dlf

DLF: Real Estate Leadership

Vikas kujur

DLF: Real Estate Leadership in India

DLF was the leading real estate player in India, and its visionary chairman, Mr. K.P. Singh, had played played a large role in this. this. In April 2008, he was was conferred conferred an Honorary Honorary Degree of Doctorate in Science by the prestigious G.B. Pant University of Agriculture & Technology, in recognition of his 'invaluable contribution in the field of Business Administration.' Describing his vision, Mr. K. P. Singh said in his acceptance speech, 'In my own humble way, it has been my endeavour to pioneer a movement to make Housing and Urban Development the new Sunrise Sector of our economy.' 'I am acutely aware that although my company DLF is today regarded as the largest real estate developer in the world and has a pan-Indian presence with over 50 million square feet under construction, India needs not one DLF, but hundreds of companies like DLF to meet the rising aspirations of the people for better living standards, better homes and better all round infrastructure.' Mr. Singh further said, 'the ground reality is that due to neglect of this crucial sector in the past, our urban infrastructure is today crumbling and our urban centers are unable to cope with the burgeoning population. Everything is in short supply, whether you talk of housing, power supply, roads or sanitation. This has led to the degradation of the human condition in our cities and towns, where fifty per cent of the population are slum dwellers, lacking even basic hygiene facilities and slum children, the citizens of tomorrow, are growing up in an environment where character building has no place.’ On the occasion, Dr. A. P. Sharma, Vice-Chancellor, G.B. Pant University said that Mr. K. P. Singh has made 'historic and lasting contributions to the building of modern India through his pioneering role as a real estate developer and corporate leader with a vision to transform the urban landscape of the country'. Mr.K.P. Singh also set 'new standards standards in the housing and urban development development scenario' scenario' emerging as the 'driving force'

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The Real Estate Sector in India The real estate sector plays an important role in the overall development of the country. Real estate involves the purchase, sale and development of land, residential and non-residential buildings. Real estate sector activities also encompass activities in the housing and construction sector. The size of the Indian real estate sector is estimated to be over US$12 billion. billion. The contribution of the housing sector to India's GDP is a meagre 1% against 3-6% of developing countries. If the economy grows at the rate of 10%, the housing sector has the capacity to grow at 14% and generate 3.2 million new jobs over the next 10 years. In the last 3 years, the construction activity in the real estate sector has been buoyant, after going through a recession between 1995 and 1999. High growth in the economy, growing contribution of the services sector, changing demographic profile (increasing proportion of young and working population, increasing disposable incomes and urbanisation), rising demand from the technology sector and favourable government policies are expected to drive the demand for real estate in India. The housing boom is expected to continue, despite a marginal firming up of the interest rate on housing loans. Key Characteristics Characteristics

The Indian real estate sector has traditionally been dominated by a number of small regional or local players with low levels of expertise. The sector has seen limited inflow of institutional capital and has used high net-worth individual (HNI) and other informal sources of financing as the major source of capital, leading to low levels of transparency. This is rapidly changing as the sector is witnessing far higher growth rates and significantly improved quality expectations as India gets better integrated integrated with the global economy. Some of the key charact characteristics eristics of the Indian real estate sector are: a) Highly fragmented fragmented market dominated by regional players - Rapid growth in the last decade has seen see n the em emer ergen gence ce of la large rgerr pla playe yers rs tha thatt hav havee dif diffe feren rentia tiated ted th them emsel selve vess th throu rough gh su super perior ior execution and branding. Further, these players are now able to capitalize on their early mover advantage with high market share, but remain confined to local or regional markets. While these

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larger players are now initiating efforts to develop a broader geographic presence, their home markets continue to generate majority of their profitability. b) Local know-how critical success factor in the development phase - One of the key reasons for emergence of local developers is the critical importance of local knowledge and relationships in ensuring successful and timely development of real estate projects. Property is a state subject in India Ind ia an and d the rul rules es and re regul gulat ation ionss tha thatt af affec fect, t, am among ong ot other her thi thing ngs, s, app appro roval val pro proces cesse sess and transaction costs vary from state to state. c) High transaction costs -The sector has traditionally been burdened with high transaction costs as a result of stamp duty on transfers of title to property that varies state by state. Though efforts are being bei ng made at the state level level to reduce the stamp duties, duties, they continue continue to be as high as 11 % in certain states. d) Enhanced role of mortgage financing -Over the last five years, a significant portion of new acquisitions, particularly in the larger cities in India, has been financed through banks and financial institutions. This has been aided by a sharp decline in interest rates and broad availability of financing products, due to aggressive marketing and product development by financial institutions. Reforms in the Real Estate Sector

In recent years various reforms have been initiated at the Central as well as State level which is leading to greater organisation and transparency in the sector. These include: i) Support from the GOI for the repeal of the Urban Land Ceiling Act (introduced in 1976), with nine state governments having already repealed the Act. The law was repealed by the Central Government in 1999. However, land being a state subject, the law is still in force in some states like Andhra Pradesh, Assam, Bihar, Maharashtra and West Bengal; ii) Modifications in the Rent Control Act to provide greater protection to homeowners wishing to rent out their properties; iii) Rationalisation of property taxes in a number of states; iv) The proposed computerisation of land records; and v) FDI being permitted in the real estate sector, subject to certain conditions.

