“Our concern was – How do we manage our rate of debt?”
In the midst of the general concern and uncertainty in the market regarding the realty sector and companies like DLF, the company’s Group Executive Director Rajeev Talwar is optimistic of a more evolved market & consistent supply in the coming years. In this exclusive with virat bahri of B&E, Talwar talks about DLF’s downturn adjustments and future vision. Some excerpts
B&E: Market reports are highlighting the fact that DLF missed its targets for FY 2009-10. What is your view of the company’s performance?
Rajeev Talwar (RT): This question (by analysts) is unreasonable on two grounds. Firstly, is it due to lack of knowledge about the recession in the developed economies, including Japan, and downturn and meltdown in the other economies? That should answer one half of your question – why the targets were missed. Secondly, real estate is a hugely complex and intricate business. People talk at times of a price bubble in booming economies. There was no price bubble (in India) at all. There was a mere gap between demand and supply. It may take a gestation period of less than an year for a particular processed product in the manufacturing sector; in this sector it takes very often 4-5 years between conception to delivery. Whenever economies boom and there is no regular supply chain, there is bound to be a price rise due to shortage of housing or office space. If the economy grows at 8%, then the CAGR of real estate sector should be around 20%. That is the reason for demand-supply gap and increase in prices and speculators coming in. On the other side, in a downturn, people’s jobs are affected, emotional security is affected; there is an immediate drop in interest to acquire. Downturn and slide is much greater in the real estate sector. We were certain that there is bound to be a tight leash on targets of sales and revenues in downturn. But expenditure targets have to be exceeded, since that is the time when you have to concentrate and focus on execution and delivery. Construction in the last 1 year, which had dropped down from peak levels of 65-70 million sq. ft. (msf), a large percentage of construction in the private sector to 40-41 msf has picked up again to around 56 msf. So we are focusing on execution and in better times to come they would reflect better deliveries and constant supply.
B&E: How do you see the demand scenario picking up now?
RT: A good economy which is coasting along, hopefully a good monsoon, better crops, lower inflation and pressure on RBI reduced to hike up rates and possibly to go back to a low interest economy regime – if that happens, one sees a growing confidence from consumers and strongest demand from the residential sector. A good economy will also reflect that the corporate sector is getting stronger, which will reflect itself in increased demand for office space. In retail segment, while last year’s festive season was good, a good period of economic growth will shore up confidence among people and if there is a good festive season this year, the next fiscal should see some growth signs back in the retail segment.
B&E: What potential does DLF see in middle income/affordable housing?
RT: Due to our legacy, it is high income, because our locations and plots are extremely valuable. We are taking projects and seeing to it that we launch at the most competitive levels in order to make them value for money housing. Revenue growth should come. Government talks about Rs.10 lakh and above as mid-income. In tier 1 and super metro cities, it should be probably above Rs.50 lakh. Land here is usually controlled by government or it becomes very valuable if it is in private hands too.
Therefore your cost of acquisition becomes high. It therefore becomes impossible to give you what is normally called affordable housing or middle income housing below Rs.20 lakh. But Rs.10-20 lakh homes, even below, will be available for the poor. If housing costs Rs.50-75 lakh as mid-income housing in the super metros; in a tier 1 city it will cost Rs.45-60 lakh and going down to a tier 3-4 cities, you will get good homes at even less than Rs.20 lakhs. Since we are not in those cities and towns, I don’t think it will be possible for DLF. Our value housing even below Rs.5 lakh and Rs.10 lakh will be adjunct to the service category of our mid-income and high income group housing in super metros & tier 1 towns. Due to our name, quality, & location in the heart of the town, we tend to be in the upper end, but certainly, we also provide housing for the economically weaker section. Those will also be coming & will be costing anywhere between Rs.5-20 lakh depending on their proximity to premium locations.
B&E: Downturn increased debt levels significantly. How have you managed them over the past year?
RT: Some time after 9/11 in the US, everyone thought there was no end to the upswing. When it did come, it caught everyone by surprise. They weren’t unmanageable levels of debt for us but the only concern was how do you reduce the rate and increase the tenure. There was so much commercial paper in the market prior to that. Anywhere from 120-180 days seemed to be a long cycle till the time we realized that a good long cycle commercial paper or debt is of a period from 3-5-7-9 years. The second lesson was to reduce the interest rate. Our debt from under 1 year has increased to 3-5 years in tenure and also has portions of 7-9 years. At the same time, from 11.98% interest level, we have already come down to 10.5%. In real estate, people ask whether your debt levels are high or going higher. The fact is that there is so much of embedded value in your assets that debt is not something that you are normally so worried about, till the time a company is so highly leveraged that it cannot meet its development requirements (front flow) or its overhead costs for its normal cash flow. For us, thanks to various policies before and therefore very far-sighted policies even to take care in a downturn where you have a steady rental inflow of income, we have been through that much more easily. It’s already established that whatever overhead developmental costs or interest costs we have are well met from our usual leasing and launch businesses; so DLF doesn’t face pressures that some other overleveraged companies may face.
B&E: Market reports are highlighting the fact that DLF missed its targets for FY 2009-10. What is your view of the company’s performance?
