................................................................. 10
Pre-fabricated construction materials .............................................................................................. 11
BUDGET AND FINANCIAL PROJECTIONS .............................................................................................. 11
TIME LINE .............................................................................................................................................. 12
CONTINGENCIES ................................................................................................................................... 13
ANNEXURES: ......................................................................................................................................... 14

INTRODUCTION
Real estate is one of the oldest and most critical sectors of the Indian economy, which
contributes to about 5% to the countrys GDP. With a market size of USD 66.8 billion, it is
the second largest employment generating industry in India.1 It is also the driver for many
ancillary industries like cement, building material etc. Some of the major players in the real
estate in India are DLF limited, Oberoi Realty, Godrej Properties, Sobha Developers and
Jaypee Infratech.
This report deals with the performance of DLF in the real estate and construction business
and the strategies it has currently considered. The culmination of the report is the
recommendation for the strategies that can be implemented by DLF based on the
understanding of Competition and Strategy as dealt in the Term 2 of the PGP 2013-2015
programme at IIM Bangalore

DLF GROUP
DLF Group is the largest real estate company in India in terms of market capitalization and
revenue.2 DLF exists in all four major segments of real estate namely: residential, office,
commercial and retail. Historically, the firm has largely focussed in the regions of North
India, with most projects and land holdings in the Delhi/ NCR region. It is in the recent past
that DLF has started putting to use, its land bank which is sparsely distributed across India,
in other metros, Tier 1 and Tier 2 cities.3 In terms of its product delivery, DLF has always
differentiated itself with the premium segment, in all fields, such as residential, commercial,
office or retail.

BUSINESS MODEL
The core business of DLF is development of real estate,
and leasing. DLF is also involved in other businesses such
as hospitality, through food courts, restaurants, hotels,
resorts etc.

Area in msf
16%

Development

84%

Rental

Through the years, DLF had ventured into the wind

turbine segment and the aluminium cladding segment
through its venture Star Alu Build. Overall the entire business has revolved around the might
of its land bank.

DEVELOPMENT BUSINESS
DLF is primarily into the development business, focussing on the premium market in the
NCR region in the following segments.

Real Estate Sector Report (September 2013) by Edelweiss Research

Refer Table 2: Annexure
3
Refer Table 1: Annexures
2

(a) Residential
The housing developmental business includes three categories: super luxury, luxury and
premium homes. DLF has already established its presence by developing properties in all the
metro cities. The next step in the expansion is ventures in smaller cities like Kochi and
Indore. Despite these efforts, the stronghold remains cities and towns in North India
including Delhi, Gurgaon, Lucknow, and Mullanpur (New Chandigarh). Most of the projects
outside the NCR region are in the premium and mid-range segment.4

(b) Commercial Spaces

Similar to the housing properties, most of DLFs commercial complexes are primarily in the
NCR region. In addition, DLF is starting to develop a small number of commercial properties
in other regions especially in the other metro cities.

RENTAL BUSINESS
DLF has firmly established its strength in the Office Leasing market with a number of
projects across the country. Currently, a key focus area for DLF is development and leasing
of retail malls, IT parks and spaces in IT parks. With quite a few projects and SEZs in cities
like Chennai, Kolkata, Hyderabad and Pune, 5DLF has exhibited its ambition to move beyond
the traditional NCR region where they have most of their rental projects.

PROBLEM STATEMENT
From the annual report of DLF it has been observed that the revenue of the firm declined by
19.3% and the profit margin fell by 41.5% from between FY-12 to FY-13. Further the balance
sheet of the firm shows a debt of INR195bn.6The largest of the problems is observed to be,
deteriorating financial situation that requires to be improved.
Breaking the problem statement into a logic tree, provided insights and elicited various
hypotheses for the problem faced by DLF as identified.

