TOPIC:FUNDAMENTAL ANALYSIS OF DLF LTD.

NAME:MUZAMIL QAYOOM BASU.

SECTION:RS 1903.
ROLL NO:B-47
REG NO:10906968.
SUBJECT:SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT.
COURSE CODE:MGT 521

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ASSIGNMENT ON:
DLF –STRATEGIC ANALYSIS

INDEX PAGE NOS

INTRODUCTION 2

ANALYSIS OF THE EXTERNAL ENVIORNMENT 11

DLF'S STRENGTH AND WEAKNESS 14

DLF'S IPO LAUNCH IN 2007 AND EFFECT OF

GDP,GOVERNMENT POLICIES. 16

DLF'S STRATEGIC DECISION 20

HYBRID MODEL AND SHAREHOLDING PATTERN 23

ANALYSIS OF THE INDIAN ECONOMY WITH RESPECT

TO REAL ESTATE 26

MACRO ANALYSIS OF DLF WITH RESPECT TO REAL

ESTATE SECTOR. 30

PORTERS 5 FORCE MODEL ANALYSIS 31

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INTRODUCTION

The DLF Group, is India's largest real estate company in terms of revenues, earnings, market
capitalization and developable area. It has a 62-year track record of sustained growth, customer
satisfaction, and innovation. The group has over 231 msf of completed development and 423 msf of
planned projects, and has pan India presence across 32 cities.

DLF's primary business is development of residential, commercial and retail properties. The company
has a unique business model with earnings arising from development and rentals. Its exposure across
businesses, segments and geographies, mitigates any down-cycles in the market. DLF has also forayed
into the infrastructure, SEZ and hotel businesses.

The business of DLF is organized on a SBU basis. The Homes SBU caters to 3 segments of the
residential market - Super Luxury, Luxury and Mid-Income. The product offering involves a wide range
of products including condominiums, duplexes, row houses and apartments of varying sizes. DLF has
214 msf of developed area under homes and residential plots. Currently, DLF has more than 319 msf of
land resource targeted towards residential business.

The Office SBU took DLF across the country, predicated on the customer demand for office space at
different geographic locations. Nearly 17 msf of ongoing projects forms a strong portfolio for DLF
offices.

The Retail Mall's and Commercial Complexes SBU is a major thrust area for DLF. Currently, DLF is
actively creating new shopping and entertainment spaces all over the country. The company has 12 msf
of retail projects and commercial complexes under construction.

DLF Hotels has also entered into a JV with Hilton to set up a chain of business hotels and service
apartments across India. DLF holds 74% and Hilton holds 26% equity in the JV.

DLF has a strong management team running independent businesses, though complementing each other
in cases of opportunities of mixed land use. DLF's mission is to build a world-class real estate
development company with the highest standards of professionalism, ethics and customer service and to
thereby contribute to and benefit from the growth of the Indian economy.

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DLF’s SBU

RETAIL OFFICE COMMERCIAL HOTELS HOMES

RESIDENTIAL
SPACE GROUPS

Vision, Mission & Values

DLF Vision
To contribute significantly to building the new India and become the world’s most valuable real estate
company.

DLF Mission
To build world-class real-estate concepts across six business lines with the highest standards of
professionalism, ethics, quality and customer service

DLF Values

• Sustained efforts to enhance customer value and quality

• Ethical and professional service

• Compliance and respect for all community, environmental and legal requirements.

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DLF's Presence
The following map illustrates the locations of our developments, projects and lands across India, as of
November 30, 2006:

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  ANALYSIS OF EXTERNAL ENVIORNMENT

ASSESSMENT OF CHANGES IN THE ENVIORNMENT

 ANALYSIS OF REAL ESTATE SECTOR

Real estate is one of the fastest growing sectors in India. Market analysis pegs returns from realty
in India at an average of 14% annually with a tremendous upsurge in commercial real estate on
account of the Indian BPO boom. Lease rentals have been picking up steadily and there is a
gaping demand for quality infrastructure. A significant demand is also likely to be generated as
the outsourcing boom moves into the manufacturing sector. Further, the housing sector has been
growing at an average of 34% annually, while the hospitality industry witnessed a growth of 10-
15% last year.