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The trend towards greater organisation and transparency has contributed to the development and organised investment in the real estate sector by domestic and international financial institutions and has also resulted in greater availability of financing for real estate developers. Regulatory changes permitting foreign investment are expected to increase investment further in the Indian real estate sector. These trends have been reinforc reinforced ed by the substantial recent growth in the Indian economy, which has stimulated demand for land and developed real estate. Additionally, the tax and other benefits applicable to SEZs are expected to result in a new source of demand.

Overview of DLF as a company DLF is a real estate developer in India and their primary business is the development of residential, commercial and retail properties. Their operations span all aspects of real real estat estate e deve developm lopment ent,, from from the identi identific ficati ation on and acquis acquisitio ition n of land, land, to the planning, execution and marketing of their projects, through to the maintenance and management of their completed develop. They also intend to diversify into other real esta estate te rela relate ted d busi busine ness sses es such such as the the deve develo lopm pmen entt of SEZs SEZs,, infr infras astr truc uctu ture re cons constr truc ucti tion on thro throug ugh h thei theirr join jointt vent ventur ure e with with Lain Laing g O’Ro O’Rour urke ke plc, plc, and and the the developme development nt of hotels and apartments apartments.. They are in the process process of adopting a new business model in respect of their commercial and retail properties. They intend to develop and sell, whereas previously they developed and leased, such properties. Consequently, the nature of their future revenues and revenue growth are expected to be substantially different from their historical results. The following map illustrates the locations of developments, projects and lands across India, as of April 30, 2007. Strengths

Their primary competitive strengths are : An established brand name and reputation for project execution

They have a 60 year history of service excellence. They have been responsible for the develo developme pment nt of 21 urban urban coloni colonies es aggreg aggregati ating ng 5,816 5,816 acres acres as well well as an entire entire integr integrate ated d 3,000 3,000 acre acre townsh township ip - DL DLF F City. City. Their Their positi position on as a leadin leading g proper property ty developer is largely due to their established execution capabilities. Their reputation for provid providing ing prompt prompt paymen paymentt to landow landowner ners s upon upon the acquis acquisitio ition n of their their land, land, developing and completing projects in a timely manner and conducting their business with with transp transpare arency ncy has create created d a relati relations onship hip of trust trust with with their their custom customers ers and suppliers, many of whom have been involved with them across generations.

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Extensive land reserves

As of April 30, 2006, their land reserves under development aggregated 1,372 acres repr repres esen enti ting ng appr approx oxim imat atel ely y 102 102 milli million on squa square re feet feet of deve develo lope ped d area area or area area availab available le for develo developme pment. nt. In respec respectt of proper propertie ties s repres represent enting ing an aggreg aggregate ate of approx approxima imatel tely y 228 millio million n square square feet feet in 64 locati locations ons across across India, India, Cushma Cushman n & Wakefield has opined that the land value of these properties is between Rs. 772 billion and Rs. 853 billion and Jones Lang LaSalle has opined that the land value of these properties, as achievable by DLF, is approximately Rs. 853 billion. Scale of operations

Their size allows them to benefit from economies of scale. They are able to purchase large plots of land from multiple sellers, sellers, thus enabling us to aggregate aggregate land at lower pric prices es.. They They enjo enjoy y grea greate terr cred credib ibil ilit ity y with with sell seller ers s of land land as well well as buye buyers rs of properties as a result of their reputation and their scale of operations. The large scale of our developments within a business line creates demand for our other business lines. Strategic locations

Their projects are strategically located. Their luxury residential developments benefit from from desi desira rabl ble e locat location ions s that that appe appeal al to high higher er inco income me cust custom omer ers, s, wh while ile thei theirr town townsh ship ips s are are deve develo lope ped d with with easy easy acce access ss to city city cent centre res. s. Thei Theirr comm commer erci cial al developments are located in areas that are attractive to our multinational clients, particularly in the IT and ITES sectors. A tradition of innovation

They were one of the first developers to anticipate the need for townships on the outskirts of fast growing cities and are generally credited with the growth of Gurgaon. We were one of the early developers to focus on theme-based projects such as The Magnolias development in DLF City, which includes a golf course. They are one of the few developers in India to provide commercial space with floor plates of over 100,000 square feet and were an early developer of large shopping malls with integrated entertainment facilities. Experienced and dedicated management

They have an experienced, highly qualified and dedicated management team, many of whom have over 20 years of experience in their respective fields. Because of their 6


established brand name and reputation for project execution, they have been able to recruit recruit high high calibre calibre manage managemen mentt and emplo employee yees. s. They They provid provide e their their staff staff with with competitive compensation packages and a corporate environment that encourages responsibility, autonomy and innovation.