Refer Table 1 : Annexure

http://www.dlf.in/dlf/wcm/connect/Offices/Offices/Offices+on+Lease/Projects/IT+SEZs+and+Parks/DLF+IT+S
EZ,+Chennai/
6
DLF - Company Report by Edelweiss Research (October2013)
5

Monetize Assets
Deleverage Balance
Sheet

Improve financial
situation

Divest non-Core
Assets

Expand into other

segments to
generate economies

Address Project
Delays - Inventory

Relook at
Regulations

Branding exercise to
establish confidence

Marketing Efforts &

Corporate
Governance

ANALYSIS OF THE FIRM

RESOURCE BASED VIEW
In this section some of the key resources and capabilities of DLF are analysed to identify its
relative strength with respect to its competitors. In the real estate industry some of the key
resources that are essential for profitability and long term advantage of the firm are given
below.

LAND

GOVERMEN
T REALTIONS

CAPITAL

RESOURES
HUMAN
RESOURCE

BRAND

TEHNICAL
EXPERTISE

LAND BANKS
Due to scarcity of available land in strategic locations it is one of the key resources
contributing to the competitive advantage of a firm in real estate sector.

DLF has a land bank of 314 msf, out of which 265 msf is held in development and 49 msf in
lease business. Moreover the lands are held in strategic locations, which further strengthens
DLFs position. Most of its lands are concentrated in Gurgaon region, which constitutes
about 46% of its entire land reserve. Apart from NCR region and metros, DLF also has land
reserves of 45 msf in some of the Tier-2 and Tier-3 cities.7

CAPITAL
DLF has the largest market capital among all the firms in the Real estate sector in India. The
market cap of DLF is around INR 27,186 Crores, which is much higher than its nearest
competitors.8 The FY13 balance sheet shows a working capital of INR 2,542 Crores, which
shows the capital strength of the firm.

BRAND
Being the market leader in the real estate sector, DLF has a reputed brand value. Moreover,
DLF was the title sponsor of IPL till the year 2012, which increased its brand reach in the
country. DLF has consistently striven to position itself as a premium brand in terms of the
designs used, which are rich and embellished facades, to the high end architects and other
service consultants it associates with. Each of their residential projects and malls boast of
the state of the art amenities available in the country today.

GOVERNMENT RELATION
DLF has been in the real estate sector for the last sixty years and has ensured good
relationship with government agencies and regulatory departments.

TECHNICAL EXPERTISE
DLF has contracts with many consultation firms in the industry like Hafeez Contractors,
Arcop Consultants etc. Further the 60 years of experience in the sector gives DLF an edge
over other rivals in terms of technological access.

HUMAN RESOURCE
Much of the sales, marketing and legal activities are done in house by the employees. DLF
has an internal mechanism to identify and groom talents within the organisation for critical
roles which could not be outsourced. However many of the other activities like site survey,
design and construction works have been outsourced to some of the best players in the
respective industries. DLF has always exercised reason in out sourcing the activities that
have not been their strengths and have worked in house on their core capabilities.

CAPABILITIES
Some of the key capabilities of DLF are in activities like procurement, construction and sales
and marketing.

http://www.dlf.in/dlf/wcm/connect/1179aa0049033cebabddaf5274424e45/APQ2FY14.pdf?MOD=AJPERES&
CACHEID=1179aa0049033cebabddaf5274424e45
Refer Annexures: Table 1
8
http://www.moneycontrol.com/stocks/top-companies-in-india/market-capitalisation-bse/constructioncontracting-real-estate.html

PROCUREMENT
Despite soaring inflation in the country, DLF has maintained a high Gross profit margin. One
of the possible reasons is that, there is cost efficiency in material procurement and stability
in overall cost.9
Year

FY 13

FY 12

FY 10

Gross Profit Margin

58.02%

56.42%

56.58%

The immense scale of the projects as developed by DLF, and its long existence in the
industry, has given suppliers the potential to delivery large quantities and lower prices
achieving economies through scale.

CONSTRUCTION
DLF has on its rolls a large battalion of designers, engineers, planners and experts in the
services like Water Supply and Drainage, Fire, Electrical and Lighting etc. Though DLF has
had people with strong technical skills, and also the latest plant and machinery, it has
chosen the path of sub-contracting to avoid further dents to the financial situation that DLF
is facing.

