Valuation of DLF Ltd.

Project Study
Submitted to:

Prof. Dr. AMITABH GUPTA

M.COM., M.PHIL., MFC, PH.D (FINANCE), Dept. Of Financial Studies, University of Delhi

External Mentor:

PRASHANT GOOTY
Associate Director, Jones Lang Lasalle, Mumbai.

Siva Chandra Lochan Kallur Roll No: 2661, MFC Part II DFS, University of Delhi.

ACKNOWLEDGEMENT
I would like to pay my sincere thanks to Prof. Amitabh Gupta, Department of Financial Studies, University of Delhi, South Campus for endowing me with the opportunity to work on this Project. His guidance and supervision have been instrumental in providing me valuable insights regarding the project. I am also very grateful to my external guide Mr. Prashant Gooty, Associate Director, Jones Lang Lasalle, for taking out time from his busy schedule and helping me to develop my interest and knowledge in this field. I would also like to thank my parents, friends and other well wishers for their continuous support throughout the course and making my stay in MFC eventful and memorable.

K Siva Chandra Lochan, 2661, MFC, DFS.

CERTIFICATE

This is to certify that, this study entitled, Valuation of DLF Ltd is based on my original research work and my indebtedness to other works has been duly acknowledged at the relevant places in this study. Further this work has not been submitted earlier for the award of any other degree.

K Siva Chandra Lochan, 2661, MFC, DFS.

Prof. Amitabh Gupta Internal supervisor: Department of Financial Studies University of Delhi South Campus

Mr. Prashant Gooty External supervisor: Designation: Associate Director Company: Jones Lang Laselle

Table of Contents
ACKNOWLEDGEMENT ................................................................................................................ 2 CERTIFICATE ............................................................................................................................... 3 TABLES AND FIGURES................................................................................................................. 5 1. Introduction ........................................................................................................................ 6 1.1 2. 3. Phases of Real Estate Cycle ......................................................................................... 6

Objectives ........................................................................................................................... 8 Industry and Company overview ........................................................................................ 9 3.1 3.2 Porters Five Factor analysis of the industry ................................................................ 9 SWOT Analysis for DLF Ltd. ....................................................................................... 15

4.

Valuation model ............................................................................................................... 17 4.1 4.2 4.3 Discounted Cash Flows Valuation ............................................................................. 17 Assumptions .............................................................................................................. 17 Key ratios used for projection ................................................................................... 17

5.

Financial Statements ........................................................................................................ 19 5.1 5.2 5.3 5.4 5.5 Profit and Loss Statement ......................................................................................... 19 Cash Flow Statement................................................................................................. 20 Balance Sheet ............................................................................................................ 21 Calculation of Cost of equity using CAPM ................................................................. 22 Free Cash Flow Calculation ....................................................................................... 23

6. 7.

Conclusion and Recommendations .................................................................................. 25 Template for Project Cash flow projections ..................................................................... 26 7.1 7.2 7.3 7.4 Assumptions and Specifications ................................................................................ 26 Cash outflows or Costs .............................................................................................. 28 Cash inflows or Revenues.......................................................................................... 28 Cost and Collection Schedules .................................................................................. 29

8.

References ........................................................................................................................ 31

TABLES AND FIGURES

Figure 1: Phases of Real Estate Cycle ......................................................................................... 6 Figure 2: Porters Five Forces .................................................................................................... 11 Figure 3: DLF Share price movement ....................................................................................... 25

Table 1: Industry Comparison .................................................................................................. 11 Table 2: Ratios used for Projections ........................................................................................ 18 Table 3: Profit and Loss Statement .......................................................................................... 19 Table 4: Cash Flow Statement ................................................................................................. 20 Table 5: Balance Sheet ............................................................................................................. 21 Table 6: Risk Free rates and WACC .......................................................................................... 22 Table 7: Free Cash Flows .......................................................................................................... 23 Table 8: Assumptions & Specifications (Cash Flow Template) ................................................ 26 Table 9: Sample Cash Flows (Cash Flow Template) ................................................................. 28 Table 10: Construction and Collection Schedule (Cash Flow Template) ................................. 29

1. Introduction
The Indian real estate and construction industry is an integral part of Indian economy and plays an important role in the development of the countrys infrastructure base. The contribution of the real estate sector to Indias gross domestic product (GDP) has been estimated at 6.3 per cent in 2013, and the segment is expected to generate 7.6 million jobs during the same period. It is also expected to generate over 17 million employment opportunities across the country by 2025. The real estate sector of India is expected to post annual revenues of US$ 180 billion by 2020 as compared to US$ 66.8 billion in 2010-11, registering a compound annual growth rate (CAGR) of 11.6 per cent. In fact, the demand is expected to grow at a CAGR of 19 per cent between 2010 and 2014, with tier I metropolitan cities projected to account for about 40 per cent of this. The country is ranked 20th among the top global markets for real estate investment in 2012, with investments worth US$ 3.4 billion during the year, according to a latest report by Cushman & Wakefield. It is also estimated that foreign direct investment (FDI) into real estate in India will increase to US$ 25 billion over the next 10 years.

