final report-cft-formated v01(real estate)

8/7/2019 Final Report-CFT-Formated v01(Real Estate)

http://slidepdf.com/reader/full/final-report-cft-formated-v01real-estate 1/21

1

Corporate Finance and Taxes

Report on: Critical Analysis of Real estate sector

Submitted By:

AnishArvindakshin (2010H149245P)

Sagar V Nair (2010H149207P)

SoumikSaha (2010H14925P)

SiddharthSahu (2010H149247P)



2

REAL-ESTATE SECTOR (CO STRUCTIO & CO TRACTI G FI ANCIAL ANALYSIS

(2006-2010)1

An Insi In to the Real Estate Industry In India:

A Strong population growth, a large pool of highly-skilled workers, greater integration with the worldeconomy and increasing domestic and foreign investment are expected to drive India¶s real GDP by 6% p.a.

over the next 10 to 15 years. The Real Estate sector in India is the second largest employer after theagriculture industry and contributes to nearly 10% of the GDP. In terms of facts the housing and commercial

sector has been steadily growing at a 34% rate in terms of sales. The total market value of under-construction projects in India has crossed 100 Billion dollars. The residential component contributes to 66

billion dollars (66%) and the rest are contributed by commercial complexes and office spaces. There is ahuge potential for the real estate market in India with an estimate of nearly 600 new commercial shopping

complexes and an approximate requirement of 10 million new housing units every year by 2030, with a population of 1.1 billion people and still increasing and also being the second favoured location for investors

after China these figures do look realistic. Real estate being a major contributor to the Indian GDP, giving

lively hood to millions of people and also having a great opportunity and potential to grow in the future, we

decided to undertake our study in the realty sector. The realty sector having major players like DLF, ShobhaDevelopers, HDIL, & India-Bulls we targeted the above mentioned companies to analyse its Balance Sheet,

Profit & Loss Account and provide an extensive study to get better understanding of the performance of each

company.Source* Refer footnote 2.

Demand Dri ers:

Source* Refer footnot e 2.

Prof itability Analysis:

1.Dun & Bradstreet India (D&B India)

2. Corporate Catalyst India



3

The sales turnover of DLF was around 953.46 crores and had consistently increased. The sales increased by

around 16% for 2007, in 2008 there was a drastic 400% increase in sales during this period the real estate

market in India was in a booming period and there was cost bubble or high amount of speculation in the real

estate prices. During the recession when the subprime crisis occurred, the housing and real estate sector

collapsed and there by bringing down the sales volume of all major real estate companies. This change in theeconomy reduced DLF sales by 50% in 2009 and in 2010 it further reduced by 4% in 2010. In terms shares

it¶s good for the company when its sales are growing up as it brings in more confidence in the investors and

so DLF share prices has been increasing till 2008 and then drastically fell in 2009 and 2010. The trend

remains similar for EBIT & PAT as they do not have much of an income from other activities. The profit

margins during the recession period has increased due to the lowering in tax payments and also due to cost

cutting efforts that is labor cost and raw material costs were low during the recession. However if we see the

net profit during 2010 has reduced to 28% because of rise of prices in raw material, Labor etc. The reason

for high EBIT during the years 2007,2008,2009 & 2010 the company has gone for huge debts , which in turn

has increased its interest and so lowering the net profit margins. The debts, in this firm, has grown at an

average rate of 40% Y-O-Y. Also there is a decrease in EBIT during the years 2008, 2009 as during this

period the selling and administration cost for the firm increased drastically as they were trying to push sales

duringthis period. DLF has a good interest coverage ratio for the year 2008 however it reduced drastically in

the years 2009, 2010 and is still reducing which is a bad indication for the company. The key reason for the

company to perform bad is that like all real estate companies DLF invested heavily in to land much more

than needed expecting land prices to increase however the recession collapsed all their plans as the prices of

the land reduced by nearly 30% and this left the company short of financing its operating needs and leading

to the downfall.The sales of IndiaBulls were zero for the first year. And gradually increased over the next 2

years but during 2009-20010 it has seen a gradual fall in its sales. This could be because of the reason of

recession. In its first year there were no sales but only inventory. But from the next year onwards they were

able to use up those inventories and produce sales without subsequent inventory stoking. They just prepared

estates and sold. No stock.The Sales figures look the strongest for DLF and it¶s reached the peaks on 2008

next followed by HDIL and then by Shobha. From 2006 to 2008 the % increase was 463.7% However, even

during the recession that is during the period of 2009-10. It¶s sales reduced by -27.7%, indicating the effect

of recession in the company. The trend remains similar for EBIT & PAT as they do not have much of an

income from other activities.