Business level strategy DLF continues to lead and set benchmarks in the fast-growing real estate industry. Its transformed unique business model would facilitate its aspiration of capitalising on the ‘India ‘India Growth Growth Story’ Story’.. It is organi organisin sing g itself itself into into a high-g high-grow rowth th develo developme pment nt company. It seeks to minimise risks by having multiple business across geographies, which will complement each other in case of mixed land use Since 2006, DLF has successfully transformed and established its business model as a unique proposition. At one hand it is adopting a development company, while on othe otherr hand hand it is reta retain inin ing g few reta retail il and and comm commer erci cial al proj projec ects ts in its its book books s for for contin continuou uous s cash cash flows flows in forms forms of rental rental earnin earnings. gs. The company company is focusi focusing ng on minimising business and financial risk through diversification & a range of de-risking initiatives.

The transformed unique business model

1. Previ Previous ous model model focuse focused d on ‘sale ‘sale of asset assets’, s’, wherei wherein n curre current nt mode modell envis envisage agess to enjoy enjoy developm development ent and rental rental earnings earnings.. DLF is adopting adopting ‘develop ‘developmen mental tal company company’’ business business model and retaining few commercial & retail assets for leasing income. 2. It is taking taking exposur exposuree acros acrosss busin business ess,, segme segments nts and geogra geographi phies es to miti mitiga gate te any any downdowncycles in the market. 3. DLF inten intends ds to sell most of its commer commercial cial propert properties ies and offices offices to improv improvee cash flows flows and sustain large scale land acquisition acquisition in the initial years. Most commercial commercial properties (IT Parks, SEZs) have tax benefits; hence there is no tax impact. It also intends to sell few properties (commercial/residential) through sale of shares.

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4. A separate separate asset company company,, i.e.DLF i.e.DLF Asset Asset Ltd.(DAL) Ltd.(DAL),, to buy assets assets from the ‘developm ‘development ent company’ on an ar,’s length, transparent basis through ‘open bid’ process with conditions like ,1) if the market price of the asset be less than the 10% cap, dlf can execise a put option on DAL, causing it to compulsorily buy the asset, and 2) DLF shall have an option to sell assets, to the external ‘third party’ customer as well. 5. Mitigat Mitigating ing financia financiall & business business risk risk by a range range of initiative initiatives, s, (refers (refers A Risk Mitigatin Mitigating g High Growth Approach below)

A Risk Mitigating High Growth Approach

1. Mitiga Mitigating ting risk by continuin continuing g its diversif diversificat ication ion plan, i.e, i.e, multiple multiple business business across across geographies; 2. Mitiga Mitigating ting fundin funding g risk in its its existing existing and future future busin businesse esses; s; 3. Mini Minimi misi sing ng risk risk in existi existing ng busin business ess through through optima optimall produc productt segme segment ntati ation on & continuous cash flows in terms of development and rental income; 4. Comp Comple leme ment nting ing exis existi ting ng &

future future busin business esses es in case case of mixed mixed land land use and

mitigating execution risk by having tie-ups with best in class global organisations; 5. De riskin risking g busines businesses ses throu through gh the virt virtuou uouss cycle, cycle, asset asset monet monetisa isati tion on & value value unlocking and sub vertical level fund launches; 6. Mo More re de risking risking by monet monetis ising ing retail retail and leisu leisure re busine businesse sses( s( raising raising funds by launching retail and convention centre REITs);and 7. Intends Intends to have have a larger footpr footprint int in vertical vertical or projec projectt level fund fund managemen managementt to be managed through its own AMC.

Three Phased Strategy In line with emerging opportunities, DLF has set an ambitious target of becoming a major player not only in the real estate industry in India, but also when benchmarked against global peers. Accordingly, it was aggressively pursuing land acquisition to build land

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reserves in the last 1-2 years for fulfilling its growth agenda a until 2020 & beyond. The company has kicked off four key strategic initiatives; a) Separation Separation of development development and asset ownership ownership by creating creating two entities; entities; b) Completing Completing the the acquisition acquisition of necessary land bank bank at at a rapid pace; and c) Establishing Establishing of a civil constructi construction on JV with with LOR LOR to ensure ensure scaling scaling up; d) Diversify Diversify into other other businesses businesses & successfully successfully complement complement them with with existing existing business. business.

Horizon 1

Focus on building core business and land bank acquisition. 2006-08 •

Achieve market leadership in core business using standard formats. Eg; 

Group housing for homes in NCR and metros

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Prime downturns shopping and neighbourhood malls for retail

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Office spaces for IT and non IT

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Complete land bank acquisition for Horizons 2 and 3,

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Finalise Finalise partners and develop pilot properties properties for emerging business, business, eg; SEZ, hotels

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Build leadership position in top 4-5 cities,

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Create presence in top 10-15 cities.

Horizon 2

Aggressive rollout of existing business and new business 2008-12 •

Expand product line within core business, e.g 

Destination malls for shopping

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

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Develop townships in tier 2 cities

Grow hotels and SEZs 

Aggressively roll out hotels

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Increase presence in SEZs across country

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Consolidate position in top 10-15 cities

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Create presence in next 30-40 cities.

