financial modelling hdil
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Financial Modeling of Infrastructure Industry HDILTRANSCRIPT
Financial Modeling – Real Estate - HDIL
By
Ruchi Jha
Roll No. 14
Under the guidance of
Ms. Anupama Khaitan Prof. Kalpakam
Vice President Faculty
Corporate Bridge K J SIMSR
K J Somaiya Institute of Management Studies & Research
July,2012
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Table of Contents:
1) Introduction to Corporate Bridge……………………………………………………………………..09
2) Introduction to Financial Modeling………………………………………………………………….09
3) Sector Overview-Realty.………………..……………………………………………………………………….. 21
4) Introduction to HDIL……..……………………………………………………………………………………37
5) HDIL Financials
a) HDIL – Summary of Important Financials….………………………….………………………………. 39
b) HDIL – Projection of Balance Sheet till FY16…………………..……….……………………………. 40
c) HDIL – Projection of Income statement till FY16………………..….…………………………….. 42
d) HDIL –Historical ratios analysis…………………….…………………………….…………………………..45
e) HDIL – Projection of company’s performance…………………………….……….………………..49
f) Comparable analysis between players..………………………………………..… ………………….50
6) HDIL – Equity Research Report……………………………………………………………………………… 53
a) Buy/Sell Recommendation for investors…………………………………………………………….. 53
b) Synopsys of Financial Statements………………………………………………….…….................53
c) Key Risks………………………….……………………………………………………………………………………54
7) Recommendations…………….……………………………………………………..…………………………….548) Income Statement of HDIL………………………………………………………………………………………….559) Balance Sheet of HDIL…………………………………………………………………..…………………………….5610) Cash Flow of HDIL………………………………………………………………………………………………………..57
11) Bibliography……………………………………………………………………………………………………………..58
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Declaration
I, Ruchi Jha hereby declare that this project report is the record of authentic work carried
out by me during the period from 6th May, 2012 to 5th July, 2012 and has not been
submitted to any other University or Institute for the award of any degree / diploma etc.
Signature:
Name of the student: Manoj Kumar
Roll Nos: 14
Date: 10th July, 2012
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(On the letterhead of the Company/ Organisation, given and signed by the concerned
authority in the Company / Organisation where student has done the Summer Training. It
should also have Company/ Organisation Seal /Stamp.)
Certificate from Industry Guide
This is to certify that Ms. Ruchi Jha, a student of the Post-Graduate Diploma in Management-
Financial Services (PGDM-FS), has worked in our organisation on a project assigned by us. To
the best of our knowledge, this report is a product of the student’s own effort on the project
conducted under our guidance and supervision.
Organizational Guide
Designation
Organization
Address
Date
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Certificate from Faculty Guide
This is to certify that Ms. Ruchi Jha, a student of the Post-Graduate Diploma in Management
(PGDM-FS), has worked under my guidance and supervision. This Summer Project Report has
the requisite standard and to the best of our knowledge no part of it has been reproduced from
any other summer project.
Prof Kalpakam G.
Faculty
K J Somaiya
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Acknowledgement
I t ’s a great pleasure to present this report of summer training in Corporate
Bridge in partial fulfillment of PGDM FS Programme under K.J Somaiya Institute of
Management Studies & Research, Mumbai. At the outset, I would like to express my immense
gratitude to my training guide Mr. Dheeraj Vaidya and Ms. Anupama Khaitan guiding
me right from the incept ion t i l l the successful completion of the training.
I am falling short of words for expressing my feelings of gratitude towards my institute guide
Prof. Kalpakam for extending his valuable guidance about market and support for
literature, critical reviews of project and the report and above all the moral support he had
provided me with all stages of this training.
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Executive Summary
This report provides an analysis and evaluation of the current and prospective profitability,
financial stability, operating efficiency and liquidity position of Housing and Development
Infrastructure Ltd. and the real estate sector as a whole. It also helps in understanding the
financial modeling of HDIL and recommends a BUY/SELL.
Methods of analysis include financial modeling, trend, horizontal and vertical analyses as well as
ratios such as DuPont, solvency and turnover ratios. It also included financial modeling with
valuation which included the comparative analysis between the different players in the same
sector. Other calculations include rates of return on Shareholders Equity and Total Assets and
earnings per share to name a few. HDIL is one of the most diversified groups of companies in
terms of operations in the real sector industry. Result of the data analyzed showed that HDIL has
a promising growth in the uncertain economic scenario. In spite of high inflation and high interest
rate scenario, HDIL has been able to have the highest return on investment in the real estate
sector. A decreasing trend is expected in neat future with overall increase in efficiency and
improvement in global economic condition along with the significant fall in overall debts
expected in near future as debt repayments are due in the coming months. The company is trying
to rely more on internal sources of funds and reduce external expenses. Locked in land sales
along with the new ones are going to form a part of this.
In spite of the weak economic conditions, consistent YOY growth shows the caliber of the
company to expand and be the leader from being amongst the top five. The company’s stock is
highly undervalued and the financials of the company promise a robust growth in near future.
Steady growth in overall margins expected, with steady growth in sales numbers, improved
operational efficiency and national and international economic scenario.
Projected ratio reflects a positive outlook on the overall company’s performance and margin.
Based on the past and future performance of HDIL, a buy for the company’s stock was
recommended. However, the key risks to our view are as follows:
Overall economic scenario going down due to current financial crisis is affecting
investments in India. The real estate sector is also badly affected.
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Unavailability of some current and past data.
The model is based on few assumptions which might change with the change in economic
scenario.
Delay in the government norms, shortage & skilled labour, high cost of construction,
input & labour cost, and legal issues still a major hindrance for the overall sector growth.
.
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Objective of the Report
The main objective of the study is to get a definite idea about how Financial Modeling plays a
vital role in taking an investment decision related to a company. Financial Modeling and
Valuation are the key "building block" skills required in today's business, banking and financial
services world.
Furthermore, the orientation is very useful to detect whether the theoretical knowledge matches
with real life scenario or not. Through the title "Financial Modeling - HDIL”, the specific
objectives are as follows:
To learn importance of Financial Modeling
To learn Financial Modeling procedure.