Representation of EVA:



4

Economic Value Added or EVA is an estimate of a firm's economic profit - being the value created in

excess of the required return of the company's shareholders - where EVA is the profit earned by the firm less

the cost of financing the firm's capital. This explains that shareholders gain when the return from the capital

employed is greater than the cost of that capital. The higher the economic value add of the company the

better it is from point of view of the investor and the company.

DLF has performed well in terms of the investors as the EVA values for 2006, 2007 & 2008 are high which

shows better returns. DLF has experienced a negative EVA for years 2009 & 2010 due to the recession

which shows that it¶s not earned better return than the cost of the capital employed which shows poor

performance of the company for last two years. For India-Bulls, the EVA has been always in negative over the last 5 years. Over the year 2006-2208, there was some increase in the value, but since 2008 after

recession, there has been increase in the negative value. HDIL has performed well in terms of the investors

as the EVA values for 2006, 2007 & 2008 are high. DLF has experienced a negative EVA for years 2009 &

2010 due to the recession which shows that it¶s not earned better return than the cost of the capital employed

which shows poor performance of the company for last two years. EVA looks strong for DLF & Sobha

developers as they are more constant and this due to a good Non-Operating Profit after Tax for both these

companies.

-300

-200

-100

0

100

200

300

400

500

600

700

0 1 2 3 4 5 6

EVA DLF

EVA Sobha



5

Representation of MVA:

The market value adds is the difference between the equity market valuation of a listed company and theadjusted book value of equity invested in the company. The higher the market value adds the better as a high

MVA shows that the company has created substantial wealth for the shareholders. A negative MVA shows

that the value of the actions and investments of the management is less than the value of the capital

contributed to the company by the capital market.

DLF MVA has never been negative since 2006 which means that its shares are providing some sought of a

value add always. The least MVA for DLF is during 2009 where it falls to 94 this can be explained because

of low sales, poor results which resulted in bad market sentiments. However it has improved to 233 in 2010

which shows that the market is improving and investors are again gaining confidence. In IndiaBulls

company there was an increase in the value over the year 2006-2008. There was a very substantial rise in the

value addition. But since recession it has witnessed a reduction in the value. But after 2009, it has showed aslight increase in the year 2010. This may be because in improved market condition which has made the

investors go more more investment. Also an increase in sales, have contributed to it. The MVA is related to

various factors like company results, sales, profits, market sentiments, Investors trust towards the company,

future growth rate and opportunity etc. In case of real estate we see clearly that the MVA & EVA is related

to the sales and also the economic conditions prevailing. Real estate is one sector which gets drastically

effected during the recession as their will be liquidity crunch in the market and due to this less or almost no

people would be ready to invest in real estate.

Inventory Turnover, Fi ed Asset & Total Assets Ratios

The ratio is mainly used to give an idea of the company's ability to pay backits short-term liabilities

(debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the

more capable the company is of paying its obligations. Inventory turnover ratio is the ratio between sales and

-200.0000

0.0000

200.0000

400.0000

600 .0000

800.0000

1000.0000

0 1 2 3 4 5 6

MVA S

¡

¢ a

MVA £ LF



6

inventory high inventory turnover ratio means that there has been good sales and so lesser inventory

however a lower inventory turnover ratio could mean poor sales.

DLF has had a high inventory turnover ratio for 2006 which says that there has been higher sales and less

inventory and ever since 2006 it has an almost constant low inventory turnover ratio which says that there

has been more of inventory rather than sales which is not a very healthy for the company. DLF uses many

inventory management strategies which reduces their inventory and their by reducing their inventory

costs.The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset

investments - specifically property, plant and equipment (PP&E) - net of depreciation. A higher fixed-asset

turnover ratio shows that the company has been more effective in using the investment in fixed assets to

generate revenues. The fixed asset turn over ration for DLF for March 2006 is 0.49 this low as the sales are

low for 2006 and it means the fixed asset is not effectively used however it steadily increased to 0.62 and

1.07 for 2007, 2008 which shows the companies fixed asset are effectively used to convert to current assets

and thereby contributing to the sales. Again there has been a dip in fixed asset turnover ratio to 0.43 & 0.27

which show ineffective use of fixed asset reflects that company¶s sales are bad.The total asset turnover ratio

measures the ability of a company to use its assets to generate sales. The total asset turnover ratio considers

all assets including fixed assets, like plant and equipment, as well as inventory and accounts receivable. The

lower the total asset turnover ratio, as compared to historical data for the firm and industry data, the more

sluggish the firm's sales. This may indicate a problem with one or more of the asset categories composing

total assets - inventory, receivables, or fixed assets. The small business owner should analyse the various

asset classes to determine where the problem lies. The total asset turnover ratio is low for DLF ranging from

