DLF India Ltd. Is India’s premier construction firm and is largest real estate developer in India. DLF stands for Delhi Land and Finance. Group was founded in 1946 by Raghuvendra Singh. Since then group has grown exponentially and is major contributor to real estate boom in India. The first project DLF undertook was a residential colony, Shivaji Park in Delhi. After that it developed housing colonies of greater Kailash, Hauz Khas and Kailash Colony. Delhi Development Act of 1957 had major impact on company’s business as law prohobited private real estate development in Delhi metropolitan Area.
Since 1957 DLF acquired lands outside the jurisdiction of Delhi Development Act. Major areas of land acquisition were Gurgaon and some parts in Haryana. Primarily DLF is involved in development residential and commercial properties. Business model of company is unique with income from development and rentals. Aso DLF owns hotels in various parts of India which forms substantial portion of their income. Real estate is normally considered as very risky business as downside is very steep especially during down-cycles in the market.
However DLF mitigates those risks by exposing itself to various categories of construction business like infrastructure, SEZ and hotel business. Development Business Development business is the primary business of DLF. It can be divided into two categories Residential and Commercial. Residential properties are divided into further 3 categories depending upon facilities offered viz. Super Luxury, Luxury and Mid-Income. DLF offers wide options in their residential business like Condominiums, duplexes, row houses and apartments.
Commercial properties are developed by DLF across India. DLF claims to pioneer the concept of home-near-work by building commercial properties next to residential complexes. Currently DLF is developing 302 mega square feet of area across India. Annuity Business DLF rents out offices and retail spaces to various businesses. DLF has achieved excellence in this segment by building industry specific commercial properties mostly for IT and ITES industries. DLF also built malls in North India where space was rented out to vendors.
Retail business is growing exponentially for DLF. Currently DLF is developing 86 mega square feet of area for rental business. Hotels DLF owns and operators chain of resorts called Aman Resorts across the world.. It has entered into alliance with Hilton group which jointly plans to develop and operate hotels in India. Hotels business yet requires comprehensive planning by senior management by DLF to extract entire potential. Company has vision to build and operate hotel space of 11 mega square feet. COMPETITION DLF truly leads real estate development segment.
Competitors are far behind DLF interms of total turnover and reach to various parts of country. Main competitors of DLF include HDIL, Unitech, Sobha Builders, India Bulls. Apart from these new players are entering real estate domain which include Bombay Dyeing, Godrej group etc. As we can see from the graph the stock has fallen from its peak in 2008 at 100% above mean to a negative 60% in 2011. The ROE of the company has also decreased significantly in the last two years. This shows that company’s return to shareholders is very risky and volatile.
BSE-Realty Index has underperformed all the other sectoral indices – over the past week, month, quarter and the year. It has underperformed the benchmark Sensex by 29% over the past three months, and by more than 47% over the past 12 monthDLF being a construction company, we believe the apt Liquidity ratio to be considered is Acid test ratio as inventory of a construction company will not be very liquid in nature. We can see that from the year 2002 to 2006 the acid test ratio has been increasing (though not in a steady fashion) but post recession 2008-2010, the value has been significantly decreasing (0.
512 to 0. 229). Hence we can say that the liquidity position of the company as of 2010 is comparatively worse than its peak times in 200By analyzing the solvency ratios we can see that all the ratios (debt to capital, debt to equity, debt to asset etc) are in a upward trend from 2002 to 2007. In 2008, the company drastically increased its assets by increasing the total shareholder equity involved. From 2008 to 2010 these ratios again increased as the company increased their long term debt component. The interest coverage ratio has dropped for the company from 8 to 2.
2 during the period 2008 to 2010 which can be attributed to the increase in interest payments from the long term debts raised by the company during this period. The company may want to build on this interest coverage ratio by increasing their operating efficiency and hence increasing the operating profit (earnings before interest and tax) The tables above show financial leverage ratio of the industry and DLF. From the values we can infer that in 2010 DLFs leverage ratio is higher than industry standards.
But historically speaking apart from 2006 and 2007, DLF has always maintained a financial leverage ratio less than the industry. Hence we believe that DLF will bring down its leverage ratio in the near future and the current increase in financial leverage value is due to the long term debt that they have incurred recently. Hence we conclude that the company does not have excessive leverage but the financial risk aspect is dependent on reviving their interest coverage ratio which is currently on a downfall.