1.1

Phases of Real Estate Cycle

Figure 1: Phases of Real Estate Cycle

Recession - Property is cheap and bargains are everywhere, prices are depressed. Home builders are going out of business; real estate agents are leaving the business. The media is completely negative. Recovery - Real estate prices are slowly rising along with demand. The media becomes more and more optimistic about real estate. Investors on the sidelines start jumping in. The market starts to feed upon itself, causing prices and demand to continue to rise. Soon double digit rates of appreciation are the norm. Expansion - In this phase prices reach a market cycle peak and flatten out. Real estate is overpriced. Everyone that is going to get in the market is already in, so there are fewer and fewer buyers. Sellers try to hold out without reducing prices until a few are forced to reluctantly lower their prices a little bit. Contraction - In phase 4 things start to unravel and continued lack of demand causes prices to fall. This is the most dangerous time to be invested in real estate. Even though prices are starting to fall, sellers are still in denial. They hold out and think things will turn quickly around. Eventually, reality sets in and more and more sellers are forced to lower prices. Incentives from home builders and sellers become the norm but its not enough to create demand, prices continue to fall even further.

2. Objectives
Developing interest during my summer internship at CAPSTAR, Essel Financial Services Ltd, I wish to continue my project study in the Indian real estate sector The objectives of this project study are broadly divided into the following two: 1. Valuation of DLF Ltd to value DLF Ltd using DCF valuation method and to find whether it is overvalued or undervalued. 2. Preparing a template for project valuation a generic template useful in evaluating a project value. This template provides a generic tool to capture all the assumptions, costs, revenues, cash flows over the project period, sales and collection periods, IRR and other project financials for a project which help an investment analyst in taking investment and advisory decisions. This report demonstrates the application of the basic valuation method namely the Discounted Cash Flow to determine future value of the DLF Ltd company on a 5 year planning horizon from the perspective of potential investors and shareholders. From a quantitative perspective, investing in real estate is somewhat like investing in stocks. In order to profit in real estate investments, investors must determine the value of the properties they buy and make educated guesses about how much profit these investments will generate, whether through property appreciation, rental income or a combination of both.

3. Industry and Company overview

With growing trends in young and earning population, real estate sector in India has always been the center of attraction for many big players across the industries. Though it was lopsided journey for majority of the players over the years, analysts and reports say that this sector would be cautiously encouraging for the potential entrants and existing players.

3.1

Porters Five Factor analysis of the industry

The analysis of 5 Forces model has been done to determine whether the Indian Real Estate sector will remain profitable in the years to come Threat of New Entrants: There will be a decrease in profitability due to increase in the number of entrants. As a result of the economic downturn around the globe, it has been difficult for the new entrants to get a hold because of cost reduction in expansion plans by corporate in real estate, little scope in commercial construction, and strong rivalry between existing firms. Result: Relatively weak threat of new entrants

Bargaining power of Buyers: Powerful customers are able to exert pressure to drive down prices, or increase the required quality for the same price, and therefore reduce profits in an industry. Customers significantly influence the business operations in real estate. Customers do possess a threat of integrating backwards. Consequently, the bargaining power of the buyers is strong.

Bargaining power of suppliers: An important category of suppliers is the bank. They have the power to decide whether to fund a venture or not and at what rate.

Banks have now become highly conservative especially after the economic downturn.

Are significantly affected by the monetary regulations like the Repo rate & CRR formulated by the Central Bank of the country. This is in turn affects the real estate sector.

Consequently the bargaining power of suppliers is very strong

Threat of Substitute products and services: In real estate business, substitute might be some type of totally new retail space, some new location for office space or rehabilitation instead of new construction. The threat of substitute in real estate business and its impact on profitability of the industry is quite ambiguous and difficult to establish given the economic downturns and the recovery mode of the real estate business cycle. Rivalry among existing competitors: Rivalry is strong due to the large no. of real estate firms operating in India (65 in total) and the difficulty to differentiate The services offered by real estate companies cannot be differentiated because these firms dont offer a product, other than the facilities they lease and this itself is very difficult to quantify. In the current economic crisis, there is minimal profitability and only companies with large cash reserves are likely to survive. Considering all the 5 forces, it can be said that the real estate industry is not very profitable at this stage as it was before the subprime crisis of US in 2008 But considering the fact that the real estate cycle is in the recovery stage right now and given that the demand for real estate is growing at a CAGR of 19%, it can be said that there are still bright prospects ahead in a country like India.