0.1 - 0.25 which shows that it¶s not performing well it terms of effective use of its assets to generate sale.The

current ratio and quick ratio shows an increasing trend from the year of IPO (Nov 23, 2006). There has been

a great increase in current assets due to growth in sales and proportional growth in inventory levels due to

the large no. of residential and commercial projects undertaken in major cities. This trend continued until

2008.However, the ratio (Current ratio, Quick ratio and inventory turnover Ratio) dip after the year 2008 can

be owed to the sluggish sales due to recession. Many buyers deferred their decision to acquire properties dueto this uncertain economic scenario.Inventory turnover ratio is not applicable for this company as they didn¶t

have any inventory in their stock. They had no stocked inventories.Fixed Asset Turnover ratio: If we see the

trend of the company over the 4-5 years, it has been able to convert its fixed assets into revenues. But

towards the year 2009, 2010 there has been a fall in it because the prices of the buildings and plants have

risen. But the rise in the demand for real estate is not the same.

Total Asset Turnover Ratio:

Similarly, the sales generated from each dollar or Rupees worth of asset¶s, is shown by this ratio. For this

company, the ratio has been increasing over the years. But as seen in the trend of the fixed asset ratio, there

is a steep fall in it from 0.016 to 0.008 in year 2009. This can be because of the high profit margin sales.Companies with high profit margin sales tend to have low asset turnover.The inventory turnover ratio for

HDIL, was high in 2007, but after 2007 there been a constant decline in the ratio. A low turnover is usually a

bad sign because products tend to deteriorate as they sit in a warehouse.Low-ratio, means the company has

funds tied up. They must be having difficulty in selling. Which in turn may eat up company¶s profit?The

fixed asset turnover ratio means the company's effectiveness in generating sales from its investments in

plant, property, and equipment. From 2006 to 2008 it increased by 204% but than from 2009 to 2010 it

declined by 81%. If the fixed asset turnover ratio is low as compared to the industry or past years of data for



7

the firm, it means that sales are low or the investment in land is too much. This may not be a serious problem

if the company has just made an investment in fixed asset to modernize. The asset turnover ratio was highest

in 2006 but thereafter it¶s on a decline phase. There could be a problem with inventory. The firm could be

holding obsolete inventory and not selling inventory fast enough. With regard to accounts receivable, the

firm's collection period could be too long and credit accounts may be on the books too long. Fixed assets,

could be sitting idle instead of being used to their full capacity. All of these issues could have lowered thetotal asset turnover ratio.

Current Ratio & Quick Ratio:

The current ratio is a measure of the company¶s liquidity; it also measures the margin of safety that

management maintains in order to allow for the inevitable unevenness in the flow of funds. The Current ratio

is mainly used to give an idea of the company's ability to pay back its short-term liabilities

(debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the

more capable the company is of paying its obligations. The current ratio can be misleading as a company

with high cash reserve will be having more liquidity than a company with high inventory. So Quick Ratio

gives a better measure of the liquidity in the company as it does not include inventory and prepaid expensesin the current assets.

The current ratio for DLF has increased steadily till 2009 which may show that the company has more

liquidity but it may be actually due to more current assets as during the recession the sales has reduced and

inventory has increased however this dip is clearly visible in quick ratio as it slip down during 2009

considerably which show liquidity in the company is less. The quick ratio of DLF reached its peak in 2008 at

0.74 which showed it¶s performed well in 2008. DLF has maintained satisfactory current asset ratios this is

owing to the fact that they have invested their investments well and have been successful in generating

quality assets also DLF has never had any issues with liquidity as they maintain good cash flow and manage

their working capital requirement well and its clearly visible from its quick ratio. However it¶s true it has

faced issues like all during the current recession.DLF Quick Ratio's is very low as the Monitory assets are

less as they have high A/c receivables and also huge inventories. This also the case as DLF has a high sales

turnover and therefore tries to push sales on credit.The current ratio and quick ratio shows an increasing

trend from the year of IPO (Nov 23, 2006) for Sobha Developers. There has been a great increase in current

assets due to growth in sales and proportional growth in inventory levels due to the large no. of residential

and commercial projects undertaken in major cities. This trend continued until 2008.However, the ratio

0

2

4

6

8

10

12

14

16

18

2004 2006 2008 2010 2012

Current Ratio

- DLF

Current Ratio

- So ¤ ¥ a

Current Ratio

- HDIL

0

2

4

6

8

10

12

14

16

2004 2006 2008 2010 2012

Quick Ratio -

DLF

Quick Ratio -

So ¦ § a

Quick Ratio -

HDIL



9

the fact that Sobha Developers mostly caters to the middle class customers, and hence such it maintains a

low pricing policy to attract the large customer base in this segment in South India. There was negative

profit margin because of no sales in the first year of 2006. But then there was a steep increase in profit

margin sales in 2008 even though there was less sales because of very high income from other sources. But

again there was fall from 72% to 11% and 16% in the year 2009 and 2010 because of poor sales. India-Bulls

seems to be having a high profit margin on sales but this is not very convincing since they have very highincome from other investment and this gives a false image of the company. HDIL & DLF also has a high

profit margin over Sobha Developers which talks of the cost effectiveness and pricing strategy of each

company.

