Project Study

Submitted to:

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

External Mentor:

PRASHANT GOOTYAssociate Director, Jones Lang Lasalle,Mumbai.

Siva Chandra Lochan KallurRoll No: 2661, MFC – Part IIDFS, 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.

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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 Mr. Prashant Gooty

Internal supervisor: External supervisor:

Department of Financial Studies Designation: Associate Director

University of Delhi South Campus Company: Jones Lang Laselle

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Table of Contents

ACKNOWLEDGEMENT..............................................................................................................2

CERTIFICATE............................................................................................................................. 3

TABLES AND FIGURES...............................................................................................................5

1. Introduction......................................................................................................................6

1.1 Phases of Real Estate Cycle........................................................................................6

2. Objectives......................................................................................................................... 8

3. Industry and Company overview......................................................................................9

3.1 Porters Five Factor analysis of the industry...............................................................9

3.2 SWOT Analysis for DLF Ltd.......................................................................................15

4. Valuation model..............................................................................................................17

4.1 Discounted Cash Flows Valuation............................................................................17

4.2 Assumptions............................................................................................................17

4.3 Key ratios used for projection..................................................................................17

5. Financial Statements.......................................................................................................19

5.1 Profit and Loss Statement........................................................................................19

5.2 Cash Flow Statement...............................................................................................20

5.3 Balance Sheet.......................................................................................................... 21

5.4 Calculation of Cost of equity using CAPM................................................................22

5.5 Free Cash Flow Calculation......................................................................................23

6. Conclusion and Recommendations.................................................................................25

7. Template for Project Cash flow projections....................................................................26

7.1 Assumptions and Specifications...............................................................................26

7.2 Cash outflows or Costs.............................................................................................28

7.3 Cash inflows or Revenues........................................................................................28

7.4 Cost and Collection Schedules.................................................................................29

8. References...................................................................................................................... 31

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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

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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 country’s infrastructure base. The

contribution of the real estate sector to India’s 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 20 th 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

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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 it’s not enough to create

demand, prices continue to fall even further.

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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.

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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.

1.2 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.

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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 don’t 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 player’s financials in India and their performance in the recent past:

Table 1: Industry Comparison

Detail

North West South

DLF UnitechGodrej Group

Oberoi Realty

Sobha Developers

Purvankara Group Prestige

Market Cap (Cr) 29421.00 4186.0

0 3340.00 6271.00 3291.00 1758.00 5493.00 Income Statement

Sales (Cr) 7772.00 2444.0

0 1037.00 1047.00 1864.00 1245.00 1947.00 EBITDA (Cr) 3911.00 416.00 296.00 711.00 553.00 603.00 642.00 Net Profit (Cr) 341.00 250.00 138.00 505.00 217.00 243.00 285.00 Revenue / Employee (lacs) 299.00 220.43 314.28 205.00 64.76 122.63 -Profit/Employee(lacs) 13.14 22.58 41.95 98.89 7.55 23.96 -Growth Position 3 Yr CAGR Sales % 1.55 -5.87 62.28 9.87 18.17 37.59 23.88 3 Yr CAGR Profit % -41.13 -27.48 105.98 3.32 17.57 18.77 29.80 Valuation

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P/E 53.42 13.66 20.57 14.07 14.38 6.83 19.70 P/BV 1.07 0.35 1.57 1.51 1.54 0.84 2.00 EV/Sales 7.04 4.31 4.37 5.01 2.48 2.66 3.93 EV/EBIDTA 13.98 25.29 15.31 7.38 8.35 5.50 11.90 Dividend yield 1.76 0.00 0.93 1.05 2.09 1.52 0.76

With a track record of 64 years, DLF Ltd. is India’s 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.

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- We offer integrated family entertainment centers with the commencement

of operation of 'DT Cinemas' at Gurgaon, Haryana

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.

1.3 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

Strengths 1. Largest real estate company in India

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

Weaknesses

1.Affected due to lack of regulations and effective policies

2.Majorly present only in India and limited global exposure

Opportunities

1.Reduction in interest rates

2.Tax incentives for housing investments

3.Shortage of houses in urban areas

Threats

1.Increasing interest rates

2.Economic downturn

3.Volatility in financial markets

Competition

Competitors

1.Oberoi Realty

2.Godrej Properties Limited

3.Shobha Developers

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4. Valuation model

1.4 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.

1.5 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.

1.6 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 StableInventories 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 StableRevenue 10144.4 10223.9 9095.7 8822.9 8858.1 8999.9 9179.9 9409.4 9644.6Growth 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 StableGross Block as % of Revenue 209% 224% 253% 245% 243% 240% 240% 240% 240%

Gross Block21211.

7 22919.7 23017.6 2161621525.