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Figure 2: Porters Five Forces

The following table gives a quick snapshot of the existing players financials in India and their performance in the recent past:
Table 1: Industry Comparison

North Detail DLF Unitech Market Cap (Cr) 29421.00 4186.00 Income Statement Sales (Cr) 7772.00 2444.00 EBITDA (Cr) 3911.00 416.00 Net Profit (Cr) 341.00 250.00 Revenue / Employee (lacs) 299.00 220.43 Profit/Employee(lacs) 13.14 22.58 Growth Position 3 Yr CAGR Sales % 1.55 -5.87 3 Yr CAGR Profit % -41.13 -27.48 Valuation P/E 53.42 13.66

West Godrej Oberoi Group Realty 3340.00 6271.00 1037.00 296.00 138.00 314.28 41.95 62.28 105.98 20.57 1047.00 711.00 505.00 205.00 98.89 9.87 3.32 14.07

South Sobha Purvankara Developers Group Prestige 3291.00 1758.00 5493.00 1864.00 553.00 217.00 64.76 7.55 18.17 17.57 14.38 1245.00 603.00 243.00 122.63 23.96 37.59 18.77 6.83 1947.00 642.00 285.00 23.88 29.80 19.70 11

P/BV EV/Sales EV/EBIDTA Dividend yield

1.07 7.04 13.98 1.76

0.35 4.31 25.29 0.00

1.57 4.37 15.31 0.93

1.51 5.01 7.38 1.05

1.54 2.48 8.35 2.09

0.84 2.66 5.50 1.52

2.00 3.93 11.90 0.76

With a track record of 64 years, DLF Ltd. is Indias largest real estate company in terms of revenues, earnings, market capitalization and developable area. It currently has pan India presence across 30 cities with approximately 250 million sq ft of completed development and 500 million sq ft of planned projects, of which 60 million sq ft of projects are under construction. Creating records with its IPO inception at Rs. 550 per share in June 2007, DLF Ltd has been through a tough journey so far. Following is the timeline of DLF Ltd: 1963 - Incorporation of American Universal Electric (India) Ltd 1979 - DLF United Limited amalgamates with American Universal Electric (India) Limited to form DLF Universal Electric Limited 1981 - DLF Universal Electric Limited changes name to DLF Universal Limited DLF Universal Limited obtains its first licence from the State Government of Haryana and commences development of the 'DLF City' in Gurgaon, Haryana 1985 - We initiated plotted developments, self first plot in Gurgaon, Haryana. Consolidate the development of DLF City for township development. 1991 - Construction of our first office complex, 'DLF Centre', at New Delhi 1993 - Completion of our first condominium project, 'Silver Oaks', at DLF City, Gurgaon, Haryana 1996 - Construction of 'DLF Corporate Park', our first office complex at DLF City, Gurgaon, Haryana. 1999 - Development of the DLF golf course 2000 - The Scheme of Merger/Amalgamation of DLF Industries Limited with M/s. DLF Universal Ltd., which was approved by the Hon'ble High Court of Delhi at New Delhi and by the Hon'ble High Court of Punjab and Haryana at Chandigarh came into effect on 09.10.2000. 2002 - We venture into retail development in Gurgaon, Haryana. We offer integrated family entertainment centers with the commencement of operation of 'DT Cinemas' at Gurgaon, Haryana
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2003-04 - Development of 'DLF Cybercity', an integrated IT park measuring approximately 90 acres at Gurgaon, Haryana.

2005 - Acquisition of 16.62 acres (approx) of mill land in Mumbai Received 'Corporate Buildings Award' instituted by 'Indian Architect and Builder', a publication of Jasubhai Media Group, Mumbai Received 'Superbrand' award from Hon'ble Minister for Civil Aviation, Mr. Praful Patel.

2006 - Construction joint venture signed between DLF Universal Limited and U.K. based Laing O'Rourke Plc to form DLF Laing O'Rourke (India) Limited DLF Universal Limited changes name to DLF Limited Alliance agreement signed between DLF and Hilton International Co. to incorporate a joint venture company in India to develop, own and acquire 50 to 75 hotels and services apartments. DLF enters into a joint venture with WSP Group Plc. for the purposes of providing engineering and design services, environmental and infrastructural facilities and also project management services.

2007 - DLF enters into a joint venture with Prudential Insurance to establish a joint venture company to undertake life insurance business in India. DLF launches Rs. 9,188 crores issue. The US-based Hilton Hotels Corporation has declared that it will develop 10 hotel projects in the country in alliance with DLF Ltd. Company has changed its name from DLF Universal Ltd. to DLF Ltd.

