DLF moves out and up from Delhi base
DLF is no fly-by-night arrivé on the Indian property scene. As Delhi Land & Finance, it has been in the real estate business since 1946. It is now run by Kushal Pal Singh, estimated by Forbes magazine to be the world’s eighth-richest man. The company’s $2 billion initial public offering in July 2007 created India’s biggest real estate operation, and was at the time the largest stock sale ever completed in Mumbai. The company’s foundations are to be found in Gurgaon, a fast-growing, all-encompassing commuter belt/suburb/industrial zone to the southwest of Delhi. DLF owns 62 million square feet of land in Gurgaon, out of a total countrywide land bank of 75 million square feet.
It’s also the country’s flagship property company. A senior official at DLF told Liquid Real Estate that while India’s real estate market was currently “in a state of uncertainty” – because of a general slump in domestic stock prices, rising prices and a gently slowing economy – the company boasted the “brand strength and market depth” to survive the lean times. India is in dire need of vast tracts of quality residential, commercial and industrial structures. The vast majority of the country’s buildings are shoddily constructed – if they are built at all – and DLF is one of the few domestic property firms independently capable of building whole, functioning and much-needed townships.
“DLF can become one of Asia’s biggest real estate firms,” says Aashiesh Agarwaal, research analyst at Mumbai-based Edelweiss Capital. And the company isn’t restricted to its traditional base in Gurgaon: it is expanding its land bank to include property assets in the central city of Hyderabad, as well as Bangalore and Chennai in the south. “DLF was earlier synonymous with Gurgaon, but is acquiring a pan–India footprint with project launches in new cities, which have met with a certain amount of success,” says Agarwaal. Other recent major investments by DLF include a Rs7 billion ($166 million) buyout of old mill land in Mumbai, and a $2.1 billion investment in the southern state of Tamil Nadu.
And yet despite the enormous local need for quality real estate, property firms in the world’s second-most populous nation have had a tough year. Emaar MGF was in February 2008 forced to pull its Mumbai initial stock sale, and several Indian property owners, including DLF, have been forced to shelve planned real estate investment trust listings in Singapore – India still has no functioning onshore Reit market. Uncertainties have spilled over into DLF’s results and stock price. On August 1 it surprised the market by announcing a 23% rise in net income to Rs18.6 billion in the three months to June 30 – a full billion rupees lower than analyst expectations. DLF vice-chairman Rajiv Singh said that rising interest rates would increasingly hurt the property industry. India’s central bank increased benchmark rates to their highest level in seven years on July 29 in order to combat rising prices.
DLF’s stock price, which went on a tear in 2006 and 2007, has also slumped, falling 48% in the year to August 8, although analysts say it looks set to regain some of those gains over the final months of 2008.
Another cloud of uncertainty hangs over DLF – the cost of additional land bank acquisitions. The company wisely chose not to ride on the coat-tails of its existing land bank in Gurgaon, branching out into second- and third-tier cities across India. But new land costs new money, and urban property is far from being the bargain it once was. This will inevitably hurt DLF’s sizeable profit margins, although the next few years still look likely to be good. “Most of the recent projects have been high-margin commercial properties and high-end luxury homes and offices,” says Agarwaal. “However, they are moving into the large mid-income homes segment where the volumes can be significantly higher.” Edelweiss Capital expects the company to generate $1.85 billion in profits in the full financial year 2010, on turnover of $3.7 billion, with accumulated cashflow of $2.3 billion.
Much of that profit will be generated on the back of DLF’s ability – via its strong brand and commercially sound image in the eyes of Indian homeowners and buy-to-let investors – to build quality structures with perceived long-term financial value. DLF launched 2,000 mid-income homes in Gurgaon in February this year, half of which sold out on the first day. “That’s the sort of credibility they enjoy, and it speaks volumes about how strong they are in the [Indian real estate space] today,” says Edelweiss Capital’s Agarwaal. “People believe that DLF homes are a good investment, and that they will deliver a good product. “That gives a huge amount of confidence to a buyer and to an investor.”
