India’s largest real estate firm DLF Ltd has, over the past few weeks, announced plans for: a township in WestBengal; two SEZs, one in Maharashtra and the other in Gujarat; a large commercial development in Gurgaon; and developments in Chennai and Bangalore. According to the company’s vice chairman Rajiv Singh, this will be the frenetic pace of deal-making and announcements at DLF in coming months. 48-year old Singh, an alumnus of the Masschussets Institute of Technology with a reputation for being media shy, met with Mint for a rare interview on Friday at his tenth floor office at the company’s headquarters in Connaught Place. Edited excerpts:
The township, the two SEZs... DLF has been making several announcements in the past few weeks. DLF looks like a company in a hurry that wants to do too many things.
No, I don’t think it is true. But let us put it this way: what has changed is that till about 45 days ago we were in a silent state (in the run up to the company’s early June initial public offering), so news flow from our side was strictly controlled. So, we were a little cautious of saying too much because it could be deemed to be influencing our constituency of investors, which we didn’t want to.
It is partly our opening up because of removal of restraints and partly, I think, media’s interest in us.
This is virtually the kind of continuous deals, continuous news ... the company has been generating and shall be generating. Now that we also have a larger responsibility to report this to both the stock exchanges and the media because our investor community needs to be more informed of everything.
Real estate is actually not even regional. I would almost say it is a local business. We were the first to sort of take this initiative and actually go outside our boundaries. And I can go back and say my grandfather did this quite successfully in the late 1940s when we he built large tracts of northern India.
This was done basically because of the demand of our clients. In the office space business, we were dealing with large clients who needed space across the country. And subsequently, retail clients who needed space across the country prompted us to go national. Residential (development) was a natural corollary.
And other developers now have seen our model and are seeking to emulate it in whatever way they see fit. A few of them will succeed. Few of them may not succeed. I don’t know. I still believe we need very very strong monitoring to be successful.
We have invested heavily in building up teams at the local levels to actually handle this task before us. And you know, it (real estate) is a local business. Like people say, it is a local business at many different places.
One (part) is related business and one (part) is unrelated business. In the unrelated business, we are making a move into the financial services business. (the) Prudential insurance (joint venture) is more of a good investment for the long term. That’s about it.
Everything else that has been announced has strong umbilical cords with our core business.
People who live in residential colonies would like to have access to good medical facility. So, we are in the hospital business.
People working in a large SEZ would like to have convenient infrastructure. So, we will be in the infrastructure business. Our purpose of doing all that is to make sure that our core businesses are well supported. (And that) customers are looked after.
That said and done, we do believe that every new business is a challenge. We have our hands quite full with tackling our existing businesses. Therefore, we look for partners who can help us with the new businesses — who bring skill sets to the new businesses, who bring capital to the new businesses... To that end, for all our new businesses, we are actively seeking partnerships.
Whether it is hotels with Hilton, or a large infrastructure or township project with Nakheel ... they are all people we are talking to because they have something to contribute.
We do what we know best. They do what they know best. And it is working quite well. It helps us grow without taking on too much risk.
It is not coincidental that the IPO money was about the same as the debt we held in our books. So, subsequently, with the IPO, we became net debt zero. Which means we will keep that (some of the debt) in our books; we will keep matching amounts of surplus and liquid funds so that the company’s net borrowing position is zero. The net (zero) position was achieved shortly after the IPO in early July.
We were fortunate that we also added in the first quarter substantial amount of profit. We continue to generate a fair amount of profit.
Temporarily, it (the IPO proceeds) would be deployed to meet new acquisitions. But broadly our intention is to operate at almost net debt zero position.
The current position... we have cash reserves Rs 5000 crore. Our debt is slightly in excess of that. We have reduced our debt to some extent.
All your recently announced projects will need money. Where is that money going to come from?
The core businesses we are doing will be funded by internal accruals. The new businesses we are doing will be funded partly from equity from our side and partner equity and independent debt.
The total investment in SEZs before it sort of starts becoming self-generating could be to the order of say Rs12,000-15000 crore. Out of this, equity capital would be Rs 4000-5000 crore. So, my investment into equity (the rest will come from the partner — Nakheel Group in the case of the Gurgaon SEZ) would be Rs2,500 crore over three years time. We will have to put aside around Rs700-800 crore every year for our foray into SEZs. Around Rs700-800 crore a year, we will have to put aside for our foray into hotels. And maybe another Rs400-500 crore for our other projects. So, around Rs2000 crore will have to be put aside every year. We are generating substantial cash accruals to meet this investment.
Will you look at funding from private equity firms?
No. Not that I have nothing against private equity funding. In the sense that Blackstone, the private equity fund, is now the owner of our hotel partner, Hilton.
