TOP OF THE WORLD: DLF chairman K.P. Singh says the windfall from his company's IPO "is embarrassing to me. That is not the yardstick by which I want to be known."
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DLF, which obviously remains a family-run operation, will need that kind of focus to successfully execute its ambitious agenda amid growing scrutiny, a by-product of going public. Some analysts say DLF, like the Indian property market itself, isn't transparent enough. There are questions surrounding the true value of DLF's recent land acquisitions, in part because 35% of the land on its books is not owned but under "agreement to purchase," according to IPO documents. In a pre-IPO report, Sydney-based Macquarie Research also criticized the fact that more than half of DLF's land is in New Delhi, Gurgaon and Mumbai, cities that some analysts believe will lag growth in smaller centers over the coming few years — a view rejected by DLF management. "These guys are perhaps not used to aggressiveness in business development," says Singh.
The biggest threat, though, remains an outside shock, especially a crash in the property or stock markets. When U.S. property and media tycoon Sam Zell visited India in April, he told local real estate executives that they were "on the brink of excess" and that the boom could end in a bust. Indeed, the past few months have been shaky ones. Real estate stocks plunged as much as 50% in a general market sell-off last spring, while property prices have fallen by 20% or so in some areas in the past six months. Both the government and the Reserve Bank of India are trying to cool the real estate sector without crashing it. The RBI has cautioned banks against excessive lending for property deals and has raised interest rates six times in the past 18 months to try to rein in inflation, which peaked at almost 7% in March. The Securities and Exchange Board, meanwhile, has tightened up regulations on foreigners investing in real estate firms ahead of public listings. All that has made it harder and more expensive for Indian builders to raise money.
Considering the challenges, it's hard to see how DLF's spectacular growth rate can be sustained for long. In its fiscal year that ended March 31, 2007, DLF reported that its profit grew by more than 1,000% to $470 million, while sales tripled to just under $1 billion. That record is fully reflected in the stock price, says Mukesh Agarwal, a manager at Indian financial-services firm HDFC Securities. "Since we have already had a stupendous run-up over the past two years, prices have been fully factored in," says Agarwal. "The upside may be limited."
Singh doesn't see it that way. "Urban development in India ... will be the biggest sunrise industry that any country has seen in any part of the world," he says. "And this is going to be a long haul, not three or four years but 20 years or more." The trend is being driven by macro forces, such as the country's demographics, that aren't usually taken into account by stock analysts, he says. Not only will India pass China as the most populous nation on the planet in a couple of decades, its citizens are a lot younger than its rival; one in three Indians is currently younger than 15. As the country becomes richer (with a little help from the strengthening rupee, India became a $1 trillion economy in late April) and more urban (the number of people living in cities will rise to 461 million by 2025 from 286 million today, according to the Asian Development Bank), demand for housing should go right on booming. Already India's Ministry of Housing and Urban Poverty Alleviation puts the shortage of homes at 25 million.
As its economy grows, India will need millions more square feet of offices as well. Industry analysts estimate India has less modern urban office space than a single large American city. India's infrastructure demands, too, should keep plenty of companies in business. The government estimates the country needs $320 billion of investments in roads, ports and bridges by 2012. "It's not a bubble," says Arjun Divecha, the California-based manager of investment firm GMO's $15 billion emerging-markets fund. "In India the reason why prices have risen so rapidly is because there has been so little increase in supply. If you look at the experience of other emerging markets, the real wealth escalator has been real estate and I expect the same in India."
So does Singh, who laments that in its first 60 years, India's philosophy was to "think small, make small buildings and never to think that we could make bigger things, better things." He pauses for a second, looking old when he stops, but animated and younger as soon as he begins talking again. "I ask you, why can't we be excellent?"