To Model a LIVE sample company and prepare final research report in Real estate sector:
HDIL
Methodology of Study
Analysis has been made on the basis of the objectives mentioned before in the context of
"Financial Modeling - HDIL”
For financial modeling, following steps were employed:
1) As the first step, an industry analysis report of the Real Estate Sector was prepared in
which the impact of various factors was studied.
2) Extracting data from past five years from the annual reports of HDIL, the historical Ratio
analysis was done.
3) In the next stage, forecasting for next five years was done using past data and industry
report data setting certain assumptions.
4) The last step was to prepare a research report for the company and recommending
buy/sell for the same.
The report has been written on the basis of information from available Secondary sources and
various assumptions required preparing financial modeling of the company.
For the completion of the present study, secondary data has been collected. The main sources of
secondary data are:
Annual Reports of HDIL
Website Of HDIL
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Data Published in Mckinsey Report
Limitation of the Study
To make a report various aspects and experiences are needed. But I have faced some barriers for
making a complete and perfect report. These barriers or limitations, which hinder my work, are as
follows:
Difficulty in accessing data of Company’s internal operations.
Non-Availability of some preceding and latest data.
Various Assumptions have been made especially during the preparation of financial
modeling.
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INTRODUCTION TO FINANCIAL MODELINGFinancial modeling is one of the most powerful skills of modern finance. It is used extensively
by investment bankers and other finance professionals. Financial modeling is creating a complete
program or a structure, helping in coming to a decision regarding investment in a project/
company. It is a process by which a firm constructs a financial representation of some, or all,
aspects of the firm or given security. The model is usually characterized by performing
calculations, and makes recommendations based on that information. The model may also
summarize particular events for the end user and provide direction regarding possible actions or
alternatives. In a nutshell financial modeling is a process of building a multi-year forecast of a
company's financial statements: income statement, balance sheet and statement of cash flows.
The projected time period varies from one model to the next, the norm being 5 to 10 years .
Anybody dealing with any decision related to money needs financial modeling. Any person
involved in financial decision making/ planning related to large corporate needs financial
modeling day in and day out. It is used in a variety of finance applications such as investment
banking - initial public offerings (IPO), secondary financings, mergers and acquisitions (M&A);
corporate banking; private equity; venture capital; equity research; corporate strategic planning
and budgeting; and numerous other important applications. Below are just a few financial
modeling application examples:
An investment banker builds a financial model of a mobile telephony software company
that is going through an IPO process. The main outputs of the model will be metrics used
in valuation: unlevered free cash flows (UFCF), earnings and net debt calculations. The
financial model will be used in discounted cash flow (DCF) valuation. DCF, together with
comparable trading and transactions valuation will be used in the company's ultimate
valuation. The end goal of this modeling process will be to value the per-share offering
price of the company's shares once they are listed on the stock exchange.
A credit-focused financial model is being built by the commercial lending unit of a major
bank. This is a part of processing a large commercial loan application filed by a
manufacturing company which is looking to expand its operations. The model's emphasis
is on the debt servicing ability of the company in question. The most important outputs
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that the commercial bankers will look at are debt to equity ratio, interest coverage and
fixed charge coverage ratios.
An equity analyst builds a financial model of a company that his firm decided to initiate
coverage on. The focus of the model is on DCF valuation and unlevered free cash flows
generated by the company. Based on the model's results the analyst will issue
buy/sell/hold recommendations on the stock based on the relationship of his target stock
price and the current market stock price.
A private equity firm is considering a 50% acquisition of an early stage pharmaceutical
company that needs capital for sustaining its research and development (R&D) program.
The private equity firm sees value and significant upside in this situation given the target
firm's pending patent applications. The purpose for building the financial model is to
determine the price at which the private equity firm is willing to purchase the 50% stake,
given the hurdle IRR (internal rate of return) rate of 35%.
Financial models can be constructed in many ways, either by the use of computer software, or
with a pen and paper. What's most important, however, is not the kind of user interface used, but
the underlying logic that encompasses the model. A model, for example,
can summarize investment management returns, such as the Sortino ratio, or it may help estimate
market direction, such as the Fed model.
TYPES OF MODELS
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Financial models are used in Investment Banking and Corporate Finance fields, as well as
Commercial Banking, Portfolio Management and Venture Capital / Private Equity applications.
Different types of financial models are as follows:
Risk analysis models – These models are used to analyze different types of risk
Trading models - used in portfolio management and sales/trading functions
Portfolio allocation models - determine asset type and other allocations within a portfolio
Financial statements projection model
Financial statements projection models are the most common used type of financial model.
Financial statements projection model forecasts the company's future financial results and
consists of:
Income Statement
Balance Sheet
Cash Flow Statement
Supporting schedules - CAPEX Schedule, Debt Schedule, Working Capital and other
schedules.
The financial projections model is an essential building block for valuation and investment
decision making analysis. Subsequent valuation models such as the Discounted Cash Flow
(DCF) models, Comparable Trading and Comparable Transaction analysis models, LBO
(Leveraged Buyout) models, and Mergers and Acquisitions (M&A) models build on the financial
statements projection model.
The level of detail of a given model depends on its intended use. For example, if the model's
purpose is to analyze a company's tax situation, then building a detailed tax schedule into the
model will suit that purpose. In another example, if a company has a complicated debt structure
with layers of senior and junior debt, adding a complex debt schedule outlining all debt segments
and determining repayment order will be warranted. Finally, if one wants to analyze the CAPEX
program of a company, he needs to build a more comprehensive CAPEX schedule to analyze
different CAPEX inputs and their dynamics over time.
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When building a financial statements projection model an analyst creates financial statements of
a company that reflect its historical financial performance (usually 1-3 years), and forecasts the
company's financial performance over a certain period of time (usually 3 to 10 years). The
forecast period can be monthly, quarterly or yearly depending on the requirements. The modeller
focuses on the three main financial statements: Income Statement, Balance Sheet and the
Statement of Cash Flows.
The Income Statement would typically have the following line items: Sales Revenue; Cost of
Goods Sold (COGS); Sales, General and Administrative Expenses (SG&A); Research and
Development Expenses (R&D); Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA); Depreciation and Amortization Expense (D&A); Interest Expense; Earnings Before
Taxes (EBT); Income Tax Expense; Net Profit (Net Income).