2008 - DLF inked a memorandum of understanding with the infrastructure company Gayatri Projects Ltd (GPL) to develop roads, highways and bridges across the country. DLF Ltd and the Tamil Nadu Industrial Development Corporation (TIDCO) have forayed into an alliance agreement for a Rs 1,500-crore Information technology Special Economic Zone (SEZ). Commences operations of India's first Luxury Mall - Emporio Clinches the Title Sponsorship of IPL

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2009 - DLF Ltd launched Capital Greens, the Largest private sector residential project in Delhi. Foundation stone laid for DLF-IL&FS Metro In Gurgaon - India's first public rail trasport system to be built & run by a private Company DLF conferred Best Global Developer Award, 2009 by Euromoney DLF sells DT Cinemas, enters into a long term strategic alliance with PVR

2010 - DLF Ltd Launched plots in Gurgaon after a decade, creating a new suburb'New Gurgaon' DLF Ltd announced the launch of the first phase of its 200-acre project in Panchkula with an investment of nearly Rs 2,200 crore. DLF launching ultra-rich homes in Shimla and Goa DLF, Country's largest realty firm, has sold 150 plots, garnering over Rs 500 crore, in a township project at Gurgaon. DLF launched a 100-acre township 'Alameda' in Gurgaon.

2011 - DLF Ltd Delivered Delhi's first Automated Car Parking in Sarojini Nagar. DLF Pramerica Life Insurance, the insurance arm of India's largest realty developer, DLF announced that it hired over 3,000 additional financial advisors in 2010-11 for boosting its sales and growth. The insurance firm's workforce grew from 2,115 in 2009-10 to 5,119 in DLF Ltd has decided to sell off the property in Gurgaon as an effort to minimise the debt of the company, which stood at Rs 21,524 crore as on 30 June 2011. DLF's arm DLF Hotel Holdings Ltd acquires 26% stake from Aro Participation Ltd and Splendid Property Company Ltd, affiliates of Hilton International Company. India's largest real estate developer, DLF Ltd along with its JV partner Hubtown have sold 100 per cent of their respective share holding in DLF Ackruti Info Parks to private equity fund, Blackstone for Rs 810 crore.

2012 - DLF Ltd Marks footprint in Infrastructure.It has Launched an 8.3km expressway project in Gurgaon and delivered Delhi's second Automated Car Parking in Connaught Place, New Delhi.

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DLF sells hotel subsidiary as divested its entire shareholding in Adone Hotels and Hospitality Limited for Rs 567 crore.

DLF LTD seeks association in the latest upcoming trends in sports and games, the country's largest realty firm DLF has exited the five year long alliance as IPL sponsor.

DLF LTD along with its three wholly-owned subsidiaries - i) DLF Cyber City Developers Ltd., ii) DLF Universal Ltd. and iii) Jawala Real Estate Pvt. Ltd. (Jawala), have entered into an agreement with Lodha Developers Limited (Lodha) for divesting the entire stake of the Company, DLF Cyber City Developers Ltd. and DLF Universal Ltd. in Jawala for an enterprise value estimated to be Rs. 2700 crores.

DLF LTD promoter Pia Singh offloads 1.04-cr shares in DLF to other promoters.

3.2

SWOT Analysis for DLF Ltd.

SWOT analysis (alternatively SWOT Matrix) is a structured planning method used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a project or in a business venture. A SWOT analysis can be carried out for a product, place, industry or person. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieving that objective. Setting the objective should be done after the SWOT andalysis has been performed. This would allow achievable goals or objectives to be set for the organization. Strengths: characteristics of the business or project that give it an advantage over others. Weaknesses: characteristics that place the business or project at a disadvantage relative to others Opportunities: elements that the project could exploit to its advantage Threats: elements in the environment that could cause trouble for the business or project SWOT Analysis

1. Largest real estate company in India Strengths 2. Its exposure across businesses, segments and geographies
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reduces the impact of economic cycles 3. Experience of over many decades in Indian retail sector with an expertise in the field 4. Strong management team

1.Affected due to lack of regulations and effective policies Weaknesses 2.Majorly present only in India and limited global exposure

1.Reduction in interest rates 2.Tax incentives for housing investments Opportunities 3.Shortage of houses in urban areas

1.Increasing interest rates 2.Economic downturn Threats 3.Volatility in financial markets

Competition

1.Oberoi Realty 2.Godrej Properties Limited Competitors 3.Shobha Developers

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4. Valuation model
4.1 Discounted Cash Flows Valuation

In discounted cash flows valuation, the value of an asset is the present value of the expected cash flows on the asset, discounted back at a rate that reflects the riskiness of these cash flows. Basis for Approach The value of an asset is not what someone perceives it to be worth but it is a function of the expected cash flows on that asset. Put simply, assets with high and predictable cash flows should have higher values than assets with low and volatile cash flows. In discounted cash flow valuation, we estimate the value of an asset as the present value of the expected cash flows on it.