Horizon 3

Create huge upside beyond current business plan 2012-16 •

Aggressively expand geographic spread in all the business

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Explore additional growth platforms

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Incremental growth

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More cities becoming tier 1

Complete presence in next 30-40 cities

In line with initiatives and stratergies formed by DLF, it is pretty much on the path of following its three –phase strategy. Its current land reserves are sufficient to last for its horizon 2 and 3. Its land reserves are widely spread across geographies and is optimally segmented across different verticals, i.e, residential, commercial, retail, plots. As seen from land concentration table , which is in line with DLF Horizon 1, top 10 cities account for almost 94% of land reserves. It is now present in all regions regions of India and has been able to create create a successf successful ul diversified diversified portfolio with in its exist existing ing busine business ss . i.e, i.e, optima optimally lly divide divided d land land reserv reserves es betwe between en reside residenti ntial, al, commercial(including IT/IT SEZ) SEZ) and retail. The company company has also been been able to draw an effective line in between its sale and lease projects.

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It has finalised partners for its ambitious hotel ventures and is on its way to roll out 4,000 hotel rooms by end -2010. It has acquired 51 hotel sites having a potential development of ~ 9,000 rooms.It has received in-principle approvals for six of its SEZ & has initiated the process for acquiring land. Land acquisition for its Manesar SEZ & South Maharashtra SEZ has already begun.Despite having the largest development plan in the country across segments and geographies,we expect DLF to continuously bid for large projects( contiguous plots or large infrastructure projects), which will furt furthe herr help help DL DLF F in miti mitiga gati ting ng the the risk risk of any any down down-c -cyc ycle les s in the the mark market et by complementing its acquired projects with other verticals through mixed land use.

A Peep Peep into into the the oper operat atio iona nall stra strate tegy gy:: Proj Projec ectt Ex Exec ecut ution ion Methodology They have established a systematic process for land identification and acquisition, project execution and the sales and marketing of their completed developments.

Land identification and acquisition

Their land acquisition team monitors real estate markets and emerging trends. The team assesses selected markets to identify cities and localities with development pote potent ntia ial. l. The The init initia iall asse assess ssme ment nt and and sele select ctio ion n of the the land land invo involv lves es a deta detail iled ed assessment of the plot with a focus on the land’s development potential and location. After they conduct a preliminary land title evaluation and the land title is reviewed by local lawyers, a preliminary agreement is entered into with the landowners for the purchase purchase of the land. Following title clearance, clearance, they either either acquire acquire the land or enter enter into a joint joi nt development agreement with the owners. Execution

The project execution process commences with the obtaining of requisite regulatory approv approvals als,, includ including ing environ environme menta ntall approv approvals als,, and the develo developme pment nt of a projec projectt concept based on the area’s marketability, target customers and potential return. After a detailed review of the site parameters, they formalise an architectural brief based of the project concept which is subsequently finalised with selected architects and other other extern external al consul consultan tants. ts. They They close closely ly monito monitorr the develo developme pment nt proces process, s, construction quality, actual and estimated project costs and construction schedules. Sales and marketing

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They operate three separate separate sales and marketing marketing departments, one one for each of their their residential, commercial and retail business business lines. Their Their sales and marketing marketing function is illustrated illustrated in the chart (source: DLF IPO Red Herring prospectus)

Segmental snapshot Residential business •

Aggressive launch of mid income housing projects in second half of Q3FY08 with primary focus on Chennai, Indore, and Kolkata.

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The New Town Heights in Rajarhat witnessed aggressive absorption; it was sold out with in four days of its i ts launch.

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Selling prices of the luxury housing category increased.

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New tools like one house per family and one year lock in period were used to cut down speculative demand.

Commercial segment •

Aggressive growth in area under construction; it increased by 16% and 35% over Q2FY08 and Q1FY08, respectively.

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On track to achieve lease volume target of 12 mn sq ft per annum.

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•

Average lease rates have dropped over the past quarter by more than 30%, primarily due to change in location.

Hotel segment •

Management has identified 51 hotel sites compared to 39 in the previous quarter.

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The first Hilton Garden Inn is set to open in Saket (New Delhi) by end 2008. 4,000 hotel rooms expected to be operational by FY10 end with a long term target of 25,000 hotel rooms in the next six-seven years.

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International Convention Centre at Dwarka, New Delhi, is in advanced stage of design and development.

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Acquisition of “Aman” gives a significant thrust to the hotels business unit, with a strong international footprint.

SEZ business •

Five SEZs got notified, aggregating to 27 mn sq ft.

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Six SEZs have been sent for final approval.

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Land acquisition for both Manesar and Ambala SEZs is in progress.

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For Goa, land acquisition process has just j ust begun.

New land acquisition •

DLF added 26 mn sq ft during the quarter, adding 748 mn sq ft compared to 738 mn sq ft in the previous quarter. The new acquisitions were as follows: •

Hyderabad Raidurg: Acquired two parcels of 26 and 30 acres of land.

