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.
CORPORATE STRATEGY
Key elements of its existing business strategy
DLF has outlined a three-pronged growth strategy:
1} Building its pan-India presence,
2} Acquiring lands reserves at strategic locations
3} Leveraging its real estate capabilities in related business ares likes development in SEZs
DLF wants to go for cost differentiation leadership strategy. They expect to cut down costs and achieve differentiation in all business units
SWOT ANALSYSIS
Strengths
- India is currently having boom in IT/ITES sector, this has resulted high growth in other supporting sectors like housing, real estate and construction. DLF India Ltd. being the leader of real estate industry is expected to get maximum benfits.
- DLF has vast experience, excellent expertise to develop mega-scale projects. Brand Value of DLF carries a lot of brand value.
- On supplier side, DLF is extremely strong, it has good command and reputation among suppliers which brings down cost of raw materials and timely delivery.
- DLF has acquired huge manpower through smart recrtuiment techniques
Weaknesses
- DLF is primarily into construction business and doesn have parallel products/services in its portfolio which exposes them to business risk
- Mainly concentrated in northen India, DLF needs to penetrate in other parts of countries in true sense.
- Real estate business carries huge business risks and it gets amplified in case of DLF as they deal only in mega projects which required huge capital investments and thus it can not abandon projects without its balance sheet getting badly hit.
- DLF’s capital requirements are very high coupled with their inability to abandon projects may pose problem for comapny during recessionary periods
Opportunities
- DLF primarily present in Northen India and thus its business is far from getting saturated. It needs to tap into other parts of India. They can leverage upon their current presence in other markets for better market share.
- Although DLF is primarily real estate development company their recent ventures in infrastructure construction have opened a whole new segment for themselves.
Threats
- Organized real estate sector still forms miniscule of total real estate sector in India, thus main competitors for DLF are not other big real estate players but local players present in the market who are better positioned to take advantage of local laws and systems
- Democracy in India is plagued by political unrest and DLF constantly faces regulationary risks from government bodies. Previously DLF was victim of Delhi Development Act.
- Real estate markets in India have been very unstable in India posing market for DLF
FINANCIAL ANALYSIS
RETURN TO SHAREHOLDERS
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 months.
LIQUIDITY
DLF 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 2008.
SOLVENCY
By 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
INVESTMENT EFFICIENCY
Considering only the period post recession for analysis, from the ratios depicted above we can see that asset turnover, fixed asset turnover and working capital turnover all have reduced. This can be attributed both to a decrease in sales as well as the increase in assets. We must note at this juncture that the sales have dropped by almost 50% in 2010 compared to 2008 levels. Hence the asset utilization by the company has not been optimum. The company should have increased sales by correspondingly increasing their inventory levels. We can also see that the working capital has jumped to 1700 post 2007 compared to 665 in 2007. This also shows an operational inefficiency.
The tables given above depict the operational efficiency of the company. We can see that the days of inventory has increased by almost 3 times in 2009 and 2010. This may be due to the decrease in demand in the market of the services of the company or the overall slowdown in the economy. The days of sales outstanding shows that sales outstanding has almost increased by 4 times in 2010 as compared to 2009. This can be attributed to the credit policy of the company or cash collection inefficiency of the company. These aspects have to be taken care of by the company. Due to the current boom in the industry and 2011 financial results much awaited, it is yet to be see whether the company can enhance its position compared to 2010.
PROFITABILITY
The reported net profit for the company for the last few years are given below in the table (in Rs Crore)
If we look at the trend in the profitability we will realize that it has decreased by more than 67% in the last two years and this was the common trend in the housing sector. There is an uneven rise and fall in the reported net profits as visible from the table. This can sometime decrease the confidence of the investors.
The ROE of the company has decreased in emphatic amount from the last two years basically because of the subprime crisis where the prices of land plummeted. The ROE of the company in the last few years are given below. This shows that company was producing good results before the crisis hit India but after that it has been unable to maintain its momentum and ROE has decreased.
CASH FLOW ANALYSIS
Major sources of cash: The major source of cash is from the investing activities which must include the sale of the real estate which the company owns.
Major use of cash: The major use of cash is in the financing activities which mostly includes the interest payment on the debt raised by the company.
The main problems come when we look at the cash flow statement of the company and realize that cash and cash equivalents has decreased by more than 80% as compared to the levels of 2008. There is huge drop in the investment activity also as compared to 2008 but it has increased as compared to 2009 levels showing some signs of recovery of the company.
The company has also increased its secured debt by more than 225% from the levels of 2008 and by more than 45% from the previous year shows that company is able to maintain a secured line of credit but on the other hand the interest expenses has increased dramatically effecting the liquidity of the company. The interest expenses which stands at Rs 847 crore is almost 80% of the operating income which stands at Rs 1045 crore; for the year 2010.
SUMMARY
Overall we feel that the firm is not suitable for investment purposes in either its debt or equity. Inspite of being the bellweather stock for property the business risk is high and further downside possible. The Bombay Stock Exchange’s 15-stock 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 months. A string of negative news ranging from sticky inflation, hardening interest rates, bribes-for-loans scandal, high raw material and land costs and dampened demand. We see substantial scope for disappointment, given that volumes have slackened due to rising property prices and their negative impact on affordability. DLF's net debt has grown more than 50% to Rs208.3bn over the past year (largely due to consolidation of Caraf-DAL, a promoter owned entity). If we assume the cost of debt of 11%, annual interest outflow amounts to Rs23bn, or 54% and 48% of analyst’s FY11 and FY12 EBITDA forecasts, respectively. Net cash from operations was Rs 14.7bn in 1HFY11, while interest outflow was Rs11.8bn, leaving limited funds for investment or debt repayment. Overall DLF is a bellwether stock of realty sector and continues to have the largest rent-yielding commercial asset portfolio (enjoying traction in leasing as well) and relatively good execution skills compared with its peers, slow asset churn, high debt and unfavorable macroeconomic factors compel us to believe the business is considerably risky. We believe realty sector will underperform all other sectors in the short-medium term and there is no visibility on earnings in the long term. So for debt/equity investments there are much safer sectors with much resilient businesses.
APPENDIX
SHAREHOLDING PATTERN
CONSOLIDATED CASH FLOW STATEMENT
PROFIT & LOSS STATEMENT
BALANCE SHEET STATEMENT
REFERENCES
[1] www.moneycontrol.com
[2] www.dlf.in
[3] www.luthra.com/Admin/News/Images/dlf-brands-expands%20lifestyle%20portfolio.pdf
[4] Capitaline Database
[5] Annual Reports, DLF