4.2

Assumptions

Revenue is the amount of money that is brought into a company by its business activities. The amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise. Revenue per unit is assumed to be growing at 24% per annum initially and then it is brought down to long term GDP growth rate, which is assumed to be 5%. Capital Expenditure is forecasted with the help of gross block. Depreciation rate is taken as a percentage of gross block. Tax rate is taken as 33.9% Risk Free rate is taken to be the current 10-yr bond rate i.e. 8.92%.

All other growth estimates, forecasts of cash flows, depreciation rates, debtors etc are taken from the analyst and research reports. Also various reports on real estate in India supported these forecast estimates.

4.3

Key ratios used for projection

The following set of ratios has been used to project the financial statements of the DLF Ltd Company:

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(All Figures in Crores)

Table 2: Ratios used for Projections

Ratios 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Stable Inventories as % of sales 64% 105% 159% 148% 158% 194% 170% 150% 130% 125% 120% 115% Sundry Debtors as % of sales 13% 21% 21% 15% 17% 18% 18% 18% 18% 17% 18% 18% Current Liabilties as % of sales 50% 75% 112% 73% 81% 105% 83% 88% 90% 87% 89% 90%

Profit and Loss Statement Ratio's 2011 2012 2013 2014 2015 2016 2017 2018 Stable Revenue 10144.4 10223.9 9095.7 8822.9 8858.1 8999.9 9179.9 9409.4 9644.6 Growth 29% 1% -11% -3% 0.4% 1.6% 2% 2.5% 2.5% Manufacturing Expenses as % of Revenue 0.266% 0.535% 0.888% 0.481% 0.481% 0.481% 0.481% 0.481% 0.481% Tax as a % of PBT 33% 36% 54% 33.90% 33.90% 33.90% 33.90% 33.90% 33.90% Dividend as % of PAT 46% 43% 68% 38% 35% 33% 32% 30% 30%

Balance Sheet items 2011 2012 2013 2014 2015 2016 2017 2018 Stable Gross Block as % of Revenue 209% 224% 253% 245% 243% 240% 240% 240% 240% Gross Block 21211.7 22919.7 23017.6 21616 21525.3 21599.7 22031.7 22582.5 23147.1 Cum Depreciation 1955.6 2580.9 3169 3458.6 3723.9 3758.4 3921.7 4064.9 4166.4 Depreciation as a % of Gross Block 9% 11% 14% 16% 17% 17% 18% 18% 18% Capital Work-inProgress 10234.4 8992.8 7834.3 9011.1 9547.6 9018.2 8846.5 8852.8 9105.8 Total Debt 26463.8 27436.1 27106.9 27106.9 27106.9 27106.9 27106.9 27106.9 27106 Interest 1705.6 2246.5 2314.1 2429.8 2551.2 2678.8 2812.7 2953.4 3101.0 Interest as a % of Debt 6% 8% 9% 11% 11% 11% 11% 11% 11%

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5. Financial Statements
5.1 Profit and Loss Statement

Profit and loss account is the account whereby a company determines the net result of its business transactions. It is the account, which reveals the net profit (or net loss) of the company. The profit and loss account is opened with gross profit transferred from the trading account (or with gross loss which will be debited to profit and loss account). After this all expenses and losses (which have not been dealt in the trading account) are transferred to the debit side of the profit and loss account. If there are any incomes or gains, these will be credited to the profit and loss account. The excess of the gain over the losses is called the net profit and that of the loss over the gain is called the net loss. Transferring the net profit or loss to capital account of the company closes the account.
(All Figures in Crores)
Table 3: Profit and Loss Statement

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5.2

Cash Flow Statement

(All Figures in Crores)
Table 4: Cash Flow Statement

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Complementing the balance sheet and income statement, the cash flow statement (CFS), a mandatory part of a company's financial reports, records the amounts of cash and cash equivalents entering and leaving a company in the corresponding year.

5.3

Balance Sheet
(All Figures in Crores)
Table 5: Balance Sheet

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It is a financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders. Capital Expenditure and Working Capital Forecasting: Gross block for the next 5 years are forecasted taking CAGR over the past 5 years. Working capital is forecasted using its average ratio with sales/COGS as mentioned before. Moreover, in calculating working capital we have excluded Cash and marketable securities and notes payable. The related spreadsheets are shown above.