The Balance Sheet in the financial modelling context will consist of the following line items:
Current Items (Cash, Investments, Accounts Receivable, Deferred Taxes, Prepaid Expenses,
Inventory); Fixed Assets - mainly Property, Plant and Equipment (PP&E) net of Accumulated
Depreciation; Current Liabilities (Short-term Borrowings, Current Portion of Long-term Debt,
Accounts Payable, Accrued Expenses); Long-term Liabilities - mostly Long-term Debt and
Pensions; Shareholders' Equity - typically consisting of Common Stock, Treasury Stock and
Retained Earnings.
The Cash Flow Statement acts as an indicator of sources and uses of cash. In a typical model it
consists of the three main parts: Cash Flows from Operating Activities, Cash Flows From
Financing Activities and Cash Flows From Investing Activities. Every year-to-year change in the
model's Balance Sheet is reflected on the Cash Flow Statement.
Sensitivity and Scenario Analysis in Financial Modeling
In a typical financial model, variability in cash inflows and net present value (NPV) are often
modeled using sensitivity and scenario analysis. Sensitivity analysis uses several possible values
for a given variable, such as cash inflows, to assess that variable’s impact on the company’s
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return, measured here by the NPV. This technique is often used by financial analysts to get a feel
for the variability of return in response to changes in a key variable.
One of the most common sensitivity approaches used in financial modeling is to estimate the
NPV in relation to a number of different estimates of cash inflow, which vary from the optimistic
case (best) estimates for cash flow, to the base case (expected) estimate of cash inflow, to the
pessimistic case (worst) estimate of cash inflow.
The NPV range can then be determined by subtracting the pessimistic outcome NPV from the
optimistic outcome NPV. Often, by putting forward an NPV range, a good financial analyst is
able to present a balanced view of a business case by highlighting both the potential downside
risks as well as the potential upside of the investment, allowing business executives to make
calculated decisions based on their risk appetite.
Scenario analysis in financial modeling is similar to sensitivity analysis, but broader in scope.
Scenario analysis evaluates the impact of simultaneous changes in a number of variables, such as
cash inflows, cash outflows, the cost of capital, or even leading revenue / cost growth rates. The
combined effects of changes in these variables are then applied to evaluate the impact on the
company’s return.
For instance, a company could evaluate the impact of a high or low risk-free interest rate
environment on a company’s NPV. Each scenario will affect the company’s cash inflow, cash
outflows, and cost of capital, thereby resulting in different levels of NPV. A financial analyst can
then use these NPV estimates to assess the risk involved with respect to the interest rate
environment.
Components
A typical excel financial model consists of the following:
1. Assumptions. These are the model's inputs. Assumptions are based on the company's
historical information as well as its future plans and current market trends. For making the
assumptions, it is very important to do the industry analysis of the sector as it would
determine the factors which have the direct impact on the financials of the company and
the decisions taken by the management.
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2. Historical and projected financial statements – After knowing the factors which impact
the entire sector, it is necessary to know how the company performed in the past in order
to have the future projections. The financial statements which help in knowing the past
performance of the company are income statement, balance sheet and cash flow
statement. Projections are based on historical performance, i.e the ratios calculated from
the historical data and observing the behavior of the financials. Also, the future
projections would depend on the model assumptions as well.
3. Supporting schedules including working capital schedule, capital expenditures (CAPEX)
schedule, debt schedule, and tax schedule.
4. The model's outputs depend on the primary purpose for building the model. In many cases
modelers focus on earnings, unlevered free cash flows, capital structure and debt capacity.
5. Scenario and sensitivity analyses are often incorporated into the models, including
scenario managers, data tables and charts.
6. Financial models often serve as foundation for more detailed further analysis such as
valuation, M&A merger modeling (accretion/dilution analysis), LBO analysis and Monte
Carlo simulations.
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REAL ESTATE SECTOR ANANLYSIS
The construction industry is the second largest industry of the country after agriculture. It makes
a significant contribution to the national economy and provides employment to a
large number of people. The use of various new technologies and deployment of project
management strategies has made it possible to undertake projects of mega scale. In
its path of advancement, the industry has to overcome a number of challenges. However, the
industry is still faced with some major challenges, including housing, disaster
resistant construction, water management and mass transportation. Recent experiences of
several new mega-projects are clear indicators that the industry is poised for a bright future. It is
the second homecoming of the civil engineering profession to the forefront amongst
all professions in the country.
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Features of Real Estate Markets:
Durability
Heterogeneous
High transaction costs
Long time delays
Both an investment good and consumption good
Immobility
Performance of Real Estate Sector in India:
India has emerged as a leader in the global economy.
It is a magnet for foreign direct investment (FDI), and has displaced Mexico as the third
most preferred country for foreign investment.
Market analysis pegs returns from realty in India at an average of 14% annually with a
tremendous upsurge in commercial real estate on account of the Indian BPO boom.
The housing sector has been growing at an average of 34% annually, while the hospitality
industry witnessed a growth of 10-15% last year.
On the construction front, the average profit from construction in India is 18%, which is
double the profitability for a construction project undertaken in the US
Five per cent of the country’s GDP is contributed by the housing sector. In the next three
or four or five years this contribution to the GDP is expected to rise to 6%.
One Rupee invested in this sector results in 78 paisa being added to the GDP of the State.
Therefore, if the economy grows at the rate of 10% the housing sector has the capacity to
grow at 14% and generate 3.2 million new jobs over a decade.
Private equity players are considering big investments, banks are giving loans to builders,
and financial institutions are floating real estate funds
Private equity players are considering big investments, banks are giving loans to builders,
and financial institutions are floating real estate fun
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Growth Prospects in India
India’s real estate is projected to grow to $ 180 billion by 2020 from $66.8 billion in the
year 2011.It is expected to have a CAGR of 11.92% by 2016 which shows the huge
growth opportunities available in the real estate sector.
The real estate sector in India assumed greater prominence with the liberalization of the
economy, as the consequent increase in business opportunities and labor migration led to
rising demand for commercial and housing space. At present, the real estate and
construction sectors are playing a crucial role in the overall development of India’s core
infrastructure.
India’s Real Estate Sector’s Contribution to the GDP
Real estate remains an important contributor in the GDP and continues to do the same. In the year
2012-2013, it is expected to be 6%.