R OE:

Return on equity (ROE) measures a company's profitability by indicating how much profit it generates with

the money shareholders have invested.

ROA gives an idea as to how efficient the company is at using its assets to generate earnings. Thehigherthe

ROA the better, because the company is earning more money on less investment. Return on equity

(ROE) measures a company's profitability by indicating how much profit it generates with the money

shareholders have invested. DLF Ltd. as such has provided shareholder with an in-consistent return on

common equity, however the market value of DLF is high. The ROE has been inconsistent as there are

periods during which the ROE has been less than the cost of capital which means the investment have not

provided the necessary returns. The ROE for the years 2007, 2009, 2010 have been very low as the return on

total assets and the equity multipliers have been very low, this is due to the facts that the DLF investments

have not been able to produce quality assets and also that their asset turnover ratio has been very low that is

there productivity had reduced drastically for these years.The return on equity was increasing from year

2006-2007. In the year 2008, it witnessed a big rise. That year was the best industry to invest for investors.

Company was able generate a lot on the money of shareholders. But then over the next two years there was

again a steep fall.The ROE also looks more stable in case with DLF and since it gives better returns to its

investors as it Sales, Net Profits are high. The ROE means that DLF management have invested the capital

in a better way as they have most of the time generated more than the capital invested.

DU-PONT ANALYSIS:

The Du-Pont analysis break the calculation for ROE in to five ratios namely Tax Burden, Interest Burden,

Operating Profit Margin, Asset turnover ratio, Leverage ratio. Below mentioned are the Du-Pont for each of

the companies.

The company's tax burden is (Net profit ÷ Pretax profit). This is the proportion of the company's profits

retained after paying income taxes.

The company's interest burden is (Pretax profit ÷ EBIT). This will be 1.00 for a firm with no debt or

financial leverage.

The company's operating prof it margin or return on sales (ROS) is (EBIT ÷ Sales). This is the operating

profit per dollar of sales.



10

The company's leverage ratio is (Assets ÷ Equity), which is equal to the firm's debt to equity ratio + 1. This

is a measure of financial leverage.

ROE 2006 2007 2008 2009 2010

TAX BURDEN 0.65172789 0.6529196 0.82560716 0.84153608 0.81322746

INTEREST BURDEN 0.70640864 0.6364390 0.86441824 0.69302797 0.52547295

Operating Profit Margin 0.51813395 0.8863714 0.65622998 0.93846670 0.65593789

Asset Turn Over 0.26059007 0.1484296 0.2796643 0.12860053 0.10717119

Leverage Ratio 96.8718559 24.264744 57.6477006 64.7825830 75.0201779

ROE 6.02171035 1.3265659 7.5504458 4.55977492 2.25362318

The Tax Burden and Interest Burden are more or less constant as the tax and interest will vary

proportionately with Sales & money borrowed.

Operating profit margins for the years vary with the economy and the real estate market and it¶s high for

2008 and 2009 and reduces in 2010. The leverage rate of DLF has been constantly high as its debt is veryhigh compared to the equity. The ROE for DLF has constantly varied with it peaking in 2008 to 7.55 to a

low in 2010 to 2.22. DLF on an average has provided good ROE to its investors. In general the Real estate

industry maintains a high degree of operating leverage.

Sobha Developers:

Company's Tax Burden 0.829 0.866 0.843 0.754 0.853

Company's Interest Burden 0.837 0.795 0.819 0.580 0.705

Leverage Ratio(Total asset/Equity) 26.488 19.194 37.742 41.175 32.251

IndiaBulls:

2006 2007 2008 2009 2010

Tax Burden 4.86708860 0.70294906 0.7752619 0.7073900 0.833580981

Interest Burden -3.2244897 0.99360681 0.99367505 0.2267531 0.342014992

Operating Prof it Margin NA 1.40810202 12.7092317 2.29269376 2.315681083

Asset Turnover 0.0000 0.0159 0.0168 0.0085 0.0052

Leverage Ratio 50.472732 23.3831385 58.9622171 102.840388 81.26347902

R OE 0 0.3647746 9.70936267 0.3215533 0.279417258

HDIL:

A 42.17% in 2007 return on equity is good in any industry. Yet, if you were to leave out the equity

multiplier to see how much HDIL would earn if it were completely debt-free, you will see that the ROE

drops to 27.80%. In other words, for fiscal year 2007, 27.80% of the return on equity was due to profit

margins and sales, while 14.37% was due to returns earned on the debt at work in the business. If you found



11

a company at a comparable valuation with the same return on equity yet a higher percentage arose f rom

internally-generated sales, it would be more attractive.