5.4

Calculation of Cost of equity using CAPM

WACC is calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation. All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk. The WACC equation is the cost of each capital component multiplied by its proportional weight and then summing. To calculate the cost of equity we first calculate the beta of DLF Ltd through a regression on the stock price of DLF with NIFTY price over last 3 years. Now risk free rate Rf is taken as10Yr bond rate. Market return, which is, is calculated by annualizing the NIFTY market

returns over the last 3 years. The cost of equity is calculated using the formula ( ) Where, E(R) = cost of equity = Risk free rate = Market return (NIFTY) = beta
Table 6: Risk Free rates and WACC

Beta (B) 10 yr Bond Rate (Rf) Default Spread for DLF Ltd Cost of Debt Before Tax (Kd) Tax Rate (t)

1.794 8.92% 2.30% 11.22% 33.90%

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Cost of Debt After Tax [Kd(1-t)] Cost of Equity {Ke=[Rf+B*(Rm-Rf)]} Market Return (Rm)

7.42% 18.57% 14.30%

5.5

Free Cash Flow Calculation

To calculate the share price of DLF Ltd using the FCF Method, we used the EBIT calculated from the P&L Sheet. This EBIT is adjusted for tax purpose using the average tax rate to calculate the NOPLAT. Now this is further adjusted for depreciation to calculate the Gross Cash Flow. The Gross Cash Flow is adjusted for the change in working capital. In current assets we did not include the Cash and bank balance. Now this cash flow is further adjusted for capital expenditure. Free Cash Flow to the Firm = NOPLAT + Depreciation (Changes in Working Capital) Capital Expenditures. Where, NOPLAT = EBIT*(1-t) Changes in Working Capital = -

Now these free cash flows are discounted using the WACC to calculate the present value of the cash flows. The value of the firm is directly divided by the total no. Of shares since there is no debt. NOPLAT Net Operating Profit Less Adjusted Taxes EBIT Earnings Before Interest and Tax FCF Free Cash Flow WACC Weighted Average Cost of Capital
(All Figures in Crores)
Table 7: Free Cash Flows

2013
Total Revenue COGS Gross Profit wages SG&A Expenses Depreciation 9095.74 80.78 9014.96 595.71 678.49 796.24

2014
8822.87 42.46 8780.41 504.23 617.33 289.60

2015
8858.16 42.63 8815.53 504.89 615.88 265.32

2016
8999.89 43.31 8956.58 507.52 610.07 34.47

2017
9179.89 44.18 9135.71 510.88 602.69 163.29

2018
9409.38 45.28 9364.10 515.15 593.28 143.21

Stable
9644.62 46.42 9598.20 519.53 583.63 101.62

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EBIT Marginal Tax Rate Nopat Depreciation Changes In Operating Working Capital Capex Free Cash Flow Total Equity Total Debt Total Capital Equity% Debt% Cost of Equity After Tax Cost Of Debt WACC Year Count Discounting Factor PV of FCF

6944.52 33.90% 4590.33 796.24

7369.24 33.90% 4871.07 289.60

7429.44 33.90% 4910.86 265.32

7804.51 33.90% 5158.78 34.47

7858.85 33.90% 5194.70 163.29

8112.46 33.90% 5362.34 143.21

8393.42 33.90% 5548.05 101.62

-1643.24 -224.78 3968.11 27527.69 27106.86 54634.55 50% 50% 18.57% 7.42% 13.04%

-2162.34 445.83 2552.50 28211.88 27106.86 55318.74 51% 49% 18.57% 7.42% 13.10% 0.5 0.94 2400.08

-1922.25 -70.68 -523.04 -488.14 -455.03 260.28 557.13 817.60 3708.96 4862.29 4277.82 4199.81 28615.60 29054.59 29506.21 30060.50 27106.86 27106.86 27106.86 27106.86 55722.46 56161.45 56613.07 57167.36 51% 52% 52% 53% 49% 48% 48% 47% 18.57% 7.42% 13.14% 1.5 0.83 3081.80 18.57% 7.42% 13.19% 2.5 0.73 3567.44 18.57% 7.42% 13.23% 3.5 0.65 2769.28 18.57% 7.42% 13.28% 4.5 0.57 2396.19

-360.62 545.00 4744.05

Terminal Value Total Pv of FCF Debt Excess Cash FCF to Equity Divide by No of Equity Shares(in Crores) Fair Value Per Share(in Rs) Present Market Value(in Rs)

29517.00 43731.79 27,508.88 1,844.14 18067.05 158.1426747 114.25 140.05

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6. Conclusion and Recommendations

DLF Ltd stock is overvalued according to DCF valuation method. The current market price is Rs. 140.05, according to valuation we obtained a value of Rs. 114.25. This variation could be because of highly overpriced assets and investments during the early stages of operation. Also the real estate sector scenario in Indian market stabilized better when compared to the last decade resulting in the reduced profits for DLF Ltd. The following graph shows the last 5 years high and low along with the movement of the DLF Ltd price:

Figure 3: DLF Share price movement

The graph clearly depicts the volatile movement of the DLF Ltd share price from around 480 in mid 2009 to 120 in mid 2013 and again 150 in early 2014. This shows that the market for this real estate giant clearly stabilized over a period but again raises many questions over and over again! Hence, we recommend selling the stock considering its focus on tapping new market, investing behind new product introductions and reducing its cost of production.