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Demand Drivers
The real estate sector is divided in four parts, namely residential, commercial, organized
retail and hotels. The demand drivers for these categories are:
1) Residential - Residential real estate industry has witnessed stupendous growth in the past
few years owing to the following reasons:
• Continuous growth in population
• Migration towards urban areas
• Ample job opportunities in service sectors
• Growing income levels
• Rise in nuclear families
• Easy availability of finance
Demand for houses increased considerably whilst supply of houses could not keep pace
with demand thereby leading to a steep rise in residential capital values especially in
urban areas. Increase in Urbanization and middle class, growing per capita GDP, tax
benefits on loans - middle class growth to 41% by 2025.
Increase in income Levels would increase the real estate demand
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Increase in Urbanization acting as a demand driver
Growth phases in the residential real estate industry
2) Commercial - The commercial office space in India has evolved significantly in the past
10 years due to change in business environment. The growth of commercial real estate has
been driven largely by service sectors, especially IT-ITeS.
Demand for office space is directly linked to addition in number of employees, which in
turn is dependent on economic
growth. When economy slows down, companies hold their expansion plans leading to
lower demand for office space.
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Commercial office Semand –Supply projection(Top seven cities)_______________________
3) Organised Retail – Entry of global brands, changes in shopping habits, increasing
disposable incomes, retail a good investment option.
The industry is expected to increase at a CAGR of 14 per cent in the short term and 19 per
cent over the next 5 years. Organised retail penetration has grown to about 5.6 per cent in
2009-10, which is further expected to increase to about 7.3 per cent by 2012-13.
In the past few years, India’s organised retail industry has posted high growth rates given
improvement in key driving factors namely, lavish lifestyles, high disposable incomes and
a propensity to spend. India’s retail market was mainly unorganised until early 2000.
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Organized Retail penetration______________________________________________
4) Hotels – Increasing tourism, increase in business travel – by 2020, India is expected to
have more than 8 million tourists and is expected to become a leading tourist destination
in South Asia.
Economic factors affecting Real estate Sector
Impact of high rising inflation on the real estate sector: Lending to the developers by
local banks reduced because of interest rate hikes and high cost of debt. Also, the home
loans for the consumers became expensive.
Impact of Rupee Depreciation: Falling value of rupee made the local investments slow
but have made the market attractive for the NRIs inturn increasing foreign investments
which would continue this year also.
Rising Factors Cost: Rising factor costs and increased raw material prices, since
September 2011 could slow the construction and reduce the number of projects developers
want to invest in until the costs come down.
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Sharp increase in input cost has severely impacted the overall performance of the sector
Higher costs mean that the rental levels can not be reduced in order to attract renters.
Deployment of Gross Bank Credit
Year On year the loans have increased but the highest growth has been in the housing loan sector
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House Price Index (Year on year) showing increase/decrease in housing prices
Affect on realty sector stocks due to fall in growth and profitability
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Investment Opportunities
Because of the hiked interest rates and reduced lending to the developers by the local
banks, private equity seemed a good option for the real estate. It had investments of US $
1700 million in the year 2011 and continues to grow.
The sector had a lot of different deals in PE and M&A last year. Deals worth around US $
1.3 billlions took place in contrast to US $ 483 the last year. The sector is likely to witness
growing investments.
FDI in Real estate
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Government’s Role
The Government of India has plans to invest more than US$ 1 trillion in infrastructure
over the Twelfth Five-Year period (2012-2017) to improve the infrastructure and make
the business environment attractive.
Government has increased the interest subsidy of US $ 301.37 on the new home loans of
upto US $ 30410.54 for the houses not exceeding US $ 50684.24.
Allocation for Bharat Nirman by the governement has been increased to US $ 12.89
billion. Also the relaxed FDI norms would also help in making the Indian market
attractive for the foreigners and NRIs.
A system called LEED 2011 was introduced to rate the buildings according to their
environmental friendliness.
Market players
The major players in the real estate sector include:
1) Oberoi Reality
2) Godrej Properties
3) HDIL
4) Indiabulls
5) Prestige Estate
6) Omaxe
7) Sobha developers
8) Parsvnath
9) Sunteck reality
The comparative analysis is done on the basis of:
Market Capitalization
Sales Turnover
Net Profit
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Market Capitalization:
Company
Market capitalization (Rs. In
cr.)
DLF 47,763.29
Oberoi Reality 8,722.80
Godrej Proper 4,586.35
HDIL 4,518.96
Indiabulls 3,368.65
Prestige Estate 3,243.01
Omaxe 2,689.42
Sobha developers 2,624.19
Parsvnath 2,591.50
Sunteck reality 2,484.65
Sales Turnover
Company
Sales
turnover
DLF 2,916.08
Godrej Proper 337.29
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HDIL 1,802.63
Indiabulls 159.1
Omaxe 1,141.09
Sobha developers 1,456.10
Parsvnath 741.31
Sunteck reality 14.77
Net Profit
Company Net profit Rs.(In Crores)
DLF 1,269.58
Godrej Proper 106.15
HDIL 897.36
Indiabulls 45.81
Omaxe 62.51
Sobha developers 182.4
Parsvnath 75.48
Sunteck reality 6.03
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SWOT ANALYSIS
Strengths
Employment and training opportunities in the field of construction.
Private sector housing boom and commercial building demands Construction of the multi
building projects on the feasible locations in the c country
Good structured national network facilitates the boom of construction industry.
Low cost well- educated and skilled labour force is now widely available across the
country.
Sufficient availability of raw material and natural resources in the country is supportive
for the industry
Weakness
Distance between construction projects reduces business efficiency.
Training itself has become a challenge.
Changing skills requirements and an ageing workforce may emphasize the skills gap.
Improvement in long-term career prospects is highly required to encourage staff retention
and new entrants.
External allocation of large contracts becomes difficult.
Lack of clearly defined processes and procedures for construction and its management.
Opportunities
Continuous private sector housing boom will create more construction opportunities.
Public sector projects through Public Private Partnerships will bring further opportunities.
Developing supply chain through involvement in large projects is likely to enhance the
chances in construction.
Renewable energy projects will offer opportunities to develop skills and capacity in new
markets.
More flexible training delivery techniques are now available.
Financial supports like loan and insurance industry seeing a good growth.
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Threats
Long term market instability and uncertainty may damage the opportunities and prevent
the expansion of training and development facilities.
Current economic situation may have an adverse impact on construction industry.
