DLF Ltd Management Discussions

862.7
(0.68%)
Dec 9, 2024|03:31:11 PM

DLF Ltd Share Price Management Discussions

I. ECONOMIC OVERVIEW

a) Global Economy

The global economy witnessed a blend of opportunities and challenges. It persisted with challenges and uncertainties arising on account of inflation dynamics, rising geo-political tensions leading to supply-chain disruptions and pace of post pandemic recovery. However, economists believe that several growth opportunities lie ahead, which are well supported by resilient performance by Central Banks in controlling inflation, major emerging markets showing consistent and strong growth outlook along with soaring capital markets across the globe. According to the latest projections by the International Monetary Fund (IMF), the global economy is slated to grow at 3.2 percent in 2024 and holding steady, even for 2025. The IMF also expects the global headline inflation to decline to 5.9 percent in 2024 and sequentially to 4.5 percent by the end of 2025, leading to a soft landing.

b) Indian Economy

The Central Banks measured stance along with prudent growth policies resulted in another strong year for the Indian economy. As per projections by the IMF, growth in India is projected to remain strong at 6.8 percent in 2024 and 6.5 percent in 2025 with the robustness, reflectingcontinuing strength in domestic demand and a rising working-age population.

The resilient growth demonstrated by the economy has led to expectations that the Indian economy may become the third largest in the next few years. Further, Indias inclusion in the Emerging Markets bond index is also poised to draw significant foreign capital into the country, which would further act as a booster.

II. INDUSTRY OVERVIEW

The Indian Real Estate sector witnessed a strong growth in the past couple of years and is poised for an assuring growth in the future. The outlook is driven by a confluence of multiple factors including increasing urbanization, shifting demographics, aspirational lifestyle and supportive economic growth in the country. A number of factors are adding further impetus to the growth of the industry. The growth can be attributed to a growing residential demand, expected growth in sustainable workplaces, rising consumption and needs of a growing population with higher income levels. The overview and outlook for different segments of the industry is given below:

a) Residential Segment

The Indian residential segment has undergone major structural transformations over the last decade. This has led to a decadal high performance across the residential segment. The sector saw multiple challenges including demonetization, implementation of Goods and Services Tax (GST) and Real Estate (Regulation and Development) Act, 2016 (RERA), Non-Banking Financial Companies (NBFCs) crisis and the COVID-19 pandemic. However, today, the sector is touching new highs with the support of strong policy interventions such as RERA which have made the sector more transparent and customer centric; a strong economic momentum and an ardent desire of owning and upgrading homes.

As per the recent report, published by Knight Frank and Confederation of Indian Industry, Indias urbanisation rate over the next decade is expected to reach 42.50% from 36.50%, whichimplies significantrise in demand of households and expansion of cities, across the country. The summary of the performance of the residential segment over the last 5 years, across the top 7 cities in the country, is given below, which clearly demonstrates the continued strength. The data also suggests that the Calendar Year (CY) 2023 was one of the best years over the last decade.

As per reports published by Anarock, the overall inventory levels across the top 7 cities witnessed a similar trend and consequently came down to ~6,00,200 units. The overall inventory levels were recorded at 15 months at the end of CY, as compared to 21 months during the previous period. The National Capital Region exhibited a well calibrated demand-supply dynamic, resulting in the inventory levels dropping by a significant 23% on yearly basis. The other notable trend witnessed in the housing market was the increasing demand for larger homes and consumer preference for the luxury segment. New launches in this segment accounted for ~23% of the total launches, as compared to a mere 9% in CY 2018. The Industry Experts, expect that demand for these segments will continue to remain robust in the near future.

The housing industry continues to witness consolidation in favour of larger and credible players. It is estimated that the share of leading developers has almost doubled in the last 7 years. This trend is expected to continue as the industry grows.

b) Office Segment

The office segment witnessed robust growth in activity(ies), as an outcome of robust domestic growth as well as renewed demand from the occupiers. CY 2023 witnessed an ~11% Y-o-Y growth in gross office absorption reaching around ~5.99 million square meters (msm) [~64.4 million square feet (msf)] during the year, which is recorded as the second-best year of leasing since 2019.

Performance of the office segment, across Tier 1 cities, over the last few years is presented below:

Despite global uncertainties, the office segment is expected to remain positive on account of expansion by Global Capability Centres, reasonable advantages that India offers to global occupiers, in terms of skilled talent pool, competitive cost structures and occupiers driving their workforce to return to office. Another notable trend in the office segment is the rising demand for quality workplaces, catering to the need of offering sustainable and safe ecosystems, modern facilities and expansion opportunities. The recent amendment by the Government, allowing floor-wise denotification is also expected to accelerate renewed demand for such spaces, thereby reducing the overall vacancy.

c) Retail Segment

The retail industry has been delivering remarkable growth over the last few years and CY 2023 exhibited similar trends. The supply-demand dynamics for this segment, across Tier 1 cities, are presented below:

The luxury segment continued to experience rising resurgence, primarily driven by rising income levels, aspirational lifestyle and growing consumption trends in the country. Realising the notable growth in the luxury segment, numerous foreign retailers have entered and continue to explore the country to capitalise on this growth.