R E of HD L is decreasing

R ECalculation

A company's R ratio is calculated by dividing the company'snet income by itsshareholder equity, or book

value. The formula is simple: Possi ble cause for decrease In net Income is possi ble decrease in R evenue,

Increase in Income tax expense. Increase in shareholder equity due to increase in assets, which In turn ishigh due to increase in inventory.It turns out, however, that a company cannot growits earnings faster than

its current R without raising additional cash. That is, a f irm that now has a 7.4% R cannot increase itsearnings faster than 7.4% annually without borrowing funds or selling more shares. So R is, in effect, a

speed limit on a f irm's growth rate, which is why money managers rely on it to gauge growth potential

Regression Analysis:

DLF:The linear equation of regression for DLF would be:

M A = 537.923+0.216EVA-0.390EBIT-3.909EPS+0.255Sales

From the equation it s clear ly visi ble that EPS & Sales contr i butes the most to MVA in case DLF. If given a

look at the data we see that whenever EPS has been low but sales have been high the MVA is high. The

values of PAT & R E are excluded as they are not showing any k ind of relation.

IndiaBulls:The linear equation of regression for IndiaBulls would be:

MVA=215+0.103EVA+6.296PAT-4.952EBIT+4.869Sales

From the equation it s clear ly visi ble that PAT, Sales & EBIT are the ma jor contr i butors to MVA. If we have

a look at the data we see that when PAT, Sales are highand if EBIT is low the MVA is high. The exclude

var iables here are EPS & R E as they have no relationshi p with MVA.

Shobha Developers:The linear equation of regression for Sobha Developers:



12

MVA=149-0.440EVA+23.42EPS+5.413ROE-.512Sales

As per the equation we see that EPS plays a major role in MVA and as per the data also we find that for all

years when the EPS is high the MVA is high and this is satisfied in the equation.

If we take the Industry as a whole we see that the EPS is the most contributing factor to the MVA.

HDIL:

The liner equation of regression for HDIL developers:

MVA = 324.084 ± 0.373 EVA + 11.54 EPS + 4.73 ROE ± 0.41 SALES

Regression analysis is also used to understand which among the independent variables are related to the

dependent variable. As per the above equation as whole we see that the EPS is the most contributing factor

to the MVA.

COST OF CAPITAL ± DLF

The weighted average cost of capital has been steady for the period from 2006 to 2008. This is due to the

fact that the economy was in a good state during this period and real estate industry was booming due to

which the cost of taking debt and cost of equity were relatively low and there by DLF was successful in

maintaining a low cost of capital. DLF as a company has a good liquidity position and therefore are

successful in maintaining a low cost of capital. During some of the years it¶s noticed that the cost of debt is

higher than cost of equity, this is so as these years the company has taken huge debts and also the interest

rates have been continuously increasing for the Indian economy. Also it must be noted that as the debt

increases for a firm the risk for the lender increases and so we can say that the cost of financial distress also

increases thereby increasing the cost of debt. During the year 2008 the period of the recession the Cost of

Capital had increased from 3.4 to 5 percentages, this clearly states the company was affected drastically by

the recession like all other Real Estate firms. This increase in cost of capital was due to increase in cost of

debt arising from interest rate hikes and also the increase in the cost of equity due to the increase in risk

taken by the investors.

The company over the period of 2006-2010 has performed in a rather unpredictable manner as during the

years 2007, 2009, & 2010 the Return on equity of the firm has been less than the cost of capital which is a

bad indication to the performance of the firm and it also states the current situation of the firm and the real

estate industry as a whole. This has been clearly indicated in the markets as all the real estate firms share

prices have been decline even though the economy as a whole is doing well.



13

Cost of Capital ± Sobha Developers

The WACC was at its peak in the FY ¶07 at 6.69. The previous year it stood at 3.79.

To reach a judgement on the WACC it is imperative that we compare it with the ROA of the company. IF

ROA > WACC:

y the project creates value for shareholders

y the project generates a positive NPV (Net Present Value)

y the project generates a positive EVA (Economic Value Added)

Comparing the two we find that ROA generated is greater than the WACC and thus it can be concluded that

the Sobha has created value for the shareholders.

