DLF Group Strategy

8/19/2019 DLF Group Strategy

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

Group 11

Section D

DLF IN THE REAL ESTATE BUSINESS

Competition & Strategy- Term 2 - PGP 2013-15



INTRODUCTIONReal estate is one of the oldest and most critical sectors of the Indian economy, which

contributes to about 5% to the country’s 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.

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.

1 Real Estate Sector Report (September 2013) by Edelweiss Research 2 Refer Table 2: Annexure

3 Refer Table 1: Annexures

84%

16%

Area in msf

Development

Rental



(a) ResidentialThe 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 Indiaincluding 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 SpacesSimilar to the housing properties, most of DLF’s commercial complexes are primar ily 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 ofprojects 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 balancesheet 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.

4 Refer Table 1 : Annexure

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



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 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.

Improve financialsituation

Deleverage BalanceSheet

Monetize Assets

Divest non-Core

AssetsExpand into other

segments togenerate economies

Address ProjectDelays - Inventory ↑

Relook atRegulations

Branding exercise toestablish confidence

Marketing Efforts &Corporate

Governance

RESOURES

LAND

CAPITAL

BRAND

TEHNICALEXPERTISE

HUMANRESOURCE

GOVERMENT REALTIONS



DLF has a land bank of 314 msf, out of which 265 msf is held in development and 49 msf in

Moreover the lands are held in strategic locations, which further strengthenslease business.

DLF’s 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

27,186 Crores, which is much higher than its nearestmarket cap of DLF is around INR

competitors.8 The FY13 balance sheet shows a working capital of INR 2,542 Crores, which

shows the capital strength of the firm.

BRANDBeing 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 thecountry. 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 RELATIONDLF has been in the real estate sector for the last sixty years and has ensured good

relationship with government agencies and regulatory departments.

TECHNICAL EXPERTISEHafeez Contractors,DLF has contracts with many consultation firms in the industry like

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 RESOURCEMuch 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 thathave 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.

7http://www.dlf.in/dlf/wcm/connect/1179aa0049033cebabddaf5274424e45/APQ2FY14.pdf?MOD=AJPERES&

CACHEID=1179aa0049033cebabddaf5274424e45

Refer Annexures: Table 18 http://www.moneycontrol.com/stocks/top-companies-in-india/market-capitalisation-bse/construction-

contracting-real-estate.html



PROCUREMENTDespite soaring inflation in the country, DLF has maintained a high Gross profit margin. One

cost efficiency in material procurement and stabilityof the possible reasons is that, there is

in overall cost.9

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.

CONSTRUCTIONDLF 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 MARKETINGDLF has always enjoyed the benefit of having much lower costs of acquisition of customers

through marketing, due to their brand’s 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 havetheir sales and marketing teams that can work in their specific regions.

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

Year FY 13 FY 12 FY 10

Gross Profit Margin 58.02% 56.42% 56.58%



VRIO ANALYSIS

RESOURCE DATA VRIO Analysis COMMENTS

LAND More than 314msf in development

and rental business

Sustained

Competitive

advantage

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 &

Competitor $994mn

Competitive parity Since capital can be raised through multiple

avenues, it doesn't give competitive advantage.

BRAND Industry Market leader Sustained

Competitive

advantage

Brand value provides competitive edge over

competitors.

HUMAN

RESOURCE

In house training to develop

employees, Well developed

functional departments

Competitive Parity Other competitors also possesses talented

human resource in their organisation. Hence it

is not a rare resource

TECHNICAL

EXPERTISE

Work with consultants of the likes of

Hafeez Contractor and Jones Lang

Lasalle

Competitive Parity Other competitors like Sobha constructors and

Oberoi Realtors also possess technical expertise

GovernmentRelations

No empirical data available Sustainedcompetitive

advantage

DLF has maintained good relationship withgovernment agencies and regulatory

departments.



FINANCIALS10 Sharp decline in DLF’s 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. DLF’s interest costs have

undoubtedly increased as well. The Debt to EBITDA ratio has also gone up from 6.4 in 2011-

12 to 9.4 in 2012-13.A way of looking at this is – the core problem is with DLF’s 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

DLF’s 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 world’s 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

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







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 government’s 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 politicalstorm 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 inventoryholding 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 alternatesources 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 makingreinvestments 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 DLF - Company Report by Edelweiss Research (October2013)

12 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 DLF’s 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 forthe 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 PROJECTIONS14

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-high-

rise-111092500028_1.html14

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=

Builders DLF Godrej Oberoi Sobha

Advertisement % 2.5 0.85 1.6 2.5



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 Time

Partnerships with contractors Immediate

Rebranding 6 months

Exploring green technology For new projects

Usage of pre-fabricated

construction materials

For new projects

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 eligibilitycriteria



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 continuedpressure 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. Peer Comparison of Financial Ratios.

Company Market Capital

(USD Mn)

EV/EBITDA

Multiple

ROAE

(%)

Debt/Equity

Ratio

Inventory

Days

DLF 4,333 14 3.4 1.0 1839

Brigade

Enterprises

104 7 4.4 0.9 684

Godrej Properties 599 9.4 12.6 1.2 1576

Jaypee Infratech 396 3.6 22 1.2 1127

Oberoi Realty 994 5.2 18.1 0 1112Sobha Developers 518 5.3 18.2 0.6 71716

15 DLF - Company Report by Edelweiss Research (October2013)

16 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

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