It is expected that this segment should continue to exhibit strong growth momentum, though demand seems to be primarily driven for quality malls at established locations.

III. OUTLOOK AND STRATEGY

The business exhibited a strong performance and continues to deliver well across all parameters. As Indian economy continues its strong growth trajectory, the real estate sector is poised to deliver a healthy performance across all segments.

The Company remains focused and committed to drive growth by bringing high quality new products across both its business i.e. development as well as the rental business.

The Company continues to follow its stated strategy of maintaining a leadership position by delivering low-risk, consistent and profitable growth. Key pillars of the strategy are outlined below:

- Development business:

The Company intends to continue to scale-up its new product offerings, while focusing on developing margin accretive products. The Company is focused on tapping multiple geographies including its core market of Gurugram and Delhi, existing land bank across multiple cities including Chandigarh Tri-city and Goa and newer markets including Mumbai.

- Rental business:

The Company remains focused on growing the rental portfolio by capturing the organic growth potential along with new products across, both office and retail segments. The Company expects to maintain its growth trajectory and achieve double-digit growth in its portfolio through organic growth, coupled with new developments. The positive outlook towards the retail business has led to a development of new retail destinations and the Company expects to double its retail presence over the next few years.

- Cash management:

Strong growth in the business has led to a healthy cash flow generation. The Company intends to put enhanced focus on steady free cash generation on a consistent basis. Backed by strong growth and high margin products, the development business has achieved a healthy net cash position at the end of the fiscal. The Company intends to strengthen this existing position going forward.

- Profitability and Shareholders returns:

In keeping with its stated strategy, the Company is targeting a steady double-digit growth in its profits.

This growth will be aided by high margin products that the Company has been launching as also planned new products over the next few years. Shareholders returns are the priority for the Company. The Company has more than doubled its payout over the last 3 years and remains committed to improving the payout as well as improving the Return on Equity for the business over the next few years.

IV. BUSINESS/ FINANCIAL PERFORMANCE

a) Material Developments

- The Company successfully launched its premium development, Privana South during the fiscal. The project size was ~0.37 msm (~4 msf) and the total new sales bookings stood at ~ 7,200 crore. The development is the first phase of a large integrated complex.

- The Company has acquired a strategic land parcel situated in Sector 61 of Gurugram. This new addition has a potential of ~0.70 msm (~7.5 msf) with a potential sales value of more than 20,000 crore, based on current prices in that micro-market.

b) Revenue and Profitability (Consolidated)

Consolidated revenue (including other income) stood at 6,958 crore during the fiscal. EBITDA stood at 2,655 crore, reflecting Y-o-Y growth of 30%. Total comprehensive income (attributable to the owners of the Company) stood at 2,730 crore, as compared to 2,051 crore in the corresponding period, reflecting a growth of 33%.

DLF Cyber City Developers Limited (DCCDL) reported a consolidated total income of 5,897 crore, reflecting a 9% growth over the previous period, primarily led by the rental growth in the office and retail portfolio. DCCDLs consolidated EBITDA stood at 4,478 crore in FY 2023-24 in comparison to 4,139 crore in FY 2022-23. Total comprehensive income stood at 1,690 crore, reflecting a 18% growth over the last year.

c) Balance Sheet

The Companys consolidated Net Worth (including capital reserves) was recorded at 39,432 crore.

The increase was primarily on account of retained profits.

The Company continues to generate healthy cash flow from its operations, resulting in the balance sheet turning into cash positive.

The key ratios arising out of the performance in the last fiscal are summarized below:

Ratio 2023-24 2022-23 Explanation
EBITDA Margins 38% 34% Higher margins on account of product mix and higher other income.
Net Profit Margin 39% 34% Higher profitability due to product mix, higher other income and profit share from joint ventures.
Return on Equity 7% 5.4% Due to higher . profitability

V. REVIEW OF OPERATIONS

a) Development Business

The Companys business continues to exhibit robust performance. The housing segments upcycle bodes well for the Company. The Company offered a strong pipeline of new products, resulting in sustained sales momentum during the fiscal and new sales bookings stood at 14,778 crore for fiscal. Summary of sales performance over the last 5 years is presented below:

The Company sold ~0.68 msm (~7.3 msf) area during the year. Key products that were sold, during the year were Privana South in Sector 76 and 77, Gurugram, The Valley Orchard, Panchkula, Central-67 in Gurugram and land sale in Chennai.

b) Rental Business

The rental business also demonstrated strong performance across, both office and retail portfolio.

The operational portfolio increased to ~4.09 msm (~44 msf) with new completion of ~0.21 msm (~2.3 msf) at DLF Downtown in Chennai.

The portfolio witnessed healthy occupancy and stood at around 93%. The Company expects steady improvement in its SEZ portfolio, as the Government has announced an amendment, allowing floor-wise denotification across such assets.