Political and security conditions in the region and Late legislative enforcement measures
are always threats to any industry in India.
Infrastructure safety is a challenging task in construction industry.
Lack of political willingness and support on promoting new strategies.
Natural abnormal casualties such as earth quake and floods are uncertain and can prevent
the construction
HOUSING DEVELOPMENT AND
INFRASTRUCTURE LIMITED
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HDIL is among the top 5 listed real estate companies in India based in Mumbai with total
revenue of 20064.10(INR m) & net income more than 8000 (INR m). It is India’s largest
slum rehabilitation company engaged in projects in Mumbai Metropolitan region.
HDIL got listed on the NSE and BSE in the year 2007.
HDIL is part of the Wadhawan Group which has been involved in real estate development
in the Mumbai Metropolitan Region for almost three decades. The Wadhawan Group has
developed approximately 62,100,000 square feet (5,770,000 m2) of saleable area and
additionally, has constructed approximately 16,300,000 square feet (1,510,000 m2) of
rehabilitation housing area under slum rehabilitation schemes. HDIL's promoters are
Rakesh Kumar Wadhawan and Sarang Wadhawan. Sarang Wadhawan is the Managing
Director of HDIL.
HDIL is the largest listed Slum Rehabilitation developer in the most resilient Mumbai
market, which contributes a substantial 71% of our GNAV. Execution of the Rs200bn
Mumbai International Airport (MIAL) project is progressing well, sustainable TDR prices
and successful new launches via the conventional method provides strong visibility for
HDIL.
It recently diversified in leisure (HDIL Leisure) and multiplexes (HDIL Entertainment)
along with the operations into slum rehabilitation programs, residential projects,
Commercial projects & industrial projects.
In residential projects it’s caters from affordable housing segments to luxury segment
ranging from apartment complexes, towers and townships. In commercial segment it
offers commercial spaces, retail outlets, multiplexes and serviced apartments. In industrial
segment it’s into development of IT parks and Industrial parks.
HDIL is a listed real estate development company in India, with significant operations in
the Mumbai Metropolitan Region. HDIL's business focuses on Real Estate Development,
including construction and development of residential projects and, more recently,
commercial and retail projects, Slum Rehabilitation and Development, including clearing
slum land and re housing slum dwellers, and Land Development, including development
of infrastructure on land which the company then sells to other property developers.
HDIL has an integrated in-house development team which covers all opment from project
identification and inception through construction to completion and sale.
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Since incorporation in 1996, HDIL has developed 23 projects covering approximately
19,290,000 square feet (1,792,000 m2) of saleable area, including approximately
12,730,000 square feet (1,183,000 m2) of land sold to other builders after Land
Development, primarily in the Mumbai Metropolitan Region. HDIL also have constructed
an additional 1,900,000 square feet (180,000 m2) of rehabilitation housing area under
slum rehabilitation schemes.
HDIL's residential projects generally comprise groups of apartments, towers or larger
multi-purpose “township” projects in which individual housing units are sold to
customers. The commercial projects are a mix of office space and multiplex cinemas. The
retail projects focus on shopping malls. They usually follow a “build and sell” model for
the properties they develop.
HDIL also undertakes slum rehabilitation projects under a Government scheme
administered by the Slum Rehabilitation Authority (SRA), whereby developers are
granted development rights in exchange for clearing and redeveloping slum lands,
including providing replacement housing for the dislocated slum dwellers. The company
has also bagged the prestigious Mumbai Airport Slum Rehabilitation Project to
rehabilitate the slum dwellers located on 276 acres (1.12 km2) of Mumbai Airport land.
Although historically HDIL has focused on real estate development in the Mumbai
Metropolitan Region, as part of their growth strategy they are considering projects in
other locations, including Kochi and Hyderabad. They also are considering expanding
into hotel projects, special economic zone(SEZ) developments and “mega-structure”
complexes, which are large-scale mixed-use retail, commercial and residential
developments.
HDIL's total land reserves comprise approximately 124,800,000 square feet (11,590,000
m2) of saleable area to be developed through 35 Ongoing or Planned projects
HDIL's turnover from sales of projects, developed land and land development rights for
the financial years ended March 31, 2008, 2007, 2006 were Rs. 23803.7 million, Rs.
12040 million, Rs. 4,348.6 million, respectively, and the restated profit after tax for
financial years ended March 31, 2008, 2007 and 2006 were Rs. 14098.4 million, Rs. 5430
million and Rs. 1,172.9 million respectively.
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VISION
HDIL has a novel business model wherein it balances its short-term as well as long-term project
initiatives. HDIL is a leader in the SRS (slum rehabilitation scheme) segment. Executing SRS
projects allows HDIL to generate higher returns on its projects, as the cost of land is the cost of
construction. HDIL’s SRS projects are characterized by a lower asset cycle risk as against
its non-SRS projects, which involve a one-time upfront payment for the land parcel. HDIL’s
future initiatives involve a venture into the hospitality sector, development of a SEZ and bidding
for Airport modernization. HDIL has so far followed the build-and-sell model even for its
commercial and retail properties. While this may not be in line with international practices, for
companies such as HDIL, which also lock their working capital in developing SRS in Mumbai,
there may be higher requirement of capital, and this is better met by building and selling, rather
than leasing property.
Summary of HDIL’s Important Financials
Market Cap (M INR) 36,432.40Price/Book (mrq) 0.3326Price/Sales (ttm) 1.7093
PEG Ratio (3 year exp.) 13.0528Estimated PEG Ratio 15.0965EV (m INR) 59,442.88EBITDA 15,058.90EV / EBITDA (ttm) 3.95EV / Revenue (ttm) 2.96EPS (INR) (ttm) 19.33P/E Ratio (ttm) 4.2344
FINANCIALS OF HDIL
Steady and robust growth seen in all financial numbers_____________________________
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According to past trends and the expected future economic situation, net sales and
EBITDA are expected to grow YOY average of 26% for the next 4 years.
PAT expected to grow on an average 27% for the next 4 years.
Overall profitability can further increase depending on favourable economic scenario,
availability of finance, low inflation and steps taken to reduce overall operating expenses
by spending on technology.