Growth 5.9807 0.2118 5.5504 3.5598 1.2536

Cost of Equity(Ks) 5.9814 0.3759 5.8297 4.0973 1.5446

Cost of Debt(Kd) 3.1520 3.4208 3.4696 5.4749 4.3576

Debt Weightage(We) 0.9876 0.9568 0.9609 0.9659 0.9738

Equity Weightage(Ws) 0.0124 0.0432 0.0391 0.0341 0.0262Cost of Capital(COC) 3.1870 3.2891 3.5618 5.4279 4.2840

Re turn o n commo n( Sh are hold ers ) e qui ty(ROE) 6.0217 1.3266 7.5504 4.5598 2.2536

Return on Total Assets(ROA) 6.2162 5.4671 13.0976 7.0386 3.0040

Earning Per Share (Rs) 85.82 46.60 25.54 212.© 1 225.38

Market Value(Price) per Share © 84.85 800.7 5© © .6 81.55 282.55

Equity Dividend 14.48 40.1 47.4 7.2©

24.52

Reported Net Profit 88.5 161.52 228.3 10© .68 136.66

Outstanding Shares(in Lakhs)211.40 72© .02 72© .02 72© .02 © 80.64

Dividend per share(DPS) 6.85 5.50 6.50 1.00 2.50

Growth 3.50 1.67 2.48 1.40 1.14

Cost of Debt 4.08 7.13 2.85 4.15 3.94

Cost of Equity 3.51 1.67 2.49 1.42 1.15

Total Debt 14© .65 83© . © 3 1023.38 1125.52 1740.77

Equity Share Capital 21.14 72. © 72.© 72.© © 8.06

Total Investor supplied operating Capital 170.7© ©

12.83 10© 6.28 11© 8.42 1838.83

Return on common equity(ROE) 4.1© 2.22 3.13 1.50 1.3©

WACC 4.01 6.69 2.83 3.98 3.79

Return on Total Assets(ROA) 15.8 11.5 8.29 3.65 4.32



14

India-bulls:

Earning¶s Per Share (Rs) -0.8200 0.1800 19.0100 0.1100 0.3900

Market Value(Price) per Share 256.7000 298.1000 487.3000 99.8000 152.5000

Equity Dividend 0.0000 0.0000 347.6500 0.0000 0.0000

Retained Earnings -0.8200 0.1800 18.6500 0.1100 0.3900

Return on common(Shareholders)equity(ROE) -0.2279

0.3648 9.7094 0.3216 0.2794

Reported Net Prof it -7.6900 13.1100 467.7000 16.5600 22.4400

Growth -0.2279 0.3648 2.4922 0.3216 0.2794

Cost of Equity -0.2279 0.3648 2.6811 0.3216 0.2794

Cost of Debt 0.2867 8.4783 111.4286 3.7898 30.8170

Debt Weightage(We) 0.9329 0.0250 0.0444 0.9638 0.5824

Equity Weightage(Ws) 0.0671 0.9750 0.9556 0.0362 0.4176

Cost of Capital(COC) 0.2522 0.5673 7.5134 3.6641 18.0643

BOOK VALUE PER SHARE in

Rs. 73.1353 46.7210 117.8392 152.4955 159.7421

Debt Ratio (Debt/Total Asset) 1.0158 1.5742 1.4175 1.4770 1.5277

Return on total Assets-0.0045 0.0156 0.1647 0.0031 0.0034

Debt Equity Ratio 0.8200 0.5600 0.0600 0.4200 0.0200

If we compare the cost of deb with cost of equity, we see that the debt taken by the company is very high,

especially in the year 2008, it is very high compared to cost of equity. The return on assets also increased

over the first three years but then the company has not been able to sustain their sales, hence a fall in the

ROA. Coming to COC, in the year 2009 there was a very high COC for the company because of steep cost

of debt. It also reached a very high level in the last year, i.e. 2010. Another means of testing a company¶s

performance is the ROE. If we see for this company, the ROE has been less than the COC. It means the

company has not been able to earn enough to fund their requirement cost. Hence, resorting to debts etc. It

gives a bad image to the company¶s performance.

Cost of Capital HDIL:

2007 2008 2009 2010

Growth 121.32 64.93 17.8 10.47

Cost of equity 121.32 64.93542 17.8 10.47

shares in Issue (lakhs) 1800 2142.72 2754.93 3588.43

Cost of debt 9.661157 3.453441 9.070431441 8.270747

Debt Weightage 0.665303 0.935597 0.937655161 0.918641

Equity weightage 0.334697 0.064403 0.062344839 0.081359

Cost of capital 47.03303 7.413064 9.614674992 8.449676



15

The WACC was at peak in the year 2007, but than declined signif icantly in 2008 by 84%. To reach a judgement on the WACC it is imperative that we compare it with the R A of the company. IF R A >

WACC:

� the pro ject creates value for shareholders

� the pro ject generates a positive NPV (Net Present Value)

� the pro ject generates a positive EVA (Economic Value Added)

WACC 47.03303 7.413064 9.614675 8.449676

R A% 73.02 35.92 9.39 6.09

Compar ing the two we f ind that R A generated is greater than the WACC in the year 2007 & 2008 and

thus it can be concluded that the HDIL has created value for the shareholders. But in the past 2 years it s

below WACC.