The office business exhibited Y-o-Y growth of 7% and retail business demonstrated a strong Y-o-Y growth of 18%.

c) Other Business

The Company also operates a hospitality division consisting of recreational clubs in and around its residential developments and two hotel properties. The Lodhi, which is an iconic hotel located in New Delhi, is managed by the Company, whereas The Hilton Garden Inn, Saket, New Delhi is managed by Hilton. Revenue from hotels, food courts and recreational facilities business increased to 536 crore, reflecting a 6% Y-o-Y growth.

VI. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company has a robust and well embedded system of internal financial controls. This ensures that all assets are safeguarded and protected against loss from unauthorised use or disposition and all transactions are authorised, recorded and reported correctly. An extensive risk-based programme of internal audit and management reviews, provides assurance on the effectiveness of internal financial controls, which are continuously monitored through management reviews, self-assessment, functional experts as well as by the Statutory/ Internal Auditors during their audits.

The internal audit plan is also aligned to the business objectives of the Company, which is reviewed and approved by the Audit Committee. Further, the Audit Committee monitors the adequacy and effectiveness of the Companys internal control framework.

The Companys internal control system is commensurate with the nature, size and complexities of the operations.

VII. HUMAN RESOURCES

The Company understands the importance of investing in the growth and development of its employees. It believes that this is crucial, not only for their personal success, but also for the overall success of the organization. Hence, the Company has crafted a comprehensive employees growth and development strategy that aims to empower the workforce, cultivate a culture of continuous learning and stimulate innovation and excellence throughout the organization. The unwavering commitment is to create a positive work environment that nurtures and supports the professional development of all employees, while striving to achieve the business goals.

In accordance with the growth plans, the Company has increased the employee strength across the project management, design, sales and marketing and support functions. Further, it encourages hiring from its internal talent pool, whenever possible and offers internal job postings to facilitate career growth and mobility. To enable career growth and development of the employees, the Company launched a formal mentoring programme for high potential employees, in this programme employees are paired with experienced mentors who provides guidance, support and career advice. To instil a continuous learning culture, the Company also established ‘Construction Ed Initiative by identifying 28 core construction activities and their internal Subject Matter Experts (SMEs). The Company has curated and facilitated key lessons on each activity in partnership with Real Estate Management Institute (REMI). The Company has additionally introduced the Graduate Trainees Mentorship Programme, aimed at offering guidance to fresh Graduate Trainees, who are annually hired from the best engineering colleges across the country. As on 31 March 2024, the Group had 2,507 employees including the workforce engaged in the hospitality division.

The Companys holistic wellness programme educates and guides employees around work-life balance and the importance of a healthy lifestyle, emotional, physical well-being and prevention of diseases. Annual medical check-ups, structured monthly health programmes, health bulletins, health talks and awareness campaigns are periodically conducted. The Company instituted attractive comprehensive group Mediclaim and Accident Insurance Policies including emergency response facilitation, alliances with hospitals and diagnostic centres as well as consultation facilities with an in-house doctor and counsellor.

VIII. SUSTAINABILITY

The Company strives to embed the best practices of sustainability in its business and remains committed towards the objective of sustainable development across its operations.

As a testament to its commitment, the U.S. Green Building Council (USGBC) recognised the Companys rental business as a global partner in leading the transformation and regeneration of the built environment across India and for the World.

After Cyber City in Gurugram, another campus viz. DLF Cyber City in Chennai has also been certified as LEED Platinum under City and Community category. More than ~3.72 msm (~40 msf) of the Companys rental portfolio is USGBC LEED Platinum certified.

The rental business continues to be a leader in sustainable practices and is a global leader in LEED Zero Water with around 45 projects, being certified with this distinction.

IX. OUTLOOK ON RISKS AND CONCERNS

The Company is exposed to multiple risks such as economic, regulatory, taxation and environmental as well as sectoral investment outlook. Some risks that may arise in the normal course of business and could impact their ability to address future developments, comprise credit risk, liquidity risk, counterparty risk, regulatory risk, commodity inflation risk and market risk. The Companys strategy of focusing on key products and geographical segments is exposed to economic and market conditions.

The Company continues to implement robust risk management policies that cater for risks and requisite mitigation plans.

Cautionary Statement

The above Management Discussion and Analysis contains certain forward-looking statements within the meaning of applicable security laws and regulations. These pertain to the Companys future business prospects and business profitability, which are subject to several risks and uncertainties and the actual results could materially differ from those in such forward-looking statements. The risks and uncertainties relating to these statements include, but are not limited to, risks and uncertainties, regarding fluctuations in earnings, our ability to manage growth, competition, economic growth in India, ability to attract and retain highly skilled professionals, time and cost over-runs on contracts, Government policies and actions with respect to investments, fiscal deficits, regulations etc. In accordance with the Regulations on Corporate Governance as approved by the Securities and Exchange Board of India, shareholders and readers are cautioned that in the case of data and information external to the Company, no representation is made on its accuracy or comprehensiveness, though the same are based on sources thought to be reliable. The Company does not undertake to make any announcement in case any of these forward-looking statements become materially incorrect in future or update on any forward-looking statements made from time to time on behalf of the Company.

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