Input costs are expected to grow at a steady rate, putting pressure on margins, however
overall improvement in operating efficiency will improve margins
Long term growth story intact
Horizontal Analysis
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The total sales increased in FY08 and then started declining. The sale of commercial and
residential space decreased considerably since FY10.HDIL changed its focus from
residential and commercial space to the slum rehabilitation which made an increasing
contribution in the sales of FY11. The total sales increased in FY08 by two fold. IN FY09
and FY10 sales has been decreasing due to low demand. In FY11 sales again increased.
Administrative expense increased significantly in FY08 and FY09 but after that it
becomes constant.
The expenses such as work in progress, cost of construction and financial charges
increased considerably because of increase in construction.
EBIDTA had a negative growth in FY09 because of high construction cost and project
specific charges.
EBIT also had a negative growth in FY09 because PBT decreased in FY09 due to low
sales because of the economic turmoil.
PAT was negative in FY09 and in FY 10 but, the PAT improved in FY11 because of
increase in the slum rehabilitation sales.
In FY09and FY10 because of lower net income, the profit attributable to shareholders was
negative but with increase in sales, the profit for shareholders increased.
Vertical Analysis
Work in progress increased significantly in FY08.
EBIDTA as a percent of sales increased in FY 08 and then has been reducing because of
increased construction and development cost and project specific charges.
PBT has decreased because of increase financial charges.
Interest cost rise very high in FY08 but decreased in FY09 and FY10, but in FY11 it
increased due to high interest charges.
There was increase in indigenous raw materials consumption due to increase in sales.
Due to decrease in the net income the net profit as % of sales decreased till FY10 but then
has increased.
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Financial Ratio Overview
HDIL FY09 FY10 FY11 FY12E FY13E FY14E FY15E FY16E
Income Sheet Historica l
Forecas t
EPS (%YoY) -62.96% -34.57% 24.27% -28.87% 22.31% 16.29% 17.59% 14.30%
RoAE (%) 16.65% 9.98% 9.95% 6.34% 7.95% 9.11% 10.20% 10.84%
RoACE (%) 9.52% 6.28% 7.26% 8.57% 9.52% 10.32% 11.14% 11.62%
Net Gearing (%) 44.07% 27.57% 25.40% 11.67% 11.36% 9.94% 7.56% 5.21%
P/E (x) 14.80 12.18 2.69 5.68 5.80 6.23 6.63 7.25
P/CE (x) 1.16 0.63 0.16 0.25 0.32 0.39 0.47 0.54
P/B (x) 2.25 0.99 0.23 0.34 0.43 0.53 0.62 0.72
EV/Ebitda (x) 16.83 12.47 5.49 3.84 4.11 4.32 4.45 4.61
Dividend yield (%) 0.76% 0.00% 0.00% 0.53% 0.52% 0.48% 0.45% 0.41%
FCF Yield 0.27 0.29 1.90 -0.18 0.54 0.46 0.39 0.35
Projected ratio reflects a positive outlook on the overall company’s performance and margin, with good returns in near future.
Income Statement
Gross Profit:- After the slowdown in FY08 & FY09, gross profit is steadily improving indicating major
growth signal for the company. The main reason being increase in sales. Fall in overall
demand in real estate sector is still a major cause of issue, however growth and demand in
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residential housing sector, will improve the overall performance of the company in near
future.
EBITDA:-
Steady increase in EBITDA, after the initial boom period in 2008 and the slowdown in
next FY09-10.With improved outlook in the sector and economy, profits have increased
greatly in FY11 Increase in WIP and cost of construction and development is a major
issue, which can be attributed to sharp increase in cost of raw material over the years and
lack of demand in the sector.
Operating Profit (EBIT):-
With improved outlook in the sector and economy after the slowdown due to financial
crisis in FY08,operating profit is steadily increasing. Also increase in the sale of
development rights year on year is adding to operating profits.
PBT:-
PBT has steadily increasing after the initial boom in FY08, in spite of the slowdown in the
sector, reflects the overall growth prospect in the company.
Net Income:-
The net income has steady declined from FY08 to FY10, due to slow down in the entire
economy which lead to fall in overall demand and also the high interest rate scenario
prevailing in the economy from FY09.
Horizontal Analysis
The total sales increased in FY08 and then started declining. The sale of commercial and
residential space decreased considerably since FY10.HDIL changed its focus from
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residential and commercial space to the slum rehabilitation which made an increasing
contribution in the sales of FY11. The total sales increased in FY08 by two fold. IN FY09
and FY10 sales has been decreasing due to low demand. In FY11 sales again increased.
Administrative expense increased significantly in FY08 and FY09 but after that it
becomes constant.
The expenses such as work in progress, cost of construction and financial charges
increased considerably because of increase in construction.
EBIDTA had a negative growth in FY09 because of high construction cost and project
specific charges.
EBIT also had a negative growth in FY09 because PBT decreased in FY09 due to low
sales because of the economic turmoil.
PAT was negative in FY09 and in FY 10 but, the PAT improved in FY11 because of
increase in the slum rehabilitation sales.
In FY09and FY10 because of lower net income, the profit attributable to shareholders was
negative but with increase in sales, the profit for shareholders increased.
Vertical Analysis
Work in progress increased significantly in FY08.
EBIDTA as a percent of sales increased in FY 08 and then has been reducing because of
increased construction and development cost and project specific charges.
PBT has decreased because of increase financial charges.
Interest cost rise very high in FY08 but decreased in FY09 and FY10, but in FY11 it
increased due to high interest charges.
There was increase in indigenous raw materials consumption due to increase in sales.
Due to decrease in the net income the net profit as % of sales decreased till FY10 but then
has increased.
Balance Sheet
Horizontal Analysis
HDIL has issued share warrants in FY10 and FY11.
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The shareholders’ equity has been increasing continuously with the major contribution of
reserves and surplus.
Total current assets increased sharply in FY08 but remain stable from FY09 to FY11.
The total current assets have increased in FY10 due to increase in inventories.
Cash and Bank balances increased 60 folds in FY08 and is fluctuating till FY11.
In FY08 the company increased its borrowings hence there is substantial increase in loan
% over previous year. But since FY09 the percent is reducing as a major portion of the
loan is being repaid.
There was an increase in long term assets of the FY08 mainly due to the additions that
happened after the company acquired the subsidiaries. Also it increased in FY10 due to
capitalization of certain projects.
In FY09 the current liabilities have increased majorly because of increase in provisions.