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7. Template for Project Cash flow projections

Valuating a company, firm or group of companies can be done using the financials available easily through the quarterly, annual mandatory financial statements. But how does real estate companies like DLF Ltd etc., go about finalizing a project or development? What are the various costs involved for a project, does the timing of different costs effect the decision on taking up a project or not, how one forecasts the cash flows for a development project with differential mix (joint venture, joint development, equity or debt), does one need to take sales or collections as cash inflows, what should be the ideal return expected from the project? These questions can be easily answered using the following template. This project cash flow projections template has 4 major sections: a) Assumptions and Specifications b) Cash outflows or Costs c) Cash inflows or Revenues d) Cost and Collection Schedules All the data forecasts from the project specifications is used to compute project IRR using which the investment analysts for the firm, analysts from both the sell and buy side can make informed decisions on investing in a particular project.

7.1

Assumptions and Specifications

This section captures all the specifications of the project such as the total area, constructed area, saleable area, FSI, no. of flats, different costs involved etc., Also the assumptions such as the projected growth in costs, sales, collections, tax projections etc., will be captured for the specific project. The snapshot of this section for a sample project is provided below:
Table 8: Assumptions & Specifications (Cash Flow Template)

ASSUMPTIONS
<Project Name> Particulars Location
Location <Date>

Value

Unit

Remarks
Sample

Land Details
Plot Size Plot Area Plot Size for development FSI available TDR 3.84 167,270 158,907 3.25 1.95 Acres sq. ft. sq. ft. nos. nos.

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TDR FSI achievable Cost of Land Cost of TDR Total Land Cost Total TDR Cost Registration & Stamping Cost Total Cost of Land including TDR and Registration

309,868 5.2 4,750 700 79 22 5 106

sq. ft. nos. Rs. / sq. ft. Rs. / sq. ft. Rs. Cr. Rs. Cr. Rs. Cr. Rs. Cr.

Area Statement
Saleable Area of Apartments Basement Parking Total Built-up Area including Basement 826,316 165,263 991,579 543,629 309,868 853,497 1,400 610 5,800 500 8.0% 3.9% sq. ft. sq. ft. sq. ft. sq.ft. sq.ft. sq.ft. sq.ft. sq.ft. Rs./ sq. ft. Rs. / sq. ft. % %

Product Mix
Saleable Area FSI Saleable Area of TDR Total Saleable Area of Apartments Average Size of Apartments Total No. of Apartments

Sales
Launch Price of Apartments Other income on Apartments Increase in Sales Price Increase in Sales Price

Per annum Semi Annually

Consultant / Development Expenses

Consultant Fees (Architect, structural, plumbing & electrical)
Approval & Liasioning Cost

50 100 1.0 3.0 2,400 600 5.0% 2.5% 3% 6% 1.5

Rs./ sq. ft. Rs./ sq. ft. Rs. Cr. Rs. Cr. Rs./ sq. ft. Rs./ sq. ft. % % % of Sales % of COC Rs. Cr. % % % Rs. Cr. Rs. Cr. Rs. Cr. Per annum Per quarter

Sample Flat, Villa and Sales Gallery Initial Advertising Expense

Construction Costs
Apartment Construction Cost Basement Parking Cost

Increase in Construction Costs Increase in Construction Costs

Per annum Semi Annually

Other Cost
Marketing & Advertising Expenses Overheads - Administration, PMC etc Consultant Fee

Debt Costs
Debt Cost Debt Cost 0.0% 32.4% 10

Tax
Marginal Tax Rate

Investment
Developer Contribution Investor Contribution Total Investments

Return Requirement
Distribution Upto 25%

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Investor Developer Distribution After 25% Investor Developer

% %

% %

7.2

Cash outflows or Costs

This section contains the forecasts of all the cash outflows or costs involved for the specific project during the tenure of the project. The timing of these costs is critical as this would alter the IRR.

7.3

Cash inflows or Revenues

The sales forecasts for the specific project along with any other income are captured in this section. These two sections together determine the net cash flows for the project, very important in calculating the return from the project. The cost per sq.ft for the project and net sales price per sq.ft can be easily calculated using the net cash outflow and inflow respectively.
Table 9: Sample Cash Flows (Cash Flow Template)

