KUMAR DIGANT SINGH (01/10)

ANSHIKA AGARWAL (03/10)

NEERJA BHARDWAJ (10/10)

ANKUR GARG (12/10)

VIKAS AGARWAL (39/10)

FINANCIAL ANALYSIS OF DLF LTD.

Expected to grow from the current USD 14 billion to a USD 102 billion in the next 10 years

Driving ForcesBooming economy; accelerated GDP to 8% p.a Realization of large commercial projects Gradual organization of the markets in the Tier I cities Governing legal framework relaxed Entry of professional players equipped with expertise in real

estate development

CURRENT SCENARIO OF REAL ESTATE MARKET IN INDIA

DLF limited is the India’s biggest real estate developer based in New Delhi, India

DLF was founded in 1946 with the original name of Delhi Land & Finance DLF is currently sponsoring Indian Premier League (IPL) , A Twenty20 format

cricket league in India. Developments:

DLF INDIA

Risk & Return Analysis

Share Prices of DLF on BSE (1-Aug-09 to 31-July-10)

Beta ( β ) THE SENSITIVITY OF A SECURITY TO MARKET

MOVEMENTS IS CALLED BETA .

BETA REFLECTS THE SLOPE OF A LINEAR REGRESSION RELATIONSHIP BETWEEN THE RETURN ON THE SECURITY AND THE RETURN ON THE MARKET PORTFOLIO.

CALCULATION OF BETA For calculating the beta of a security, the following

market model is employed:

Rjt = aj + bjR Mt + ej Rjt = return of security j in period t aj = intercept term alpha bj = regression coefficient, beta RMt = return on market portfolio in period t ej = random error term

Beta reflects the slope of the above regression relationship. It is equal to:

Cov (Rj , RM) CorjM ρj σM CorjM σj bj = = = σ2

M σ2M σM

where Cov = covariance between the return on security j and the return on market portfolio M. It is equal to:

n _ _ (S Rjt – Rj)(RMt – RM)/(n-1)

i=1

  DLF Market

(1-Aug-2009 to 31 July 2010)  Rj Rm

Mean -0.088 0.054

Standard Deviation (SD) 2.599 1.161

Variance of returns 6.753 1.348

n 244

Covariance (Rj , Rm) 2.142

Correlation (Rj , Rm) = Cor 0.713

Coefficient of determination ( Cor2) 0.508

βj = Covariance (Rj ,Rm) / Variance Rm

= 2.142 / 1.348 = 1.59 = 1.60 (approx.)

OR

βj = Correlation (Rj ,Rm) * σj / σm

= ( 0.713 * 2.599 ) / 1.161

= 1.60

Security Market LineCalculation Of α

Rj = α+ β(Rm)

α = avg Rj - β(avg Rm)

α = - 0.088 - 1.6 (0.054)α = - 0.1734

Rj= -0.1734 + 1.5820 Rm

0 0.2 0.4 0.6 0.8 1 1.2

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

Dlf Return(...

Security Market Line

Total Risk of security = Unique Risk + Market Risk

Unique risk of a security represents that portion of its total risk which

stems from company-specific factors like development of a product,

labor strike. It is also called as Unsystematic Risk. It is a diversifiable

risk.

Market risk of security represents that portion of its risk which is

attributable to economy –wide factors. It is also called systematic Risk.

It is non diversifiable risk.

Analysis of Risk of DLF

Security Variance of DLF is 6.75%. Total Risk = Security Variance = Systematic Risk + Unsystematic Risk

◦ Systematic Risk = (Cor2) * Security Variance = 0.508 * 6.75% = 3.43 %◦ Unsystematic Risk = (1-Cor2) * Security Variance = (1-0.508)*6.75% = 0.492 * 6.75% = 3.32%

◦ Total Risk = 3.43% + 3.32% = 6.75%

Estimation of Cost of Capital

1. CAPM Model :

KE = Rf + βj (RM - Rf ) Rf = Risk free rate of interest

βj = Beta of the security

RM = Market Return

KE = 6.5 + 1.60 (13.20 - 6.5 )

KE = 17.22 %

Cost of Equity

2. Constant Dividend Growth Model :

KE = (D1 / P0) + g D1 = D0 * (1+g)

D1 = 2 * (1+0.1543)

D1 = 2.30

g is taken as the CAGR of the real estate industry as per BSE analysis from FY2000 – FY 2009.

P0 is taken as the closing share price of DLF on 30/7/10 on BSE.

KE = (D1 / P0) + g

KE = (2.30 / 301.30) + 0.1543

KE = 16.20 %

Cost of Debt

KD = Interest Paid (1-Tax Rate) / Sale Proceeds

KD = I (I-t) / Sale Proceed

Total value of Long term borrowings as per company balance sheet as on 31/03/2010 (Secured Loans + Unsecured Loans)

Total Financial Charges paid by the company during FY10. Assuming tax rate as 30%

KD = 2956 (1-0.30) / 21677

KD = 9.60% (approx)

Note : As per the annual presentation published by the auditor of DLF with quarterly results of April-June 2011 clearly states that the cost of debt of the company is 10.50 %. .