Vertical Analysis
The shareholders’ equity as a % of total liabilities has been decreasing since FY08.
The borrowings of the company increased due to which the loan as a % of total liabilities
increased in FY09. But since FY10 the company has repaid a lot of its borrowings and
hence loan as a % of total liabilities is decreasing.
In FY09 capital work in progress as a % of total liabilities increased due to expansion of
new projects.
Loans and advances increased from FY09 to FY11.
Inventories are very high in FY07 which decreased in FY08 and has been level stable till
FY11.
Provisioning has been decreasing from FY07 to FY11.
Solvency Ratios: The cash ratio increased from FY 08 to FY10. But in FY11 the
inventories increased considerably and the ratio has decreased.
Turnover ratios The cash conversion cycle during the years has increased considerably
because of the increase in the inventory processing periods.
Debt & Interest Costs - There is increase in the debt and interest costs of the company.
The company borrowed extensively in FY08. There was increase in interest payments on
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long term loans. Since FY09 borrowings has remained steady and from FY10 the interest
payments have reduced as major part of loans were repaid.
Operating Efficiency
Total asset turnover : There hasn’t been much change in the ratio. It didn’t change in
FY09 and FY10 . While in FY11 it went back to the FY08 levels. The total assets of the
company have been rising specially the cash balances and inventories.
Net fixed asset turnover: It decreased from FY08 to FY11 continuously from 56 in
FY07 to 7 in FY11. Net Fixed asset comparatively decreased significantly from FY07 to
FY11.
Equity turnover : It decreased from FY08 to FY11 continuously from 1.1 in FY07 to .2.
Equity turnover decreased due to higher reserve and surplus.
HDIL Ltd. FY09 FY10 FY11 FY12E FY13E FY14E FY15E FY16E
Income Sheet Historical
Margins
Gross Margin (excluding D&A) 51.64% 58.82% 65.72% 90.00% 90.00% 90.00% 90.00% 90.00%
EBITDA Margin 48.15% 54.89% 62.35% 62.50% 62.50% 62.50% 62.50% 62.50%
EBIT Margin 47.66% 50.08% 57.81% 59.99% 59.62% 59.28% 59.01% 58.80%
Net Income Margin 38.85% 38.09% 44.69% 25.51% 29.61% 31.60% 33.51% 34.01%
Operating Profitability
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Gross Profit Margin: Has been increasing YOY, which means HDIL is able to bring
down the over cost of operation and other costs, this is reflecting on the profitability of
HDIL, which is increasing YOY since FY09.
Operating profit margin: Operating profit margin has been steadily increasing since
FY09, which is good for HDIL as it shows it is gradually increasing its operating
efficiency and will have positive impact on future income generation capability of HDIL.
Net profit margin: Net profit margin increased till FY08 and since then its steady with
slight growth in FY11. This could be due to slowdown in the realty sector, fall in overall
demand and fall in prices or steady realty prices over the years.
Return on total capital: Return on total capital has been falling YOY due to sharp
increase in share holder’s equity over the years and steady and slow growth in
profitability over the years due to slowdown in the realty sector. This could affect future
fund raising capability of HDIL.
Return on total equity : Return on total equity has been falling YOY due to sharp
increase in share holder’s equity over the years and steady and slow growth in
profitability over the years. This is a negative sentiment for the investors and clearly is
showing in all time low stock prices of HDIL
Financial Risk Ratios
Debt to equity ratio : It increased in FY08 and remained constant in FY 09 because of
increase in secured borrowings of the company. It started reducing in FY10 and continued
the same way because the debts were being repaid.
Debt ratio : It rose in the year 2008 and continued in 2009 but started declining from
2010. This is because of the increased borrowings which started decreasing as a result of
repayment.
Interest coverage ratio: This ratio has not been following any particular pattern as in
some year it increased and in some it decreased. It was increasing from FY07 to FY10 but
reduced in FY11.
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Cash Flow Ratios
Cash Flow from Operations : No cash flow has been generated from operations since
FY07, in fact cash has been used by in operations over the year and it’s increasing YOY.
Depreciation also increased significantly in FY09 to FY11. Interest charges have
increased from FY09 to FY11 .This is due to sharp increase in inventory and other
receivables over the years. Net cash flow generating from operations activity are negative.
This is a serious issue and is affecting the overall profitability of the company.
Cash Flow from Investments : Cash flow from Investment has been negative from FY07
to FY10. In FY10 huge amount of money has been used up on accounts of heavy
investment on purchase of fixed assets. In FY08 the company acquired a subsidiary and in
FY11 it made investments in joint ventures. In FY11 due to sales of investment cash flow
in positive. However in FY11 HDIL has been able to generate 432 million from
investment activities, this is due to sale of investments. Increase in capital work in
progress over the year a serious issue.
Cash Flow from Financing
Over the year cash flow from financing activities has been positive. There is a slight fall
in FY11. Borrowings in FY11 has significantly decreased, this will reduce the interest
expenditure. Over the years HDIL is able to get funding through issue of shares and share
warrants, which is a cheap source of financing than other sources. This indicates the good
reputation it holds among equity investors.
Net cash in the FY11 has fallen sharply compared to FY10, due to negative cash flow
generation from operations and financing activities. This is due to overall slowdown in
the realty sector, this is clearly reflecting on the share prices of the company which are at
all time low but overall situation is likely to improve in coming years due to huge demand
in residential housing properties and India growth story in near future.
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Financial leverage is expected to fall in near future and expected to be on an average 0.75.Interest burden is likely to remain steady over the next few years but expected to fall after FY16.
Company Valuations Overview
Strong FCFF expected YOY in near future.______________________________________
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COMPARISION BETWEEN THE VARIOUS
PLAYERS
The major players in the real estate sector include:
1) DLF
2) Godrej Proper
3) HDIL
4) Indiabulls
5) Prestige Estate
6) Omaxe
7) Sobha developers
8) Parsvnath
9) Sunteck reality
DLF is clearly the market leader of Reality Sector
Page 46
Different Companies having different business models and working in different segments
EPS of Rs. 18.92, highest among its peers in FY12. P/E ratio of 4.60(Industry: 24.96), lowest among its peers.
Page 47
EPS of HDIL is best in the industry
Although DLF is the clear market leader, HDIL also enjoys being amongst the top five.