CASH FLOWS
<Project Name> <Date>
Ending Quarter Rs. Cr. Rs. Cr. Rs. Cr. Rs. Cr. Rs. Cr. Rs. Cr. Rs. Cr. Rs. Cr. Rs. Cr. Rs. Cr. Rs. Cr. Rs. Cr. Rs. Cr. Rs. Cr. Rs. Cr. Rs. Cr. Rs. Cr. Apr13 Q0 Jul13 Q1 0 0 0 0 0 0 (85) 10 (1.1) (1.1) (0.1) (1) (3) 0 0 0 .. .. .. .. .. Oct13 Q2 0 0 0 0 0 0 Jan14 Q3 0 0 0 0 0 0 .. .. .. .. .. .. .. .. .. .. .. .. .. .. (0.1) (0.1) (0.1) (0.1) (0.1) (4) (1) (24) (1) (2) (24) (1) (1) (24) (1) (1) (24) (1) (1) (27) (1) (3) (3) (214) (10) (18) Jul16 Q13 15 15 44 44 59 39 (22) Oct16 Q14 0 0 44 44 44 47 Jan17 Q15 0 0 45 45 45 65 Apr17 Q16 0 0 45 45 45 87 Jul17 Q17 0 27 27 47 15 63 90 153 Rs. Cr. Total 342 27 369 225 15 240 610 610 (85) (22) 10

Project Cash Flow

Sales Value - FSI Other income - FSI Total Sales Value - FSI Sales Value - TDR Other income - TDR Total Sales Value - TDR Total Sales Value - Project PROJECT CASH INFLOW Total Land Cost Total TDR Cost Developer Non-refundable Deposit Consultant Fees (Architect, structural, plumbing & electrical) Sample Flats and Sales Gallery Initial Advertising Expense Construction Cost Basement Parking Cost Marketing & Advertising Expenses

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Overheads - Administration, PMC etc Consultant Fee PROJECT CASH OUTFLOW

Rs. Cr. Rs. Cr. Rs. Cr. (1.5) (76) (76) 53.0% (1) (1) (1) (1)

0 (4) (4)

.. .. .. ..

(1) (49) (10)

(1) (27) 19

(1) (27) 38

(1) (28) 59

(2) (33) 120

(13) (2) (361) 248

NET CASH FLOW

Project IRR (Annual, Pre Tax)

Rs.Cr.
%

7.4

Cost and Collection Schedules

The timing of the cash inflows and outflows is very critical in projecting the returns for a project. The sales schedule would differ from the actual collections schedule in reality. Hence it is very important - to capture the construction schedule to determine the costs, to maintain sales and collections schedule to check the cash inflows. The template provides an easier way to capture the timing of the cash flows which also facilitates for any changes in the project schedule as they can be accommodated easily.
Table 10: Construction and Collection Schedule (Cash Flow Template) Construction Schedule Cost of Construction Apartments Cost of Construction Basement % Completion/CoC Incurrence - FSI % Completion/CoC Incurrence - TDR Construction Area - FSI Construction Area - TDR Construction Area - Total Sale Schedule Residential Sales Price - Apartments Sales - FSI Sales - TDR Collection - FSI Collection - TDR Saleable Area - FSI Saleable Area - TDR Saleable Area - Total Apartments Sold per quarter Rs. Psf % % % % sq. ft. sq. ft. sq. ft. nos. Rs. Psf Rs. Psf % % sq.ft sq.ft sq.ft 10,873 0 10,873 16,309 0 16,309 27,181 0 27,181 Q0-3 Q4 (2400) (600) 2% Q5 (2400) (600) 3% Q6 (2400) (600) 5% . . . . . . . . . . . . . . . . . . Q14 (2520) (630) 6% 20% 32,618 61,974 94,591 Q15 (2520) (630) 6% 20% 32,618 61,974 94,591 Q16 (2582) (646) 6% 20% 32,618 61,974 94,591 Q17 (2582) (646) 8% 20% 43,490 61,974 105,464 100.0% 100.0% 543,629 309,868 853,497

Q0-3

Q4 5,800 15% 15% 81,544 0 81,544 58

Q5 6,028 15.0% 10.0% 81,544 0 81,544 58

Q6 6,028 10.0% 6.0% 54,363 0 54,363 39

Q14 7,031 20% 6.0% 20.0% 0 61,974 61,974 44

Q15 7,306 20% 6.0% 20.0% 0 61,974 61,974 44

Q16 7,306 20% 7.0% 20.0% 0 61,974 61,974 44

Q17 7,593 20% 8.0% 20.0% 0 61,974 61,974 44 100.0% 100.0% 100.0% 100.0% 543,629 309,868 853,497 610

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Using the cash flow forecasts from the above sections, an analyst can easily calculate the project return taking into account most of the influencing factors like timing of the cash flows, different costs and revenues, etc., This template can also be used to present the project specific data to any other investor, third party interested in the project, banks etc., while looking for project finance. As the template is cyclically referenced with different calculations, any small changes to the construction schedule, sales or collections schedule, changes in cash inflows and outflows are instantly reflected. Further the template can be modified to capture the levered cash flows with minor changes in case of a levered firm.

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8. References
www.capitalline.com Annual reports of DLF Ltd Investment Valuation Aswath Damodaran www.moneycontrol.com JLL real estate blog, analysts reports on Indian real estate. The valuation of Real Estate Serving as collateral for Securitised Instruments , (2006), International Valuation white paper, July 1 2006, IVSC

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