Apart from the huge demand, India also scores on the construction front. A Mckinsey report
reveals that the average profit from construction in India is 18%, which is double the profitability
for a construction project undertaken in the US. The importance of the Real Estate sector, as an
engine of the nation’s growth, can be gauged from the fact that it is the second largest employer
next only to agriculture and its size is close to US $ 12 billion and grows at about 30% per
annum. Five per cent of the country’s GDP is contributed by the housing sector. In the next three
or four or five years this contribution to the GDP is expected to rise to 6%.

The Real Estate industry has significant linkages with several other sectors of the economy and
over 250 associated industries. One Rupee invested in this sector results in 78 paise being added
to the GDP of the State. A unit increase in expenditure in this sector has a multiplier effect and
the capacity to generate income as high as five times. 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 a
decade. The relaxed FDI rules implemented by India last year has invited more foreign investors
and real estate sector in India is seemingly the most lucrative ground at present. Private equity
players are considering big investments, banks are giving loans to builders, and financial
institutions are floating real estate funds. Indian property market is immensely promising and
most sought after for a wide variety of reasons.

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FACTORS THAT AFFECTED REAL ESTATE SECTOR DURING RECCESION

Real estate sector is second to only the agriculture sector where employment generation is concerned.
This can be further proved by the fact that the real estate sector contributes a good 5% towards the
country’s gross domestic product (GDP). However, recent financial crisis followed by economic
slowdown have placed huge strain on this sector. While all sectors of the economy were under
tremendous pressure, demand in the real estate industry was the lowest. This was largely as majority of
the homes were taken on loan and an unexpected rise in the interest rate had its obvious impact.
According to KP Singh, Chairman, DLF, "If there is a lack in demand, the projects eventually close
down. There is a lack in demand because most people take mortgage loans. In fact, currently the interest
rate is at 11–12 per cent, which should actually not exceed seven per cent. This also leads to higher
EMIs."

Also, the credit freeze stemming from the collapse of Lehman Brothers prompted investors and
speculators to withdraw investments from this sector. Property developers, who raised funds through
external sources, were left stranded with minimal cash flows and huge debt obligations surfacing in the
near term.

There are several factors that have influenced the real estate sector's performance. Some of these factors
include the unemployment rate, income level, FDI investment, rise in the number of young working
population, and easy availability of home loans. With this industry being one of the primary contributors
to the GDP over the past few years, it is indeed interesting to note the performance of companies in this
sector during the economic slow down.

The sectoral ranking, based on consolidated revenues, revealed that top three companies within the
sector had retained their positions from the previous year. There have been major changes in the list of
market leaders as compared to last year. Out of the 10 companies in the previous year, only four retained
their position among India's top 500 companies. The current challenging economy along with the
sluggish demand had a significant impact on the top-line of most of the realty developers in the country.
Some of the companies that witnessed a substantial dip in revenues include Omaxe, Ajmera Realty,
Parsvnath Developers, Ansal Properties & Infrastructure, JMC Projects and Indiabulls Real Estate.
Collectively, no developer could sustain the revenues base recorded in FY’08.

DLF, Unitech and Housing Development & Infrastructure (HDIL), though witnessed >20% fall in
revenues, maintained their first, second, and third positions respectively in the ET sectoral list. This
means, the negative impact of the financial crisis affected all top real estate companies equally. Sobha
Developers climbed up three positions to number four, despite a 58% decline in revenues. Its steady
climb was primarily due to a sharp fall in revenues of other developers. Overall average revenues for
these developers fell by 28% from the previous year. According to Sanjay Chandra, managing director
of Unitech, “We have changed our strategy from maximisation of realization to that of volumes in order
to improve operational cash flows.”