SALES AND MARKETING

DLF has always enjoyed the benefit of having much lower costs of acquisition of customers
through marketing, due to their brands reputation. This is generated through the
economies of scale, (i.e. each of their projects have been large scale, thus addressing a huge
potential customer base with a single campaign).Its corporate offices in different cities have
their sales and marketing teams that can work in their specific regions.

http://www.moneycontrol.com/financials/dlf/ratios/D04

VRIO ANALYSIS
RESOURCE
LAND

DATA
VRIO Analysis
More than 314msf in development Sustained
and rental business
Competitive
advantage

COMMENTS
Since land reserves are scares and not easily
imitable by competitors. Also it is valuable in
real estate industry.

CAPITAL

Based on Market Cap DLF: $4333m & Competitive parity

Competitor $994mn

Since capital can be raised through multiple

avenues, it doesn't give competitive advantage.

BRAND

Industry Market leader

Brand value provides competitive edge over

competitors.

HUMAN
RESOURCE

Sustained
Competitive
advantage
to develop Competitive Parity
developed

In house training
employees,
Well
functional departments
TECHNICAL Work with consultants of the likes of Competitive Parity
EXPERTISE
Hafeez Contractor and Jones Lang
Lasalle
Government No empirical data available
Sustained
Relations
competitive
advantage

Other competitors also possesses talented

human resource in their organisation. Hence it
is not a rare resource
Other competitors like Sobha constructors and
Oberoi Realtors also possess technical expertise
DLF has maintained good relationship with
government
agencies
and
regulatory
departments.

FINANCIALS10
Sharp decline in DLFs net sales figures is an area of concern.
The net sales for 2012-13 are 19.3% below 2011-12 levels. The drastic decline in sales can
be seen from the decrease in area sold i.e 7.5 msf in 2013 as against 13.4 msf in 2012.
The EBITDA margin for the company has also gone down to 33.8% in the year 2013 from
40.5% in 2012. This can be explained by the increase in the ratio of operating expenses from
59.5% in 2012 to 66.2% in 2013.
The area under rent has increased from 23.7 msf to 31.4 msf which has led to an increase in
rental income.
The ROAE is 3.4 and is very less as compared to its peers, as seen in Table 2, of annexures.
The most disturbing financial metric here is the interest expenditure, which is around 30%
of the total revenues. The high interest expenditure has the highest contribution in bringing
down the financial performance of DLF.
In the case of DLF, the Debt Equity Ratio (as at March 2013) of 1.0 is not substantially higher
than industry aggregates (it is, of course, higher than certain competitors). However, the
decline in Net Cash Flow from Operations from over Rs. 2,500 Crores (2011-12) to around
Rs. 2,000 Crores (2012-13) is an adverse signal for the company. DLFs interest costs have
undoubtedly increased as well. The Debt to EBITDA ratio has also gone up from 6.4 in 201112 to 9.4 in 2012-13.
A way of looking at this is the core problem is with DLFs operating cash flow; the
insufficiency of operating cash flow creates a situation where the company has to (in net
terms) take on additional debt, as in 2012-13. This effectively means growing interest costs.
The unavoidable result is a vicious circle.

CURRENT STRATEGY OF DLF

DLFs current strategy can be better analysed by considering its vision and mission
statements. The stated vision is to contribute significantly to building the new India and
becoming the worlds most valuable real estate company and their mission is to build
world-class real estate concepts across all business lines, with higher standards of quality,
professionalism and customer service. But in the past few months DLF has faced numerous
setbacks due to delayed launches, delayed or uncertainty of receipt of proceeds from asset
monetization and the stay order on its luxury residential projects.
10

http://www.dlf.in/dlf/wcm/connect/1179aa0049033cebabddaf5274424e45/APQ2FY14.pdf?MOD=AJPERES&CACHEID=117
9aa0049033cebabddaf5274424e45

In order to overcome the various obstacles, DLF has adopted a number of complementary
strategies which include:

The continued focus on debt reduction which is a key positive.