Rajeev Talwar (RT): This question (by analysts) is unreasonable on two grounds. Firstly, is it due to lack of knowledge about the recession in the developed economies, including Japan, and downturn and meltdown in the other economies? That should answer one half of your question – why the targets were missed. Secondly, real estate is a hugely complex and intricate business. People talk at times of a price bubble in booming economies. There was no price bubble (in India) at all. There was a mere gap between demand and supply. It may take a gestation period of less than an year for a particular processed product in the manufacturing sector; in this sector it takes very often 4-5 years between conception to delivery. Whenever economies boom and there is no regular supply chain, there is bound to be a price rise due to shortage of housing or office space. If the economy grows at 8%, then the CAGR of real estate sector should be around 20%. That is the reason for demand-supply gap and increase in prices and speculators coming in. On the other side, in a downturn, people’s jobs are affected, emotional security is affected; there is an immediate drop in interest to acquire. Downturn and slide is much greater in the real estate sector. We were certain that there is bound to be a tight leash on targets of sales and revenues in downturn. But expenditure targets have to be exceeded, since that is the time when you have to concentrate and focus on execution and delivery. Construction in the last 1 year, which had dropped down from peak levels of 65-70 million sq. ft. (msf), a large percentage of construction in the private sector to 40-41 msf has picked up again to around 56 msf. So we are focusing on execution and in better times to come they would reflect better deliveries and constant supply.
B&E: How do you see the demand scenario picking up now?
RT: A good economy which is coasting along, hopefully a good monsoon, better crops, lower inflation and pressure on RBI reduced to hike up rates and possibly to go back to a low interest economy regime – if that happens, one sees a growing confidence from consumers and strongest demand from the residential sector. A good economy will also reflect that the corporate sector is getting stronger, which will reflect itself in increased demand for office space. In retail segment, while last year’s festive season was good, a good period of economic growth will shore up confidence among people and if there is a good festive season this year, the next fiscal should see some growth signs back in the retail segment.
B&E: What potential does DLF see in middle income/affordable housing?
RT: Due to our legacy, it is high income, because our locations and plots are extremely valuable. We are taking projects and seeing to it that we launch at the most competitive levels in order to make them value for money housing. Revenue growth should come. Government talks about Rs.10 lakh and above as mid-income. In tier 1 and super metro cities, it should be probably above Rs.50 lakh. Land here is usually controlled by government or it becomes very valuable if it is in private hands too.
Therefore your cost of acquisition becomes high. It therefore becomes impossible to give you what is normally called affordable housing or middle income housing below Rs.20 lakh. But Rs.10-20 lakh homes, even below, will be available for the poor. If housing costs Rs.50-75 lakh as mid-income housing in the super metros; in a tier 1 city it will cost Rs.45-60 lakh and going down to a tier 3-4 cities, you will get good homes at even less than Rs.20 lakhs. Since we are not in those cities and towns, I don’t think it will be possible for DLF. Our value housing even below Rs.5 lakh and Rs.10 lakh will be adjunct to the service category of our mid-income and high income group housing in super metros & tier 1 towns. Due to our name, quality, & location in the heart of the town, we tend to be in the upper end, but certainly, we also provide housing for the economically weaker section. Those will also be coming & will be costing anywhere between Rs.5-20 lakh depending on their proximity to premium locations.
B&E: Downturn increased debt levels significantly. How have you managed them over the past year?
RT: Some time after 9/11 in the US, everyone thought there was no end to the upswing. When it did come, it caught everyone by surprise. They weren’t unmanageable levels of debt for us but the only concern was how do you reduce the rate and increase the tenure. There was so much commercial paper in the market prior to that. Anywhere from 120-180 days seemed to be a long cycle till the time we realized that a good long cycle commercial paper or debt is of a period from 3-5-7-9 years. The second lesson was to reduce the interest rate. Our debt from under 1 year has increased to 3-5 years in tenure and also has portions of 7-9 years. At the same time, from 11.98% interest level, we have already come down to 10.5%. In real estate, people ask whether your debt levels are high or going higher. The fact is that there is so much of embedded value in your assets that debt is not something that you are normally so worried about, till the time a company is so highly leveraged that it cannot meet its development requirements (front flow) or its overhead costs for its normal cash flow. For us, thanks to various policies before and therefore very far-sighted policies even to take care in a downturn where you have a steady rental inflow of income, we have been through that much more easily. It’s already established that whatever overhead developmental costs or interest costs we have are well met from our usual leasing and launch businesses; so DLF doesn’t face pressures that some other overleveraged companies may face.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
Prof. Rajita Chaudhuri's Website
domain-b.com : IIPM ranked ahead of IIMs
Arindam Chaudhuri's Portfolio - he is at his candid best by Society Magazine
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
Professor Arindam Chaudhuri - A Man For The Society....
IIPM: Indian Institute of Planning and Management
IIPM makes business education truly global
IIPM B-School Detail
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
Prof. Rajita Chaudhuri's Website
domain-b.com : IIPM ranked ahead of IIMs
Arindam Chaudhuri's Portfolio - he is at his candid best by Society Magazine
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
Professor Arindam Chaudhuri - A Man For The Society....
IIPM: Indian Institute of Planning and Management
IIPM makes business education truly global
IIPM B-School Detail
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