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Adjoin Adjoining ing site site of Chenna Chennaii IT Park: Park: Acquir Acquired ed 1.73 1.73 acres acres site site adjoin adjoining ing Chennai IT Park.

32 miles mileston tone: e: Execut Executed ed collab collabora oratio tion n agreem agreement ent for 10.45 10.45 acres acres for new site site at Village Silokhera Gurgaon

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They have a loyal customer base and encourage the participation of former buyers or tenants in their new product launches. They employ various marketing approaches depending depending on whether whether the project project is residentia residential, l, commercia commerciall or retail. retail. These include laun launch ch even events ts,, corp corpor orat ate e pres presen enta tati tion ons, s, web web mark market etin ing, g, dire direct ct and and indi indire rect ct marketing, as well as newspaper and outdoor advertising. Their marketing team sells both both direct directly ly to custom customers ers and throug through h broker brokers. s. In their their commer commercia ciall and retail retail busine business ss lines, lines, they they market market space space primari primarily ly throug through h proper property ty consul consultan tants ts and by using their relationships with existing tenants. Different marketing approaches are used to target anchor commercial and retail tenants. They use approximately 120 brokerage firms to market their properties.

Mergers & Acquisitions (Joint Ventures & Partnership) In November 2006, DLF has entered into a joint venture with the UK-based design and engineering consultancy firm WSP to ensure quality work in India. The joint venture provid provided ed the design design,, engine engineeri ering ng and projec projectt manage manageme ment nt servic services es along along with with infrastructure and environmental facilities. Mr. Rajiv Singh, Vice-Chairman, DLF Ltd, said, "We are sure that while WSP will bring in its its own own stre streng ngth ths, s, we at DL DLF F will will set set new new benc benchm hmar arks ks in the the desi design gn and and construction industry." In February 2006, DLF has entered into a joint venture with UK's leading construction company, Laing O'Rourke Plc to form DLF Laing O’Rourke with an initial investment of about Rs 500 crore. Both partners had contributed Rs. 250 crore each to the initial corpus of the joint venture and it had also floated a dedicated fund with a corpus of $1.5 billion for infrastructure projects. The joint j oint venture company completed the most prestigious projects of DLF like- IT Parks, The Mall of India, The Magnolias and many of DL DLF' F's s reta retail il dest destin inat atio ions ns.. The The joint joint vent ventur ure e comp compan any y will will help help DL DLF F grou group p in executing its infrastructure projects like harbors, tunnels, power plants, pipelines, bridges and roads, "The joint venture will help DLF become a major player in the country's construction and infrastructure development programmes. It will tap potential across infrastructure sector covering express highways, airports and hi-tech construction involving power plants and mega projects," the DLF Universal Vice-Chairman, Mr. Rajiv Singh, said at a conference”

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DLF signed a memorandum of cooperation with Frankfurt Airport Services Worldwide in April 2007 to explore airport projects and modernization. It launched a special purpose vehicle, DLF Fraport SPV, specializing in development and management of airports in India.

On March 2007, DLF2 signed a 50:50 joint venture with Nakheel, a large property deve develo lope perr from from the the UA UAE E for for two two inte integr grat ated ed town townsh ship ips s in Indi India a with with an init initia iall investment of $10 billion..The joint venture company will develop 40,000 acres at Gurgaon and between Mumbai and Pune in Maharashtra. Construction of these two proj projec ects ts is expe expect cted ed to star startt the the same same year year only only and and the the firs firstt phas phase e of the the construction/development is targeted to complete in next three years. The cost of the land is only 40% of the $10 billion investment. Approximately 70% of the land has been acquired by DLF.

In November 2006, DLF signed a joint venture with Hilton Hotels Corporation. The plan plan of the joint venture venture company company is to devel develop op and own 75 hotels hotels and servi service ce apartments throughout India over the next seven years and Hilton will invest up to $143 million in the joint venture. 74% stake was held by DLF in the joint venture and the rest will be held by the Hilton Hotel Corporation as a symbol of its commitment to the joint venture. The first stage of the joint venture was to involve 20 hotels in key loca locati tion ons s like like Kolk Kolkat ata, a, Chenn hennai ai,, Hyde Hydera raba bad, d, Bh Bhub uban anes eswa war, r, Koch Kochi, i, Delh Delhii and and Chandigarh.

DLF made a partnership with IBM for a 10 year contract to transform and manage DLF' DL F's s IT Infr Infras astr truc uctu ture re.. DLF trie tried d to leve levera rage ge IBM' IBM's s Info Inform rmat atio ion n Tech Techno nolo logy gy infras infrastruc tructur ture e manage managemen mentt soluti solution on to get high high quality quality inform informati ation on that that will will be efficiently managed in a cost-effective manner. Rajeev Singh, Vice Chairman DLF thinks “As part of the partnership IBM and DLF will also set up a Technology Innovation Council (TIC) with joint participation. The TIC will focus on identifying and deploying new solutions for DLF and Indian Real estate indu indust stry ry.. Some Some of the the solu soluti tion ons s unde underr cons consid ider erat atio ion n are are adva advanc nced ed secu securi rity ty

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management solutions like Digital Video Surveillance, utilizing technology for land acquisition process and other management systems. Some of the other focus areas would include IT solutions for building management and intelligent buildings.”