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A closer look into the financials elucidate that developers faced stiff margin pressure, resulting from the
drop in real estate prices. Real estate prices have been sky rocketing for several years and a sharp
correction has been long overdue. Average net margins of the four developers slipped by a colossal 890
bps to 39.7%. This indicates that the companies faced higher liquidity pressure which consequently led
them to unwind inventories at lower rates. The companies which have huge land bank and are primarily
funded through external sources have been wiped out of the market and are yet recovering from losses
incurred.

Valuations of the companies have bottomed out. The BSE realty index is trading at a Price/Book value
of 2.69x this year as compared to 21.11x in 2007 and 13.36x in 2008. Players like Unitech and DLF
have lost more than 75% of their values. DLF, which debuted the market in July 2007 entered the bear
phase and remained below its issue price. Recently, the markets have seen immense recovery with the
realty index gaining 88% from its previous low in 2008. The relaxed FDI regulation has invited several
players to invest in the real estate market. Various private players are considering investment in the
sector as banks are now readily giving loans due to a rise in the consumer confidence index. By 2010, it
is expected that nearly 150 million square feet of office space across urban India would be utilised by
the IT sector. The retail industry is also likely to utilize an additional 220 million sq ft by next year.

According to the Tenth Five-Year-Plan, there is a shortage of 22.4 million dwelling units. Thus, over the
next 10-15 years, 80 to 90 million residential units will have to be constructed with a majority of them
catering to middle- and lower-income groups. This will create immense opportunities for real estate
companies. “Now that property prices have dropped and the risk of job layoffs has diminished, the
service class is likely to actively participate in property absorption, leading to a strong recovery in
residential demand,” says Suman Memani, associate vice president, Religare Capital Markets.

In conclusion, with early signs of recovery currently reflected by the drop in unemployment rate, easing
liquidity and aggressive government initiatives to pull back the sector, increased activity in the real
estate sector should be expected.

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  DLF’S STRENGTHS, WEAKNESS, OPPORTUNITY AND THREATS.

STRENGTH

• Uniquely positioned in emerging, profitable segments:

• DLF has a sizable presence across several key cities (Delhi NCR, Mumbai, Bangalore, Chennai,
Kolkata, Chandigarh, Goa etc) and clear market leadership position in commercial, retail, and
lifestyle/premium
• Apartments. These segments are highly profitable and have significant entry barriers. The
estimated market share at ~16% in commercial offices and ~8% in retail space absorption in
India over the next 2 years.

• Better placed to face the macro challenges:

• Commercial, retail, luxury and premium housing account for 67% of DLF's estimated Gross
• Asset Value (GAV). Middle income housing segment accounts for just 24% of DLF’s GAV
(56% of the development area). This segment is more susceptible to emerging macro concerns
and challenges, and thus even 50% lower absorption v/s estimates would impact GAV by ~11%

• DLF huge land bank

• DLF’s current land bank stands at 13,055 acres (addition of 2,800 acres since filing of RHP) and
Total developable area at 612m sq ft (addition of 43m sq ft). Recent land bank addition of
~2,800 acres has been done at Rs19.3b (average cost of Rs230/sq ft, assuming FSI of 1x). For
DLF, land cost stands at Rs154b, i.e. an average of Rs252/sq ft, which provides competitive
advantages.

• Large companies such as DLF, which have holding power, are best positioned to take large bets
by acquiring large tracts of contiguous land, which could create value through ‘land bank ageing’
and ‘integrated development’. It is believed that this strategy will generate better returns, which
would lead to continuous upgrade in NAVs and allow for higher asset turnover.

• Successful implementation of monetization strategies will lead to lower capital costs and
Create conditions for building integrated property business models, comprising property
Development, re-development, acquisitions, divestitures, leasing and management

WEAKNESSES

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 DLF due to its predominant positioning in the commercial office, retail and premium
Apartment segments is relatively less vulnerable to the emerging macro challenges. We believe that a
significant part of the concerns pertaining to the sector are getting compounded in middle income housing
segment, which is more sensitive to prices and higher interest rates.

OPPORTUNITIES.