Expansion of land reserves in strategic locations in addition to the NCR region, its
stronghold in terms of land reserves.
Stronger entry into Tier-2 and Tier-3 cities, with the increasing disposable
income, as given the core business of DLF a national presence. It includes
development of SEZ in these cities to keep pace with the governments plan for
more SEZs.
Management strategy to optimize the workforce in terms of number and skill to
enhance execution capabilities and customer relationship management.

STRATEGIC RECOMMENDATIONS
Corporate Rebranding
Recommendation
DLF should take up the exercise of corporate rebranding on an urgent basis by practicing the
best corporate governance practices, ensuring transparency in all its deals.
Reasons
DLF has been in news for the wrong reasons and has found itself in the middle of a political
storm with activists like Mr. Arvind Kejriwal accusing it of carrying out dubious deals with
Skylight Realty (owned by Mr. Robert Vadra) since 2008. The publicly released statement by
the Canadian investment-research firm Veritas alleging DLF to have inflated its sales figures
by Rs. 11,236 crores and its profit after tax (PAT) by Rs. 7,233 crores via its dealings with DLF
Assets Ltd has also contributed to the negative publicity of DLF. Also, the Competition
Commission of India had imposed a huge penalty of Rs. 630 crores for abusing its dominant
position and indulging in promotion of monopolistic conditions in the market.
Therefore, to improve its repute and image in the market, we have suggested DLF to take up
the exercise of corporate rebranding through better corporate governance.

Partnerships in core businesses

Recommendation
DLF should outsource the construction work to quality players, who can develop a cost
effective product, due to the economies of scale at the supplier end. For example, it can
assign construction contracts to well-known contractors like L&T, HCC etc

Reasons
Acquiring land and identifying core development projects are the strengths of DLF.
Combining these strengths with the expertise of contractors like L&T, HCC etc would enable
DLF to create positive synergies for its projects. With their help, DLF can bring down the
delay in the launch of projects which would help it to bring down its current inventory
holding period of 1839 days.11
Contracting will also help DLF in deleveraging its balance sheet as it would reduce the need
to incur capital expenditure to execute the projects.

Alternate Sources of funding REITs and FDI

Recommendation
DLF should focus on deleveraging its Balance Sheet and simultaneously look for alternate
sources of finances in the form of REITs and FDI.

Reasons
DLF had more than INR 24,800 Crores of debt on its Balance Sheet and a consequent
interest expense of more than INR 2,300 Crores for the financial year 2012-13. The high
interest expenditure impacts its profitability with the expected ROAE for Financial Year 14 as
3.4% as against the industry average of 13.1%. The alternatives available for DLF are raising
equity through REITs and FDI. The advantage of raising funds through equity is that it does
not carry a periodic fixed cost and thereby does not prevent the company from making
reinvestments in new projects.12
The introduction of REITs by SEBI would give an opportunity to the small retail investors to
earn higher returns by mobilising their savings into the real estate industry. Also, with the
relaxation of norms of FDI in the real estate industry, the foreign investors, desiring to tap
the attractive valuations and returns of the Indian real estate industry, could be a significant
source of equity finance for the company.

Green Technology
Recommendation
DLF should explore the field of building green buildings by using cleaner and more
environmental friendly technologies.
Reasons
With greater emphasis on clean and green construction, the concept of green buildings has
the potential to be the next big thing in the real estate industry. Since the technology is in its
11
12

DLF - Company Report by Edelweiss Research (October2013)

DLF - Company Report by Edelweiss Research (October2013)-Balance sheet.

nascent stage, the cost of such construction techniques can be slightly on a higher side.
However, since DLFs properties are majorly for premium customers, marketing and selling
such properties should not be a problem for DLF.