DLF signed a joint venture with U.S. based Prudential Financial Inc. This agreement allowed Prudential Financial Inc to expand its international investments business and make a relevant relevant mark of its official official entry into the Indian mutual fund market. market. Under Under the terms of the joint venture, DLF will own the 39 percent and Prudential Financial Inc. will hold the majority stake in the joint venture with 61 percent interest. The asset management joint venture is based in Mumbai and provides a wide range of mutual fund and investment related products, including domestic and international mutual funds to Indian retail and institutional i nstitutional clients

Competition Even though many players are present in the real estate space in India, the top 5 of them are as under: •

DLF Ltd.

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HDIL

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Sobha Developers Ltd.

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Omaxe Ltd.

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Parsavnath Developers

We analyse each of these competitors and there relative positions in the real estate space in India. HDIL

Housing g Develo Developme pment nt and Infras Infrastru tructu cture re Limite Limited, d, is a liste listed d real real estate estate HDIL HDIL - Housin development company with significant operations in the Mumbai Metropolitan Region. HDIL's HDIL's busine business ss focuse focuses s on Real Real Estate Estate Deve Develop lopmen ment, t, includ including ing constr construct uction ion and develo developme pment nt of reside residenti ntial al projec projects ts and, and, more more recent recently, ly, commer commercia ciall and retail retail projec projects, ts, Slum Slum Rehabi Rehabilit litati ation on and Develo Developme pment, nt, includ including ing cleari clearing ng slum slum land land and reho rehous usin ing g slum slum dw dwel elle lers rs,, and and Land Land Deve Develo lopm pmen ent, t, incl includ udin ing g deve develop lopme ment nt of infrastructure on land which the company then sells to other property developers.

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HDIL HDIL has an integr integrate ated d in-hou in-house se develo developme pment nt team team which which covers covers all aspect aspects s of property development from project identification and inception through construction to completion and sale. Since incorporation in 1996, HDIL has developed 23 projects covering approximately 19.29

million

square

feet

of

saleable

area,

including

approximately

12,730,000 12,730,000 square square feet feet (1,183,000 (1,183,000 m2) of land land sold sold to othe otherr buil builde ders rs afte afterr Land Land Dev Develop elopme ment nt,, prim primar aril ily y in the the Mu Mumb mbai ai Metr Metrop opol olit itan an Regi Region on.. HDIL HDIL also also have have constr construct ucted ed an additi additiona onall 1,900, 1,900,000 000 square square feet feet (177,0 (177,000 00 m2) of reha rehabi bilit litat ation ion housing area under slum rehabilitation schemes. HDIL's residential projects generally comprise groups of apartments, towers or larger multimulti-purp purpose ose “towns “township” hip” projec projects ts in wh which ich individ individual ual housin housing g units units are sold sold to customers. The commercial projects are a mix of office space and multiplex cinemas. The retail projects focus on shopping malls. They usually follow a “build and sell” model for the properties they develop. HDIL was the most profitable company out of the 5, with Operating profit margins as high as 51.4% for a 3 year average, and Net Profit Margins as high as 43.75% for the 3 year average (refer Appendix >>>>___ for detailed comparison). Furhter, its 3 year CAGR was a whopping 251%, which was also the best in the industry. Among the 5 play player ers, s, It cont contro roll lled ed 36, 36, 50 and and 62% 62% of the the mark market et In term terms s of reve revenu nue e in proportionate distribution terms. (refer appendix for details) Sobha Developers Ltd

Sobha developers was founded by Mr. P N C Menon in the year 1995. He did this with the clear vision to "transform the way people perceive quality" in the real estate industry returned home from the Middle east where he was acclaimed for quality interiors and construction since 1977. Sobha developers is now a Rs. 12 billion plus company, and is one of the largest and only backward integrated company in the construction arena. Since its inception Sobha's reputation is built on rock solid values, benchmark quality standa standards rds,, uncom uncompro promis mising ing busine business ss ethos, ethos, focuse focused d custom customer er centri centric c approa approach, ch, robust robust engine engineeri ering, ng, in-hou in-house se Resear Research ch and develo developme pment nt and transp transpare arency ncy in all spheres of conducting business. They also had a successful IPO in 2006 when the issue was oversubscribed by 127 times. The company had completed 18.8 million square feet of area as of September 2007, 42 completed residential/ commercial in house projects, 36 ongoing projects and 104 contractual projects beginning with the 17


first residential project in Bangalore in 1997. The locations it was present in were Bangalore, Karnataka, Kerala, Andhra Pradesh, Orissa, Tamil Nadu, Punjab, Harayana and Maharashtra. Its OPM and NPM for a 3 year average were 22.86% and 14.60% respectively. Its 3 year CAGR was also lower than competition at 60.62%. Omaxe Ltd