We are looking for people who can contribute more than money to us. People who can bring in not only money but can also bring some operating expertise would be our preferred partners because there is some value addition to the game.
Most analysts say that there will be a sharp correction in real estate prices, especially in the suburbs, by the end of the year. How much would, say a 10% correction, affect your company’s valuation?
People are talking about it but there has been no significant price correction in the markets. Yes, there has been some dampening of enthusiasm. People expected to launch at RsX and they had to launch at RsY. That is not a correction; they thought that they would achieve something; they have achieved less than that. That was possibly because of overplaced enthusiasm on their part. For established names in established locations there will be no price correction at all.
That said and done, the interest level from private equity funds or real estate mutual funds continues to be and is extremely high. In fact, I think those people now see much greater opportunity for themselves because of a lack of many (funding) options available and they feel that they can now come in and provide viable funding to local real estate industry. At the same time, they need to be much more cautious and far more prudent in their investments.
I think they will try to find quality deals that are relatively safe. You will see that they will be more careful about the quality of the deal and the quality of the developers they associate with. I think their appetite is still very large.
I am not saying that if a developer is good they will fund anything. A bad project with a bad developer — you can forget about it.
The price correction does not affect us. In fact, in a crude sense if at all there has been a price correction — there hasn’t been any — it would help us, because it will allow us to acquire our land a bit cheaper than I would have expected it to be acquired in the past. I am not seeing anything. Nobody has reduced the land price. Nobody has done anything.
How much has your land bank increased over the past few months?
Right now at the end of June, it was about 615 million sq feet.
Is this the developable area?
Yes. That is the potential. 615 mn sq feet excluding hotels, etc.
And has all the land been acquired?
Almost all. There is always a stage... like lets say we have bought some land from DDA (Delhi Development Authority) — first we make the second payment, then they give the title. So, this kind of process carries on.
In addition to this, what is more important is that the land we are getting is very high quality land.
Just for example, in a city like Delhi what have we done in the last 3-4 months? We are building the largest convention centre in India, which is an investment of about Rs900 odd crore in land. A couple of thousand crore in building. Perceived value of about Rs6000 crore in terms of what we will be creating. So that’s just one asset. We have bought this site from DCM Shriram Consolidated and the Lohias in Shivaji Marg. That site represents investment of about Rs1,700 crores. The scheme when fully built will have a value of about Rs10,000 crore. That is the second one we have done in Delhi. We have bought some land in Delhi for our future use as and when the public-private partnership, which is mentioned in the master plan, gets operationalized. We have bought some land in areas where we believe there is scope for us to participate in. This is just in Delhi itself. In the last two months we have made an investment or committed an investment of Rs2500-2600 crore in land alone
In your IPO document, the total land bank was mentioned as 10,255 acres…
In future, we won’t be reporting in acres because what acres tend to do ...they present a distorted picture. In our first quarter results we have given complete details of the land bank. It is classified according to type of use, towns, etc. This is the first time we did it and we will continue to do it.
The investor community liked what we did. And I think most parts of the industry will follow our example.
How much of this 615 mn sq ft is directly owned by the company?
Directly owned by DLF, I can’t give you specifics. We can’t hold, by law directly in one individual name more than X amount (because of the urban land ceiling laws). How much is owned by us and/or owned by subsidiaries and/or controlled by DLF? I would say 100%. This excludes the land potential attributable to my joint venture partners.
There are joint ventures too, which are very few in our case, about 5-6%.
There have been concerns expressed in some research reports that a third of this land bank is not actually owned by DLF?
It is incorrect.
Are the owners third parties or are they related parties?
(The land is) 100% controlled by us. We have binding collaboration agreements. We disclosed (at the time of our issue that ) 7% of our development rights came from land, which was not part of DLF. Just 7%.
I do believe subsequently it may have dropped as a percentage. So, maybe it is 5-6%. So, 5-6% of our land is land where development rights are accruing from land held by somebody else. But 100% of the development rights, which we are showing, belong to DLF and DLF’s subsidiaries. They may come directly or they may come from a layer of three companies but they all flow back in the consolidated results. The profit and loss from that will be fully accounted. One hundred percent.
Will the company continue with the prevailing business model of selling assets to DLF Assets Ltd (DAL)?
Yes. We will continue with that. We believe it is a very effective way of monetization. We always look to finance DLF Assets more efficiently and we believe that it can lead to DLF Assets paying somewhat more for the assets of DLF and therefore increasing the profit contribution to DLF shareholders. So, we are in fact actively working on how DLF Assets can be a better customer for DLF.
DLF Assets still needs to pay DLF some money for properties that have changed hands, right?
Out of the total amount of the transaction between DLF and DLF Assets, I would say about 85% would have been paid. 10-15% would be the balance.
How much is that in rupee terms?
A couple of hundred crores would be outstanding which would be paid up by end of September.