Event Study: Dividend Announcement - DLF

If we look at the trend of the performance of DLF it s been very unpredictable and this un-predictableness is

clear ly visi ble on the share markets. If we do a trend study of the DLF stocks return for the year 2009 it

clear ly visi ble that the returns are very volatile. DLF announced its dividend on 31-July -2009 and if we

look at the trend for the returns on share pr ice for a per iod of 30 days around the declaration date we notice

that there has been no change to the volatility in the share pr ice and it seems to coincide with the annual

trend. This is a clear indication that there is no dramatic inf luence of the dividend announcement on the

share pr ices of DLF Ltd.

Annual Trend for daily R eturn on Share Pr ice:



16

The 30 day trend for daily R eturn on Share Pr ice:

Dividend Policy ± Sobha Developers

The share pr ices were very unstable dur ing the FY 09. However, this pattern observed a change dur ing the

15 days per iod before and af ter the dividend announcement. This could be owed to the fact that theuncer tainty in the minds of the speculators dies down once the announcement regarding dividend pay-out is

made.

The following analysis has been done for dividend announcement on 19 May, 2009.

The rate of return on share pr ice, +/- 15 days from the announcement of dividend is given below:

R ate of R eturn for the FY 09:

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

Return on share price

Rate of Return



17

India-bulls

The dividend was only announced once by the company on 13thApril 2008 and the effective date was 27th

April 2008. They have not been announced any other time. If we look at the share prices trend of the year

2008 and the +15 and -15 days of the dividend announcement date, its more or less same. The share prices

undergo volatile changes over the mentioned time period. But looking closely, the announcement of the

dividend doesn¶t bring about any steep change in the share prices before but after 13th

April, there is a steepincrease in the share price.

Annual Trend for daily Return on Share Price:

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

Rat f Ret

ate f et r

-120

-100

-80

-60

-40

-20

0

20

40

60Date

Date



18

30 day trend around dividend announcement date:

Dividends Policy HD L:

The share pr ices were very unstable dur ing the FY 09. However, this pattern observed a change dur ing the

15 days per iod before and af ter the dividend announcement. This could be owed to thefact that the

uncer tainty in the minds of the speculators dies down once the announcement regarding dividend pay-out is

made.

The following analysis has been done for dividend announcement on 10 July, 2009.

The rate of return on share pr ice, +/- 15 days from the announcement of dividend is given above.

-25

-20

-15

-10

-5

0

5

10

1520

25

Date

ate



19

30 day trend around dividend announcement date:

OPERAT N CYCLE- DLF

DLF Ltd. has repor ted drastic improvements in it sale dur ing the per iod ranging from 2006-2008, it is

usually found that if the Sales increase considerably the operating cycles also should increase almost

propor tionately, However DLF has managed its cash f lows well and has been successful in maintaining by

and large a low change in the operating cycles for this per iod. Af ter 2008 due to recession the sale plunged

to very low values however the operating cycle increased this is bound to happen as many suppliers would

have stopped sales on credit, the customer could have defaulted in the payments due to cash f low issues and

many pro jects would have stagnated, all this resulting in an increase in operating cycle for the per iod of 2009

and 2010. Now if we individually analyse the average days for account receivables we see a rather similar

trend where the average days for accounts receivable increased dur ing recession due to issues related with

the economy as a whole like the liquidity crunch in the market. The average number of days for accounts

payable also increased drastically dur ing the year 2009 indicating the shor tage in cash f lowwith DLF. DLF

due to its huge volumes of sales goes for a general policy in which it extends its credit per iod; this is done toincrease the sales.

DETAILS Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

Raw Material 0.00 0.00 0.00 0.00 0.00

Inventory(WIP) 456.73 665.03 1781.79 1657.73 1718.51

Account Receivables - 1528.50 7678.90 9786.60 6256.00

Account Payable - 267.80 1704.60 2324.90 1524.90

Credit Purchases 858.11 991.49 4947.26 2545.11 2456.48

Consumption of RM - - - - -

Mfg. Expenses 600.63 298.34 2272.79 905.47 1304.05

Depreciation 3.90 9.44 25.68 114.08 126.05

Exicise Duty - - - - -

SDA Expenses 43.65 136.16 146.06 159.03 0.00

Net Sales 953.46 1101.66 5496.96 2827.90 2729.42

Interest 146.15 356.25 447.65 809.86 847.24

Number of Days In

Working Capital651.37 1849.36 953.52 1980.86 2039.31

Inventory Turnover

Ratio2.43 0.33 -- -- --

Avg. Cost of

production 604.53 307.78 2298.47 1019.55 1430.10

Avg. COGS 794.33 800.19 2892.18 1988.44 2277.34



20

Details of the individual Operating Cycle¶s:

Net Work ing Capital in Days ± Sobha Developers

The operating cycle has increased over the years. In FY 06, this was only 52 days. In the past two years, this

has grown considerably to 1012 and 947 days. It could be analysed as follows:

Firstly, the inventory conversion period has increased due to the no. of projects in hand all over India. The

inventory turnover ratio explains this factor.