The The comp compan any y was was orig origina inally lly set set up as Omax Omaxe e Bu Buil ilde ders rs Priv Privat ate e limit limited ed in 1989 1989,, promoted by Mr. Rohtas Goel , the founder, to undertake construction & contracting business. The company further changed its constitution to a limited company known as Omaxe Construction Ltd., in 1999. The name of the company has now changed to Omaxe Ltd from 2006. The company began life as a civil construction and contracting comp compan any, y, has has

succ succes essf sful ully ly execu xecute ted d

more more than than 120 120

pres presti tigi giou ous s

Indu Indust stri rial al,,

Inst Instit itut utio iona nal, l, Comm Commer erci cial al,, Resi Reside dent ntial ial and and Hosp Hospit ital al cons constr truc ucti tion on proj projec ects ts.. The The company entered the Real Estate Development business in 2001 and in now amongst the large Real Estate Development companies in India. Mr. Rohtas Goel , a first generation entrepreneur, a civil engineer by qualification and a visionary having more than two decades of experience in Construction and Real Estate Development. Omaxe received a number of awards from the industry, recognition of its continued effor efforts ts toward towards s achiev achieving ing excell excellenc ence e and quality quality.. The compan company y became became the first first Construction Company of northern India to receive an ISO 9001:2000 Certification. The company is at present developing over 156 million sq ft of area across 31 towns in 10 states in Northern , Central India and Southern India. In terms of its financials, it still lacks behind its competitors as its OPM and NPM average over 3 years was 19.33% and 10.72% respectively. Yet, it was a fast growing company with a 3 year CAGR of 206.82% which was second only to HDIL. Parsavnath

Parsvnath had a commitment to `building a better world’, which they tried to fulfil by tran transf sfor ormi ming ng barr barren en trac tracts ts into into land landsc scap aped ed gree green n belt belts s hous housin ing g worl world d clas class s comm commer erci cial al,, resi reside dent ntial ial and and recr recrea eati tion onal al prop proper erti ties es.. They They beli believ eve e in crea creati ting ng archit architect ectura urall marvel marvels s using using statestate-ofof-the the-ar -artt techno technolog logy y and global global archit architect ectura ural, l, constr construct uction ion and busine business ss practi practices ces.. They They provid provided ed cost-e cost-effe ffecti ctive ve and holist holistic ic solutions for our customers while creating and adding value for our partners and stakeholders. They had a pan-India presence in over 51 cities in 18 states, where they built contempora contemporary ry residential residential spaces, spaces, state-of-t state-of-the-ar he-artt office office complexes complexes,, luxurious luxurious 18


shoppin shopping g malls malls and hyperm hypermark arkets ets,, posh posh hotels hotels,, futuris futuristic tic multip multiplex lexes, es, and ultra ultra modern IT Parks and special economic zones. They were a relatively smaller player compared to the rest, and had only 10% of the proportionate distribution based on revenues among the top 5 real estate players. Its profit margins weren’t too encouraging either, with 3 yr NPM and OPM averages being 18.21% and 22.45%. Their growth rate (CAGR, 3 yr average) was a healthy 140%.

HR Strategy of DLF The housing sector alone is likely to generate 40 lakh new jobs within ten years. The prime reason for such a huge demand of personnel has been due to great demands for residential and commercial real estate projects. Moreover, the sector offers attractive opportunities to people with roles such as developers, architects, strategy and urban planners, civil engineers, and contractors. It also offers a plethora of opportunities which are not confined to profiles of contractors and builders only, but extend up to professionals including people with marketing, law, finance, and advertising backgrounds. Many property management companies also work tightly with the sector, thereby, resulting into indirect generation of employment. Coming to the trends of talent acquisition, most real estate firms are becoming proactive in terms of hiring and are adopting latest talent acquisition and recruitment trends like on-campus recruitments, e- recruitments using recruitment portals, executive search and so on. To meet the demands for highly skilled professional, companies like DLF are looking out for campus recruits from top business schools like IIMs. The job options range from real estate appraisal to property managers, advisors, investment bankers, entrepreneur, retail buyers and merchandisers, visual merchandisers, supply chain distributors and logistics and warehouse managers. Challenges for HR: •

Lack of quality talent:

There is a gap between the requirements and the availability of quality manpower. The sector is growing quickly and the amount of human r esources available is not at par with the rate at which the sector is growing. A large amount of talent is absorbed in mega infrastructure projects. However, the continued growth of the industry is adding to the dearth in the existing talent pool within the country.