Also, the past performance of HDIL clearly shows that it has plans for aggressive expansion.
HDIL’s robust performance in the uncertain global scenario shows a promising growth and its
determination to be among the top three industry players in the country.
52-WK EQUITY ENTERPRISE
COMPANY STOCK PRICE High / Low VALUE VALUE
HDIL 72.05 52.05/178.40 94,870.38 29,947.03
DLF 187.10 169.75/261.20 2,63,320.99 5,49,809.99
INDIABULLS 56.00 40/125.5 91,727.53 52,133.91
Parsvnath 60.9 32.40/82.25 27,327.0 50,836.9
Prestige 118.4 57.55/144 23,382.3 57,681.8
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Synopsys of financial statements:Future prospects of HDIL
Income Statement:
In spite of high inflation and high interest rate scenario, HDIL has been able to have the
highest return on investment in the real estate sector. A decreasing trend is expected in
neat future with overall increase in efficiency and improvement in global economic
condition.
EPS is expected to increase at a steady rate and will be higher than peers and other
industry players YOY till FY16 projections.
HDIL is expected to maintain a healthy margin in coming years and will be best in the
industry.
Events like global economic crisis, persistent high inflation and weak fiscal policy of GOI
in near future, can adversely affect its performance. However currently probability of any
such events is less.
Balance Sheet Statement:
HDIL has substantially reduced its long term debts in FY12 and is maintaining a guidance
of 20% additional reduction in the debt by FY13.Over the years HDIL has been able to
put a check on overall debts. Significant fall in overall debts is expected in near future as
debt repayments are due in the coming months. This signifies company is trying to rely
more on internal sources of funds and reduce external expenses. Locked in land sales
along with the new ones are goin to form a part of this.
With improvement in overall economic scenario, inventory levels are expected to improve
in coming years. Currently it is at little higher level but less compared to its peers.
However HDIL is currently more efficient than its peers in terms of managing overall
inventory levels.
Cash Flow Statement:
Negative cash flow from operating activity is still a major issue for HDIL, as well as for
the other players in the industry. However with much better improvement in overall
Page 49
economic scenario and operating efficiency of HDIL, positive cash flow can be expected
in a few years.
Execution at ongoing projects are picking up after delays in FY12, which would aid the
cash flows.
Positive cash flow from financing activities contributes most of the fund and finances to
run the operations in HDIL. However HDIL has taken significant steps in reducing its
overall debts and long term debts is in steadily decreasing trend. YOY HDIL has been
able to gather finances through issue of shares and the trend is likely to continue in near
future, clear indication of reputation it enjoys among investors.
Key Risks to our view
Persistent weakness in the Mumbai residential market is a big concern as currently most of the projects are based out of Mumbai.
Overall economic scenario going down due to current financial crisis is affecting investments in India. The real estate sector is also badly affected.
The company has taken steps make its presence felt in areas like Delhi-NCR, southern region and other parts of India which would take some time to come into effect.
Delay in the government norms, shortage & skilled labour, high cost of construction, input & labour cost, and legal issues still a major hindrance for the overall sector growth.
Due to higher Beta value compared to peers and other industry players, short term high volatility is possible.
HDIL enjoys political advantage in Mumbai; diversifying in other regions could have some difficulties.
Recommendations1) The cost of inventory for all the players in the real estate sector because of which the net
income comes down considerably. HDIL needs to control this in order to have the growth intact.
2) Cash flow from financing activities contributes most of the fund and finances to run the operations in HDIL. In case of HDIL it is cash flow is negative for which HDIL should take some major steps.
3) HDIL enjoys political advantage in Mumbai. In case of saturation in Mumbai real estate, the profit of HDIL would be hugely impacted.
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Income statement of HDIL showing current and future prospects
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Income statement of HDIL showing current and future prospects
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HDIL FY12E FY13E FY14E FY15E FY16E
Cash Flow Statement Foreca st
Operating Activities Net Income 6413.68 9223.88 12330.42 16386.09 20885.02Depreciation 594.71 874.77 1234.53 1690.81 2265.73Amortization 6.65 11.55 14.95 18.83 23.73
Change in Working Capital 16415.36-16720.27
-19981.64
-23060.08
-28198.48
Change in Other Long Term Assets & Liabilities -5872.44 -511.83 -567.74 -631.61 -705.42Cash Flow from Operating Activities 17557.97 -7121.90 -6969.49 -5595.96 -5729.41 Investment Activities Capital Expenditures 2330.98 2937.04 3700.67 4662.84 5875.18Additions to Intangibles 11.65 14.69 18.50 23.31 29.38Cash Flow from Investing Activities 2342.64 2951.72 3719.17 4686.16 5904.56 Cash Flow Available for Financing Activities 19900.61 -4170.17 -3250.31 -909.80 175.15 Financing Activities
Proceeds from/ (repayment of) Revolver -
-
- - -
Issuance of Long Term Debt -
-
- - -
(Repayment) of Long Term Debt -7863.49 -5673.08 -917.29 -917.29 -917.29Issuance/ (Repurchase of) Equity 6400.00 8000.00 10000.00 12500.00 15625.00Dividends 192.41 276.72 369.91 491.58 626.55Option Proceeds Cash Flow from Financing Activities -1271.08 2603.64 9452.62 12074.29 15334.26 Effects of Exchange Rates on Cash Net Change in Cash 18629.53 -1566.54 6202.31 11164.49 15509.41Beginning Cash Balance 2296.97 20926.49 19359.95 25562.26 36726.76Ending Cash Balance 20926.49 19359.95 25562.26 36726.76 52236.16
Page 53
BIBLIOGRAPHY
http://www.hdil.com/
http://in.reuters.com/finance/stocks/companyProfile?symbol=HDIL.NS
http://www.rbi.org.in/
http://www.plannincommision.nic.in/
http://www.crisil.com/pdf/capitalmarket/Industry-content.pdf
www. dlf.in /
http://www.bloomberg.com/
https://www.educorporatebridge.com
www.nseindia.com
www.bseindia.com
www.sebi.gov.in
www.moneycontrol.com
www.economictimes.indiatimes.com
www.livemint.com
www.bloombergutv.com
www.beta.profit.ndtv.com
www.deadpresident.blogspot.com
http://www.rupya.com
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