Source of CapitalBook Value as on

31/3/10 Weights Cost of Source

EQUITY SHARE CAPITAL 30433 0.58 17.22%

DEBT CAPITAL 21677 0.42 9.60%

52110

Weighted Average Cost of Capital (WACC)

WACC = 0.58 (17.22%) + 0.42 (9.60%)

WACC = 14.11 %

Year 2007-08 2008-09 2009-10

Dividend Per Share (DPS) 4 2 2

Earning Per Share (EPS) 43.90 26.24 10.11

Dividend Payout Ratio (DPS/EPS) 9.11 % 7.62% 19.78%

Dividend Policy

DIVIDEND YIELD = DPS / MARKET VALUE OF SHARE

DIVIDEND YEILD = 2 / 301.30

DIVIDEND YEILD = 0.66 %

Leverage Analysis

DEGREE OF OPERATING LEVERGE: (DOL) 

It may be defined as the firm`s ability to use fixed operating costs to magnify the effects of sales on its earnings before interest & taxes (EBIT).

DOL magnifies the variability of operating profits and, hence, business risk.

DOL = % CHANGE IN EBIT / % CHANGE IN SALES

DOL = CONTRIBUTION / EBIT

 

DEGREE OF FINANCIAL LEVERAGE : (DFL) 

It may be defined as the firm`s ability to use fixed financial charges to magnify the effects of changes in EBIT on the earnings per share (EPS).

DFL magnifies the variability of EPS and, hence, financial risk.

It arises due to the presence of fixed financial charges in the firm`s capital structure. Fixed charges include: debt principal and interest payments, lease payments, and preferred stock dividends.

  DFL = % CHANGE IN EPS / % CHANGE IN EBIT DFL = EBIT / EBIT – I – [ PD / (1-t) ]

DEGREE OF COMBINED LEVERAGE : (DCL) 

It may be defined as the firm`s ability to use fixed costs (operating as well as financial to magnify the effect of changes in sales on the EPS.

DCL magnifies the variability of EPS and hence, Total Risk.It is the sum of business plus financial risk.

DCL = % CHANGE IN EPS / % CHANGE IN SALES DCL = DOL * DFL

Years 2007-08 2008-09 2009-10

EBIT (in Rs. Cr) 9,619.17 5,358.45 3,186.64

SALES (in Rs. Cr.) 14,432.89 10,035.39 7,422.87

EPS (in Rs./Share) 46.9 26.24 10.11

     

% EBIT - -44.294 -40.531

% SALES - -30.469 -26.033

% EPS - -44.051 -61.471

DOL - 1.454 1.557

DFL - 0.995 1.517

DCL - 1.4458 2.3613

Working Capital Analysis

Working Capital2008-09 2009-10

CURRENT ASSETS

STOCK 10928 12528

SUNDRY DEBTORS 2164 1619

CASH & BANK BALANCES 1195 928

OTHER CURRENT ASSETS 7621 7594

LOANS & ADVANCES 9719 4637

31627 27306

CURRENT LIABILITIES

CURRENT LIABILITIES 4140 4637

PROVISIONS 3684 4140

7824 8777

Net Working Capital (CA – CL) 23803 18529

Particulars 2008-09 2009-10

Net Cash From Operating Activities 175 8604

Net Cash (used in)/from Investing Activities (3590) (16281)

Net Cash (used in)/from Financing Activities 2442 7393

Opening Cash & Cash Equivalents 2069 1096

Closing Cash & Cash Equivalents 1096 812

Net Decrease in Cash & Cash Equivalents -973 -284

Cash Flow Statement

2008-09 2009-10

Current Ratio 4.04 3.11

Quick Ratio 2.65 1.68

Debt Equity Ratio 0.63 0.71

Net Profit Margin 40.38 32.36

Operating Profit Margin 57.79 48.96

Dividend Payout Ratio 7.62 18.44

PE Ratio 16.36 30.56

Key Ratios

Comparative Analysis of Real Estate Industry in India

DLF HDIL OMAXE DB REALITY UNITECH

Market Capitalisation (In Rs. Cr) 53639 10196 2284 10853 20596

Share Prices (as on 8/9/10) 318.25 279.25 131.6 439.05 81.9

EPS 10.11 15.4 6.8 2.54 2.77

PE RATIO 30.56 27.80 19.40 175.70 39.57

NET PROFIT MARGIN 32.36% 38.09% 11.24% 30.50% 23.03%

DEBT EQUITY RATIO 0.71 0.83 1.24 1.11 1.19

DIVIDEND YEILD 0.66 ---- 1.24 ------ 0.4

BV OF SHARES 144.28 195.7 91.14 125.32 42.02

PB RATIO 2.2 1.42 1.44 3.52 1.95

There has been 25% decline in sales revenue of the company in FY10 as compare to FY09.

Consolidated PAT & EPS has been decreased 55% & 61% respectively compare to FY09

These decline in the profitability of the company can be attributed to the economic slowdown which has hit the real estate sector.

Looking at Q1 results of FY11 we can see improvement in the overall performance of the company .Sales for Q1FY11 were 2456 crores as compared to 1654 crores in Q1FY10 .

Results and ImplicationsFor FY10 (all comparisons with FY09)

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