In the first quarter results, the company has shown a net profit of Rs2,127 crore. However, the cash from operations is a negative Rs2,270 crore. This is mainly because the company has not yet received money for the sales it has affected to the tune of R1,996 crore. To whom were the sales done? Have you at least got the money now or does the entity still owe you money?
Part of this would be the DLF Assets sale.
You say that is around a few hundred crore.
Yes, subsequently it has been paid up. Partly, it would be on this account. And partly… Not received money... I don’t know. What else can it be? I think it will be mostly on account of DLF Assets, which has been paid up. Today this figure would not be more than a few hundred crore. By end of September (this amount will be) fully paid. But a fresh liability will get created.
DLF Assets has received approvals for further funding of $1 billion from three institutional investors in addition to the $600 million it has received from D.E. Shaw and a Lehman Brothers associate. Who are the investors?
We are talking to investors as we speak. There are a large number of investors who are interested. I don’t know who will finally put in the money.
But I think we will receive the money in September. We are reasonably confident that two to three more high quality investors will join the pool.
How much stake will the investors pick up in DAL?
Stakes will depend on what price ratio we will achieve. In the longer term, I can only say one thing. DLF Assets soon will be a very widely held company with a very strong and independent board and will therefore be transacting all its business with DLF on a more than arms length basis as two independent companies with two independent set of shareholders. There will be a common link between the two (the promoters) but that’s about it.
You have spoken of a listing of DLF Assets either in the domestic or international market?
That may be a possibility. Equity in DLF Assets will stand diluted partly by conversion of all these convertibles and partly by a listing.
Will you retain a majority stake in DAL?
Whether we can remain the majority shareholder or not will depend on the total amount of financing needed.
So, it is not something you are averse to?
I am not averse to it. But one thing: the asset management will remain with DLF at all points of time. DLF Ltd is in complete control of the assets. So the income or the benefit or the appreciation flows to the shareholders of DLF Assets but DLF Ltd is in complete control of the assets or of that entity.
But the ownership moves to DLF Assets?
The ownership moves but not the operating control. That is a very important point. So, in that way it is a very effective financing vehicle if you want to use the word.
I believe in the future of that vehicle. So I would like to maintain as much (stake) as I can. I do hope it will be a majority. It is a bit too early to say this. We will be the largest shareholder, the biggest and the influencing shareholder. Whether the majority or not, lets see.
Do you think you will take a relook at your accounts to see whether a change is needed in the way in which you book your profits in future. Some analysts have pointed out that most of your revenues come from sales to DAL?
We are not. Every real estate company in India and most of them in the world, by most I mean 99% of them sell their assets to everybody. Just because we are choosing to sell a portion of our assets to an entity, which is giving the highest returns to us, should be no cause of any kind of alarm. In fact, if I were sitting in those analysts’ shoes, I would be saying what about selling the balance of your assets (to DAL)?
(Pauses then speaks) Just repeat this question to me after six months.
What will change after six months?
You ask me after six months. I will actually be able to clearly demonstrate to you... I don’t want to make any statements for whatever reasons... I will show you exactly what we achieved by what we did (by selling assets to DAL), for the benefit of the DLF shareholders.
In the first quarter of this year, the company has not launched any new luxury homes projects. Does this mean the focus is shifting to middle income housing? And will this shift affect your profitability?
Not at all. We are doing luxury homes. We continue to do what we do. We launched a project in Greater Kailash in Delhi. We continue to sell large volumes in Gurgaon. The only new locations for luxury houses where we will be making some announcement soon in due course of time will be Mumbai and something possibly in due course of time in Goa.
I don’t think our margins will be affected. Our margins are quite healthy. And even in middle class housing we make good money. I don’t think we are doing middle class housing as a charitable venture. When multiplied by the volume it is a very strong contributor.
Do you feeling any pressure after the IPO?
I think there are a lot of expectations even from us. But we have always run the company on a tight basis — we are quite focused on performance and results.
Do you have a ticker in your laptop for the DLF share price?
I don’t have a ticker. I don’t have a laptop. I just get one SMS at the end of the day giving the total volume (of shares traded in the day) and the closing price.
So you don’t track the stock…
That’s a mug’s game. We have taken it as a longer-term game. I am reasonably confident that we will look after investors well and I think trying to be a trader rather than a real estate developer is not the reason why people give us money… they give us money to go out and build projects.
What is your view on BSE’s new realty index and its performance?
Two things have happened unfortunately. One is the sub prime (loans) issue. There is no sub prime issue in India. This is a local issue in the US. But sentiment is sentiment. So it does have a play on the issues. To that extent the realty index could have been affected.
Of course, the funds overseas tend to be a bit more jumpy.