1. Expansion of business in other parts of India.

2. It can invest more in power generation projects like hydroelectric or wind power.
3. Investment in raw material-backward vertical integration.

THREATS
1. Competitors may try to get more market share through improved techniques.

Macroeconomic risks:

Any weaker-than-expected GDP growth for the domestic economy could negatively affect sentiment of
buyers, leading to elusive demand, which could render sales and earnings estimates for DLF unrealizable.
Also, any further tightening measures and policy changes by the government (with regard to mortgage
applications and approvals, project financing, and property pre-sales) to curb speculation
And overinvestment could adversely affect the bottom lines and cash flows of property developers and
sentiment of home buyers

Real risk of decline in property prices, and concentration in Gurgaon:

Conservatively, we have assumed ‘NO’ price increase in the NCR region for apartments during FY08-17 and
for commercial and retail during FY08-FY12. From FY13, we have assumed a price CAGR of 5% in
commercial and retail space in NCR. Other than NCR we have assumed stagnant prices for all projects and
all verticals (residential, commercial and retail) for FY08 and FY09. Given the sharp acceleration in real
estate prices over the past three years, there exists a real probability of a price correction in certain pockets.
Also, NCR region still accounts for 42% of the development area for the company, thus exposing it to
significant price movements in the region.

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 DLF’S COMPETITORS

India Bulls HDIL Ackruti City Omaxe Group Unitech

New rivals

Bombay Dyeing, Golden Tobacco and Century Textiles. There has been a precedent with groups like
Tata, Mahindra and Godrej having turned developers. The Tata group has Tata Housing and Tata Realty
while Mahindra’s venture is called Mahindra Life space Developers. Godrej’s venture goes by the name
of Godrej Properties.

A prominent case is that of Bombay Dyeing, a well known player in the textile business. While it has
entered the real estate business, it does not have a separate company in place.

DLF’S IPO LAUNCH IN 2007

The future grand plan after the IPO launch:

DLF has outlined a three-pronged growth strategy:

1} Strengthening its pan-India presence,

2} Building up land reserves at strategic locations, and
3} Leveraging its real estate capabilities in related areas be it special economic zones or
hospitality.

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The company will primarily be a developer and sell its properties retaining limited assets to be leased
out. The money raised through the IPO would go towards buying more land (Rs 3,500 crore -- Rs 35
billion), developing existing projects and repayment of loans.

Going by the scale of development done so far, DLF is the largest real estate player in the country with
land reserves of 10,255 acres or about 574 million square feet (msf) of developmental area. Of this, 171
msf is located in or near developed urban areas while 404 msf is urbanisable.
"About 90 per cent of the total land bank is available as large contiguous plots enabling large integrated
development", says, chief executive officer Rajiv Singh.
After being centered on Delhi for many years, the company now has a nation-wide presence across
31cities and towns. It has developed 29 msf of residential, commercial and retail projects and integrated
townships spread over 3,000 acres in Gurgaon so far. Currently, some 44 msf of development is under
progress and projects involving 524 acres is planned over the next few years.
The company intends to focus on its core competence while partnering with leading global players such
as Nakheel (SEZs), Laing O'Rourke (construction), ESP (engineering and design), Feedback Ventures
(project management) for better execution.
Right from acquiring low cost land to creating a full fledged township to realize the true potential of the
land, DLF has amply demonstrated its success in Gurgaon. One key advantage is that DLF's average
cost of acquisition of land is fairly low at around Rs 274 per sf which will enable it sit out the cycles and
not indulge in distress sale ever.
Some key determinants of profitability for real estate companies apart from the land cost, is the
developer's land acquisition and aggregation skills, relationship with the state authorities and reputation
-- on all these DLF scores highly.
And with its unquestionable capabilities as a successful developer, DLF seems best placed to capitalize
on the booming real estate market, which is expected to grow at 20 per cent-plus annually from the
current size of $40-45 billion.
Even more, the national capital region, where the company has over 50 per cent of its land holdings, is
among the fastest growing markets in the country.
Apart from the boom in retail malls and residential owning to rising disposable income, there are several
new vistas opening up for developers which DLF is planning to tap -- for instance, SEZs which offer
opportunities to create integrated townships, hotels and serviced apartments, multiplexes, airports and
the list goes on.