Pre-fabricated construction materials

Recommendations
DLF should explore the idea of using pre-fabricated materials in its constructions.
Reasons
Usage of pre-fabricated construction materials reduces the construction cycle time
drastically.
Eg. L&T Construction has successfully achieved close to completion of a prefabricated
construction project in Mumbai. In the case of this project, a slum rehabilitation project for
the Omkar group, the time consumed for constructing 6 towers of G+23 floors was taken as
22months, including the initial set up time and the manufacturing of the precast unit. 13 The
caveat here is that, efficiency in prefabricated construction can be achieved only if the
entire design, plans and elevations are be conceived in a modular way to achieve efficiency,
in terms of cost and ease of production in the process of prefabrication/ mass production.
High inventory cycle time shoots up the cost of construction. Hence, significant cost
reduction can be achieved by using pre-fabricated construction material.

BUDGET AND FINANCIAL PROJECTIONS

14

Builders
Advertisement %

DLF
2.5

Godrej
0.85

Oberoi
1.6

Sobha
2.5

In terms of absolute cost, DLF spends close to 4x the advertisement expenditure by Sobha.
Thus a rebranding effort is expected to give better yields on the amounts invested in
advertising.

13

http://www.business-standard.com/article/companies/l-t-set-to-build-india-s-first-pre-cast-residential-highrise-111092500028_1.html
14

Oberoi:http://www.capitaline.com/user/subdiv.asp?mainopt=CPLC&StringVal=sac&DType=MAN&cocode=380
25&Dispfld=Selling+and+Administration+Expenses++&noofyrs=10&Id=CPLC&seldet=&selpltype=,
Godrej:http://www.capitaline.com/user/subdiv.asp?mainopt=CPLC&StringVal=sac&DType=MAN&cocode=156
13&Dispfld=Selling+and+Administration+Expenses++&noofyrs=10&Id=CPLC&seldet=&selpltype=,
Sobha:http://www.capitaline.com/user/subdiv.asp?mainopt=CPLC&StringVal=sac&DType=MAN&cocode=274
43&Dispfld=Selling+and+Administration+Expenses++&noofyrs=10&Id=CPLC&seldet=&selpltype=

In terms of the expected returns on the divesting of non-core assets, the below mentioned
table indicates the amount of money DLF stands to gain on considering divesting as a
strategy to deleverage.

TIME LINE
We recommend the following timeline for implementation of the above recommendation.
Recommendation
Partnerships with contractors

Time
Immediate

Rebranding

6 months

Exploring green technology

For new projects

Usage
of
pre-fabricated For new projects
construction materials
Divestment of non-core assets

18 months

Monetize assets

36 months

Raise funds through REITs

Within 6 months of enactment of the Bill

Raise funds through FDI

For new projects satisfying the eligibility

criteria

CONTINGENCIES

Delay in launches due to lack of approvals/adverse macro environment

Any delay in launch due to approvals/adverse macro-environment will result in continued
pressure on operating cash flows.

Inability to monetise non-core assets and deleverage will keep balance sheet stressed
DLF has in the past attempted to deleverage its balance sheet without much success
due to a combination of weak market conditions and high price expectations. While the
management is hopeful of delivering on its deleveraging plans, any delays in doing the
same can strain the cash flows of the company and lead to erosion of NAV and cause
underperformance of the stock.

ANNEXURES:
i.

Table 1: The land bank reserve distribution across the country.

15

ii.

15

16

Peer Comparison of Financial Ratios.

Company

Market Capital
(USD Mn)

DLF
Brigade
Enterprises
Godrej Properties
Jaypee Infratech
Oberoi Realty
Sobha Developers

4,333
104
599
396
994
518

EV/EBITDA
Multiple

14
7
9.4
3.6
5.2
5.3

ROAE
(%)

Debt/Equity
Ratio

Inventory
Days

3.4
4.4

1.0
0.9

1839
684

12.6
22
18.1
18.2

1.2
1.2
0
0.6

1576
1127
1112
71716

DLF - Company Report by Edelweiss Research (October2013)

Source Edelweiss Research Reports for DLF (October 2013), Brigade Enterprises (October 2013), Jaypee Infratech
(November 2013), Oberoi Realty (October 2013), Sobha Developers (November 2013); Annual Report 2012-13 of Godrej
Properties