Number two: right now there still is a reasonable amount of confusion. Investors are still trying to figure out who is who in this space. I think in the next six months they will figure that out. And then we will see an index which will be more representative of the facts and therefore it may turn out to be bit more stable. Initially, it will be more volatile because it is based on certain perceptions.
Everyone, including developers agree that we are just not going to see the high margins and exploding increase in property prices of the last four years. What is your take on the industry?
Generally, growth in the real estate industry is going to be about two to 2.5 times the growth of GDP (gross domestic product). We can keep looking at that number.
I think 17-20% real growth will continue for this industry in the foreseeable future. Poor performing companies will see 10-15% growth in real terms.
Would you look at acquiring companies to expand your footprint in new geographies?
I don’t think we will acquire any company. We will always ally with people who know the area well. As I said, we ally with people for new businesses because they know that area well. It takes away our risk and more importantly it takes away our headache to focus on the new area. Similarly, in a new geography, we may ally with people who know the geography well. We are open to that. We will look at joint ventures.
What is the status of your foray into airport development?
We have a joint venture (with Fraport). Nothing beyond that.
What kind of investments are you looking at for airport projects?
Investment would be frankly a function of what the government opportunities are available to us. As you know, there are two kinds of opportunities. One is in privatization and modernization of existing airports. Now, we will have to wait and see when the policy will really emerge. But that is an opportunity, we will respond to whenever it comes. If we get an opportunity there great, if we don’t.
The second opportunity, which is more promising, more reliable and more durable, is the creation of new airport infrastructure. That policy is again due to come out. I hope it will come out shortly. We will then respond and look at three or four locations at key points across India and try to build new airports along with the supporting infrastructure.
(In the) long term, I hope to have five airports across the country, most of them greenfield — maybe an odd one will be redevelopment of an existing airport. How much money it is going to take? What is going to happen? We will have to see.
Where does your joint venture with Laing O’Rourke stand? You had earlier said you would partner with it for airport projects.
Laing O’Rourke is extremely good at constructing airports. Fraport is extremely good at designing and running airports. So, Fraport is the airport partner. LOR may or may not be a contractor there. They will have to bid for it along with 25 other contractors. They are good enough and competitive enough. We don’t really want to interfere too much in these processes. We just want to be sitting on both sides of the table and encouraging LOR and Fraport to talk to each other. If Fraport feels, they can get someone else to do a better job, they will use them, if LOR feels they can use their construction resources somewhere better, then its fine.
You were planning to float an infrastructure fund. What happened to that?
Yes. We shall be having a fund. First (purpose of this) will be to raise money to build our SEZ’s.
Is this the $1.5 billion fund you have spoken about?
For the SEZs, it will be less than that. Once we raise the money required for SEZs, then we would like do infrastructure projects for third-parties like the government. Then we can come out with a second one (fund).
So, you plan two infrastructure funds?
The first fund will be for financing the SEZ. There is no dedicated infrastructure fund independent of that. (At) some stage it may happen but not now.
Your family is pretty involved in the business...
My elder sister’s involvement is on specific issues. But my younger sister Pia (Singh) has been extensively involved in our retail business. Frankly, that’s about it. I wish we had a greater family involvement. But it is not so. I think the company is run by independent professionals. Even Pia is there because of what she does. She does not pull her weight. If she did, she would have been pulled up.
Does she report to you?
Yes, she does
Are your children old enough to work in DLF?
My elder daughter has just graduated from college. If you had asked me this question a week later, she would have been working with us.
What will she be joining as?
I am just going to start her off. She has just passed out of college. So, she is young. We will put her in one of the businesses, possibly along with (consulting firm) McKinsey (& Co) to sort of learn the business from the ground level. I will decide that next weekend.
Does McKinsey do a lot of work for you?
I would like to believe we are McKinsey’s largest client in India. We have a whole army of McKinsey people with us. My daughter would work along with them in one of our businesses to learn the business from the ground level.
Your father is very interested in golf and art. Do you have any such interests?
Art, no. Golf, I enjoy.
DLF is reported to have one of the most valuable collections of art in the country…
I would say my father would be having... I won’t say DLF has. That’s purely a personal interest he developed very early on.
My piece of art is a map of Delhi (points to it in his room)... when my grandfather started the company. It gives a perspective. On the outskirts of the map, you can actually see Jangpura (now a posh south-central Delhi area). That was Delhi in those days. Jangpura was a jungle area. I enjoy art. But I don’t own it. I am not a collector as such.
As a firm, do you run the risk of having whetted investor expectations just a bit much?
Investors’ expectation is something I don’t know. I will show growth. I do hope investors will be pleasantly surprised. Some of them may have expectations that could be absurd. I can’t say anything to that. But generally, I think we will outperform all expectations.
(John Samuel Raja D. in Chennai contributed to this interview)