Secondly, the sales have grown by over the years and it stands at 1110.61 as of FY 10 end. The A/R has

grown along with this. But it is to be noted that the growth is not proportional and there has been a decline in

the A/R outstanding (as can be seen in the excel files attached), despite the sales growth. Similarly, A/P has

also been steady over the years, despite huge growth in sales. This indicates that the company has

maintained a steady cash flow which has helped it clear all o/s bills of its suppliers.

Det ils Days Days Days Days Days

- - - - -

W 2

21 ! ! 1 2! 2 9 "

9# $ 91$ # !

1" "

F 350.49 0 402.0104 554.9! 35 415.2 37 349.9 56

D - 506.4199 509.8816 1263.1667 836.6026C - 98.5856 125.7622 333.4192 226.5799

Operati % g Cycle 626.2591 1598.5118 1222.0534 1938.4903 1398.5983

Ass & mi % g Fi % is ' ed Goods is 80% o ( Sales. So Fi % is ' ed goods = 80%*Net Sales

Ass & mi % g credit p & rchase to be 90%o( Sales (

or getti % g C.

March '06 March '07 March '08 March '09 March '10

12 mt )

0

12 mt )

0

12 mt )

0

12 mt )

0

12 mt )

0

I 1 ve 1 tory T 2 r 1 Over 3 atio 2.4577 3.1624 1.8231 0.9377 1.0916

Net 3 eceivables(i 1 Cr) -- 0.158 0.5548 0.3683 0.443

I 1 c/Dec i 1 A/R 0.158 0.3968 -0.0285 0.0747

A/C Payable -- 9.14 8.11 8.08 8.69

Net Sales 625.23 1194.75 1436.34 983.87 1110.61

Net Sales/365 1.71 3.27 3.94 2.70 3.04

Avg Raw Material 4 eld -- 87.27 74.61 64.5 93.36

Avg. f i 1 ished Goods 4 eld -- 0.59 0.87 0.75 0.71

Net Work5 6

g Capital in days 52.24 78.81 223.46 1012.23 947.28



21

India-bulls:

DETAILS Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

Raw Material 0.00 0.00 0.00 0.00 0.00

Inventory(WIP) 1,052.79 0 0 0 0

Account Receivables - 120,000 1,339,000 1,253,000 291,000

Account Payable - - - 289,000 388,000

Credit Purchases 0.00 12.00 42.99 40.53 30.59

Consumption of RM - - - - -

Mfg. Expenses 6.72 4.4 20.6 21.94 30.69

Depreciation 0.31 0.71 2.08 2.55 2.91

Excise Duty - - - - -

SDA Expenses 0 3.18 19.07 12.03 21.13

Net Sales 0 13.33 47.77 45.03 33.99

Interest 2.07 0.12 3.84 79.83 53.1

Number of Days In

Working Capital -- 9,667.68 12,467.89 22,144.61 32,647.02

Inventory Turnover

Ratio0.01 0.23 1.09 -- --

Avg. Cost of production 7.03 5.11 22.68 24.49 33.60

Avg. COGS 9.10 8.41 45.59 116.35 107.83

Number of Working days has increased over the 5 years from 9 thousand to 32 thousand. The A/R also

increased from the year 2007 to 2008 to 2009 but again reduced in 2010. Net sales also reduced accordingly

in the same trend. But the expenses have been only increasing over the 5 years constantly. It shows that the

situation of the company is not good. They have not been able to increase their sales but have also not been

able to control their expenses.

Operating Cycle HDIL:

Management efficiency is the focus of the operating cycle.

The inventory conversion period has increased due to increased projects as well as more storing of

inventory.

2006 2007 2008 2009 2010

Capital Work in Progress 51.44 80.46 1,178.02 1,584.37 1,389.09

Investments 113.28 165.04 212.56 302.92 596.48

Inventories 437.32 1,152.51 5,102.85 6,441.70 8,033.66

Sundry Debtors 77.39 310.26 55.82 165.4 200.72

2007 2008 2009 2010

327. 9 552. 83 1337. 6 1947. 9

Operati 7 g 8 y 9 le

final report-cft-formated v01(real estate)

Documents