According to a newly devised strategy, the company would, instead of leasing out commercial projects,
indulge in outright sale to potential buyers including DAL. This model rests on the ground that DAL
would be able to garner low cost capital by tapping the alternative investment market overseas and pay a
higher capitalization rate for DLF's properties resulting in faster growth in revenues and better margins
too.

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Brand reputation
 DLF has a 60-year history of service excellence. Since it was founded in 1946, it has been responsible
for the development of 21 urban colonies aggregating 5,816 acres, as well as an entire integrated 3,000-
acre township - DLF City.

DLF reputation for providing prompt payment to landowners upon the acquisition of its land,
developing and completing projects in a timely manner and conducting its business with transparency
has created a relationship of trust with its customers and suppliers. The company retains internationally
and nationally renowned architectural, construction and consulting firms for all its projects.

Extensive land reserves are the most important resource for a real estate developer. As of April 30,
2006, DLF land reserves under development aggregated 1,372 acres representing approximately 102
million square feet of developed area or area available for development and it has made partial payments
to acquire a further 2,893 acres in various regions across India. It is estimated that it will be able to
develop over 118 million square feet of saleable or rentable area.

The Company benefits from economies of scale and is able to purchase large plots of land from multiple
sellers, thus enabling it to aggregate land at lower prices. The company has the ability to anticipate
market trends and, in some cases, to influence the direction of such trends provides it with opportunities
to acquire strategic locations of their choice.

DLF is one of the first developers to foresee the need for townships on the outskirts of fast growing
cities and is credited with the growth of Gurgaon. The company is one of the early developers to focus
on developing theme-based projects such as The Magnolias in DLF City.

The Company has an experienced, highly qualified and dedicated management team, most of whom
have over 20 years experience in their respective fields. DLF encourages responsibility, autonomy and
innovation among its employees with an attractive compensation package

Hybrid business model

DLF has a hybrid business model, which is a blend of ‘sale and lease’. It is estimated
DLF’s rental income to increase from Rs6b in FY08 to Rs43b by FY12, comprising an
Asset base of 46m sq ft in the commercial and retail verticals. The rental stream would enable the
company a steady income source and also provide monetization opportunities, leading to a long-term,
self -sustaining growth phase.

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SHAREHOLDING PATTERN:

NO. OF SHARES % OF TOTAL

PROMOTERS 1502823120 88.26%
INSTITUTION 124231366 7.30%
GENERAL
PUBLIC 75657427 4.44%
GRAND TOTAL 1702711913 100%

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CHANGE IN TOTAL INCOME QoQ:

CHANGE IN OPERATING INCOME QoQ:

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CHANGE IN NET PROFIT QoQ:

RATIO:

30/09/07 31/12/07 31/03/08 30/06/08 30/09/08

EPS 4.50185 3.558407 3.75022 4.117167 3.752981
OPM 63.51832 52.03052 50.83347 68.86187 72.49094
NPM 59.77961 33.42675 36.35313 46.92742 46.88816
INTEREST
COVERAGE 13.90027 7.221565 4.851037 5.495604 5.100798

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EPS is showing declining trend in the last five quarter.
OPM has declined earlier from 63% to 52% but later got recovered. Same trend was also witnessed in
the NPM earlier shown a decline but later shown a recovery.
Interest coverage has shown consistent decline. It has declined from 13 to 5 in just five quarter

Analysis of the Indian economy with Respect to Real Estate Sector

According to the United Nations Population Fund (UNFPA), India is getting urbanized at a faster rate
than the rest of the world and by 2030 more than 40.7 per cent of the country’s population would be
living in urban areas. Presently, more than 28.7 per cent of India’s area is urban as against the
Global average of 48.7 per cent. However, the growth rate of urban areas was 2.3 per cent in 2005, as
against the world average of 2 per cent. The urban population of India was
Estimated to stand at 316 million in 2005 and is the second largest in the world after China. It is
estimated to reach 590 million by the year 2030 retaining its second position.
India’s cities have been the driving force in shaping India’s socio-economic profile. Urban areas which
constitute only 28.7 per cent of the population, have been a major contributor to
The GDP with a major share of industry and almost the entire services sector concentrated in the urban
agglomerations.