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•

Less Supply of freshers from educational institutions:

Since real estate sector is a burgeoning one, not every one was earlier attracted to it. Students were lured by other sectors like IT who offered better salary packages than real estate. As a result, people with high potential opted for computer science degrees rather than civil engineering courses. Its only recently that some of the universities have started offering diverse courses in real estate. Moreover, candidates are now recognizing the opportunities real estate sector provides. •

Retention:

It is becoming increasingly difficult for the companies to retain talent with them. The attrition levels in the sector have touched 12.08 per cent in last year. To retain the potential, companies are paying hefty amounts to their employees. The salary hike was recorded at 25.2 per cent in 2007 and is expected to be followed in coming years. •

Inculcating values:

Times have been changing for the real estate sector and earning profits has become top priority for every company. With respect to this, the companies often forget to comply with quality norms or ensure integrity in practices. It becomes a challenge for the HR to inculcate values of integrity and commitment towards customer satisfaction in all the employees. A majority of companies now also emphasize on transparent dealings and methods while doing business. This will be an on-going challenge since the sector has enough weak links outside their companies, which also need to be changed. •

Lack of second line leadership:

By MNCs entering the realty markets take away the cream of talent at the first level. Other players thus look for candidates with high leadership skills. The challenge for HR, here, becomes to develop the second line of management and if possible even the third line, which is capable of undertaking enormous work pressure from the top line. The changing face of realty sector is posing great challenges for the companies in terms of talent shortage and high attrition. To deal with such challenges becomes the sole responsibility of the HR departments of the companies so as to keep pace with the growth of the sector.

CSR Initiatives "For DLF, Corporate Corporate Social Responsibility Responsibility is not just an add on; rather rather our business business and social commitment are mutually reinforcing and neither will be sustainable without the

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other. We have a continuing social responsibility towards the people of the area in which we operate more so towards the less fortunate. It has been our constant endeavor to create create sustainable sustainable economies economies and transform transform stagnant stagnant lives into active active partnership partnerships s through synergized proactive handholding in areas of infrastructure, education, training, health and environment. We have made a public commitment to carry on these trusted relationships." – CEO Mr. K.P.Singh. Rural Interventions: Towards better living conditions •

•

DLF decided decided to solve solve the local problems problems of Gurgaon Gurgaon when DLF was setting up the DLF township in Gurgaon. Solved the sewer problem in Nathupur and Chakarpur villages by connecting them to the DLF’s own sewer line system.

•

Constructed the internal roads at Wazirabad and Chakarpur.

•

Provided electricity in Chakarpur and Nathupur.

•

Constructed the class rooms at the Chakarpur school and electricity work at the Nathupur Higher Senior Secondary School.

21


Appendix: Set of Exhibits

Exhibit 1: Organisational Chart

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Exhibit 2: Map showing locations of developments, projects and lands across India, As of April 30, 2007.

23


Exhibit 3: Financial Analysis – P&L account The growth rate of expenses and income is drastic at around 200% for the last few years. Though, this growth is expected to remain high for a couple more years as the company is still to cash in on the number of projects going on. Important thing to note here is that the company is utilising the economies of scale and will keep on doing so in the future as the size will increase many fold. Thi s not only improves the margins for the company but also gives a huge boost to the bottom line.

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Exhibit 4: Financial Analysis – Balance Sheet The size of the firm is growing in i n sync with the expectations; especially after the IPO in 2006-07. Also, we see that future growth is secured as the reserves increase drastically due to the strong cash inflow. This will help the company in acquiring fresh plots of land at premium locations as the cost of land increases. Other than that we can see that it is a strong balance sheet with strong projections too.

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Exhibit 5: Financial Analysis – Cash Flows Cash Flows: The company has a strong cash flow as the projects mature and deliver the outputs. Other than that, we can see that the company easily meets its capex requirements and thus is not dependent upon external sources for growth.

26


Exhibit 6: Financial Analysis – Key Ratios Profitability & Operating: Since the company is in growth stage, right now the ROE, ROCE, and margin ratios are very healthy. As the business and the industry matures, these ratios are expected to come down to a certain stable and realistic level. Liquidity: Due to strong cash flows, liquidity is not at all an issue in this case. Leverage: This might be a cause for concern today but as the projects cash in, the debt will be repaid by the company. This will decrease the financial risk for the company; which might be considered a bit high today. But considering the development sector in real estate, the debt-equity is usually high due to unknown and large financial requirements.

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Exhibit 7: Growth Story for DLF

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Exhibit 8: Competitor Analysis Comparative Ratio Analysis Company Name DLF Ltd. HDIL Sobha Developers Ltd Omaxe Ltd. Parsvnath Developers

OPM(%) 59.76% 71.01% 24.86% 29.17% 22.45%

Average 3-Years 36.06% 51.40% 22.86% 19.33% 21.59%

NPM 36.83% 59.26% 16.04% 13.26% 16.50%

Average 3-Years 25.70% 43.75% 14.60% 10.72% 18.21%

Financial Comparison Company Name

DLF Ltd. HDIL Sobha Developers Ltd Omaxe Ltd. Parsvnath Developers

Revenues (Rs Cr.) 1,101.66 2,379.87 1,422.51 940.87 643.83

3- Year CAGR(%) 63.47 137.43 50.83 54.30 139.60

PBDIT (Rs Cr.) 986.11 1,758.22 365.36 281.12 154.50

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3-Year CAGR (%) 171.32 251.89 61.21 208.54 167.64

PAT (Rs Cr.) 405.77 1,410.51 228.30 124.83 106.25

3-Year CAGR (%)

144.83 251.86 60.62 206.82 140.23

dlf

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