DLF Hawks Luxury as Profit Drops to 6-Year Low: Corporate India

DLF Ltd. (DLFU), India’s largest developer, is shunning affordable housing to focus on luxury holiday homes and land sales to boost profit from a six-year low.

DLF is constructing high-end second homes for the wealthy in the hill stations of Shimla and Kasauli in the north Indian state of Himachal Pradesh and in the beach resort of Goa, said Mohit Gujral, the vice chairman of unit DLF India Ltd. It also plans to boost revenue from offering land and plots, DLF told analysts on May 31. It earned 17 percent of its 2011 revenue from land sales, according to data compiled by Bloomberg.

Billionaire Chairman Kushal Pal Singh faced with four straight years of declining profit is focusing on businesses that may help the company improve margins and selling assets including hotels and windmill operations. DLF is betting that the villas sold at prices that can fetch a condominium in Manhattan will help it counter rising costs of steel and cement that have propelled the company’s costs to a record.

“Over the past year and a half, their preference has been to defend margins over chasing volumes,” said Bhaskar Chakraborty, an analyst at Mumbai-based brokerage IIFL Ltd. “The market doesn’t care if he chooses a higher margin-lower volume or a higher volume-lower margin business as long as his operating metrics improve, which hasn’t happened.”

DLF, based in New Delhi, has gained 5 percent this year, underperforming the benchmark BSE India Sensitive Index, which has risen 10 percent. The stock was replaced by Dr. Reddy’s Laboratories Ltd. in the gauge on June 11. It rose 1.2 percent to 194.45 rupees in Mumbai, its highest in almost two weeks.

‘Evolving Lifestyle’

DLF’s holiday villas in Shimla, India’s summer capital during British colonial rule, sell for about 40 million rupees ($700,000), Gujral said in an interview on June 25. The median price of a Manhattan condominium was at $775,000 in the first quarter, Miller Samuel Inc. and Prudential Douglas Elliman Real Estate said in an April 3 report.

In contrast, DLF is selling homes in Bangalore for between 2.5 million rupees and 3 million rupees, its first attempt to offer affordable housing in the country, he said. The company plans to complete its affordable housing project spread over 88 acres (36 hectares) in Bangalore in five years, he said.

India is evolving and we believe the time and market has come for a lifestyle second home,” said Gujral, who also manages DLF’s businesses in north and south India. “Some companies do luxury very well and some do volume products very well; we want to be in the medium and upper end, not the lowest end of the spectrum.”

‘Sama’ Villas

The developer said on May 30 fourth-quarter profit declined 39 percent to 2.12 billion rupees from a year ago. Full-year net income dropped 27 percent to a six-year low of 12 billion rupees. Costs rose 17 percent to 24.5 billion rupees. The company’s operating margin was at 33.4 percent in the period.

The company reported a total debt of 202.2 billion rupees in the three months ended March 31, data compiled by Bloomberg show. DLF plans to raise 70 billion rupees selling assets to pay debt in the next three years.

The company, which developed upscale south Delhi localities including Greater Kailash, Hauz Khas and South Extension, is also selling land to avoid the cost of constructing homes. About 17 percent, or 15.9 billion rupees, of its revenue came from land sales in the year to March 2011 from just 1.5 percent a year earlier, according to data compiled by Bloomberg.

Unattractive Investment

Building costs for developers are “staggering,” with the price of construction per square foot climbing 20 percent from a year ago, Shobhit Agarwal, joint managing director of capital markets at Jones Lang LaSalle India said. Low returns and higher gestation periods for affordable projects make them unattractive for investment, he said.

“International and domestic funds have clearly lost their taste for affordable housing,” Agarwal said. “This yesteryear poster boy of the Indian real estate story has fallen off the capital markets hit parade because of the low returns it yields and the higher gestation period involved.”

DLF is offering the holiday homes on the hillsides of India under the name “Sama,” which means tranquility in Sanskrit. It has sold its 24 villa-project “Samatara” in Shimla and has started sales of its luxury project at Kasauli, another hill town about 77 kilometers (48 miles) from Shimla.

The 100-home development, with plots ranging from 500 square yards to 1400 square yards on 60 acres of land, will be completed in about three years. The gated 40-acre project in Goa, a 45 minutes flight from Mumbai, will be marketed by the end of the year, Gujral said.

‘Volume Game’

The company, set up in 1946 as Delhi Land & Finance Pvt., is completing the affordable housing project in Bangalore after raising funds from private equity investors in 2007. Since then, land prices have climbed as the areas have become more urbanized and it has now become difficult to justify low-end projects at the sites, Gujral said.

“To make affordable housing successful, the government will need to provide infrastructure, speedier approvals and subsidized land” to make it viable for developers, said Anuj Puri, chairman at Jones Lang LaSalle India.

DLF expects the wealthy in Asia’s third-largest economy to splurge even after gross domestic product grew at the slowest pace in nine years in the quarter ended March 31. India’s wealth assets are estimated to double over the next five years, according to a Julius Baer Group report in August. The country’s wealthy will more than double to 400,000 by 2015, according to the report.

Demand for luxury homes and goods are not “that sensitive,” Gujral said. “We aren’t in the volume game.”

To contact the reporters on this story: Pooja Thakur in Singapore at pthakur@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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