During the last sixty years, post independence the population of India has grown two and a half times,
Whereas urban India has grown by nearly five times. According to Census of India 2001 estimates, 30
per cent of the total population of India would be living in urban areas by 2011. The number of cities
with one million plus population is further expected to double from 35 in 2001 to 70 by 2025.
India’s ‘Mega-Cities’ of Mumbai and Delhi would be the world’s 2nd and 3rd largest cities by 2015.
With a rapid influx of migrants in these cities there is a corresponding increase in the demand for space.
Rapid urbanization is fostering real estate growth in India.

MACRO ANALYSIS OF DLF

Before recession

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1. The turnover was increasing tremendously @2.75 times in last 5 years.
2. Profit before tax was increasing tremendously @5 times in last 5 years.
After recession.
1. The turnover now is decreased @33.3%
2. Profit before tax remains same 45%

3. Dlf lmtd was conferred the best global developer award for 2009 by euro money magazine at euro
moneys fifth annual real estate awards.
4. Net profit was up 11.05% to rs 439.74 crore versus rs 396 crore, qoq in 2nd quarter.
5. dlf-lor joint venture had announced 50:50 joint ventures with the UK based Laing O’Rourke.
6. Demand has recovered, sales in homes have picked up considerably.
7. Dlf has won the bid and has been awarded 350 acres of land by hsiidc in gurgaon.

Real Estate

• Contribution towards the Economy

1. Contribution to GDP of about 7%

2. Second largest employment generator in the country
3. Real estate growth gives boost to steel and cement sectors
4. Real estate is a growth engine for development of over 269 allied industries

Measures

1. Reduction of interest rates.

2. RBI policy for restructuring loans.
3. Reduction in excise duty on construction material like cement.
4. Encourage property development in Tier II and Tier III cities
5. Under the Interest Subvention Scheme Loan upto Rs. 10 Lakh, & property value is not above Rs.
20 Lakh will get 1% lower interest.
6. Corporate like Tata’s introduced Nano Housing for Rs. 3.9 Lakhs- Rs. 6.7 Lakh called as Shubh
Griha project.
7. SBI introduced 8 % housing loan scheme for one year followed by the other PSU & Private
Sector Bank as well.

Porters 5 forces model analysis.

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 Potential new entrants.

Bargaining power of suppliers intra-industry rivalry  bargaining power of buyers

Substitute products

THREAT OF NEW ENTRANTS.

1. Decrease in profitability due to increase in number of entrants.

2. Real estate sector needs high working capital.

3. This results in high entry barriers.

4. Existing firm has an edge over the others due to more industrial experience.

THREAT OF ESTABLISHED RIVALS

1. Dlf has 54% of the market share in the real estate sector.

2. High competition in the sector.

3. Established rivals are a threat to upcoming players.

4. DLF, UNITECH AND ANSAS are the major players in this sector.

BARGAINING POWER OF SUPPLIERS.

1. Bargaining power of suppliers is low.

2. Suppliers margins have been stagnant despite strong growth in volumes.

3. Large number of suppliers is available.

4. This leads to shift of contracts when a supplier tries to increase the price.

BARGAINING POWER OF BUYERS.

1. Bargaining power of buyers is low.

2. Difficult to predict the direction and magnitude of price movement on real estate.

3. Forces of demand and supply would always apply.

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4. Price movement would follow accordingly.

THREAT OF SUBSTITUTE PRODUCTS.

1. No substitute to the basic product. So no threat of substitute products.

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