3 21599.7 22031.7 22582.5 23147.1Cum Depreciation 1955.6 2580.9 3169 3458.6 3723.9 3758.4 3921.7 4064.9 4166.4Depreciation as a % of Gross Block 9% 11% 14% 16% 17% 17% 18% 18% 18%Capital Work-in-Progress

10234.4 8992.8 7834.3 9011.1 9547.6 9018.2 8846.5 8852.8 9105.8

Total Debt26463.

8 27436.1 27106.9 27106.927106.

9 27106.9 27106.9 27106.9 27106Interest 1705.6 2246.5 2314.1 2429.8 2551.2 2678.8 2812.7 2953.4 3101.0Interest as a 6% 8% 11% 11% 11% 11% 11% 11%

18

% of Debt 9%

5. Financial Statements

1.7 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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1.8 Cash Flow Statement

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

20

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.

1.9 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.

1.10 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 as10-

Yr bond rate. Market return, which is, Rm is calculated by annualizing the NIFTY market

returns over the last 3 years. The cost of equity is calculated using the formula

E (R )=R f+β (Rm−R f )

Where,

E(R) = cost of equity

R f = Risk free rate

Rm = Market return (NIFTY)

β = beta

Table 6: Risk Free rates and WACC

Beta (B) 1.794

10 yr Bond Rate (Rf) 8.92%Default Spread for DLF Ltd 2.30%Cost of Debt Before Tax (Kd) 11.22%Tax Rate (t) 33.90%

22

Cost of Debt After Tax [Kd(1-t)] 7.42%Cost of Equity {Ke=[Rf+B*(Rm-Rf)]} 18.57%Market Return (Rm) 14.30%

1.11 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 = Working capitalt- Working capitalt−1

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 2014 2015 2016 2017 2018 StableTotal Revenue 9095.74 8822.87 8858.16 8999.89 9179.89 9409.38 9644.62COGS 80.78 42.46 42.63 43.31 44.18 45.28 46.42Gross Profit 9014.96 8780.41 8815.53 8956.58 9135.71 9364.10 9598.20wages 595.71 504.23 504.89 507.52 510.88 515.15 519.53SG&A Expenses 678.49 617.33 615.88 610.07 602.69 593.28 583.63Depreciation 796.24 289.60 265.32 34.47 163.29 143.21 101.62

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EBIT 6944.52 7369.24 7429.44 7804.51 7858.85 8112.46 8393.42Marginal Tax Rate 33.90% 33.90% 33.90% 33.90% 33.90% 33.90% 33.90%Nopat 4590.33 4871.07 4910.86 5158.78 5194.70 5362.34 5548.05Depreciation 796.24 289.60 265.32 34.47 163.29 143.21 101.62Changes In Operating Working Capital -1643.24 -2162.34 -1922.25 -70.68 -523.04 -488.14 -360.62Capex -224.78 445.83 -455.03 260.28 557.13 817.60 545.00Free Cash Flow 3968.11 2552.50 3708.96 4862.29 4277.82 4199.81 4744.05Total Equity 27527.69 28211.88 28615.60 29054.59 29506.21 30060.50Total Debt 27106.86 27106.86 27106.86 27106.86 27106.86 27106.86Total Capital 54634.55 55318.74 55722.46 56161.45 56613.07 57167.36Equity% 50% 51% 51% 52% 52% 53%Debt% 50% 49% 49% 48% 48% 47% Cost of Equity 18.57% 18.57% 18.57% 18.57% 18.57% 18.57%After Tax Cost Of Debt 7.42% 7.42% 7.42% 7.42% 7.42% 7.42%WACC 13.04% 13.10% 13.14% 13.19% 13.23% 13.28%

Year Count 0.5 1.5 2.5 3.5 4.5Discounting Factor 0.94 0.83 0.73 0.65 0.57PV of FCF 2400.08 3081.80 3567.44 2769.28 2396.19

Terminal Value 29517.00Total Pv of FCF 43731.79Debt 27,508.88Excess Cash 1,844.14FCF to Equity 18067.05Divide by No of Equity Shares(in Crores) 158.1426747 Fair Value Per Share(in Rs) 114.25Present Market Value(in Rs) 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 year’s 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.

1.12 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> <Date>  

Particulars Value Unit RemarksLocation      

Location     Sample

Land Details      

Plot Size 3.84 Acres  Plot Area 167,270 sq. ft.  Plot Size for development 158,907 sq. ft.  FSI available 3.25 nos.  TDR 1.95 nos.  TDR 309,868 sq. ft.  

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FSI achievable 5.2 nos.  Cost of Land 4,750 Rs. / sq. ft.  Cost of TDR 700 Rs. / sq. ft.  Total Land Cost 79 Rs. Cr.  Total TDR Cost 22 Rs. Cr.  Registration & Stamping Cost 5 Rs. Cr.  Total Cost of Land including TDR and Registration

106 Rs. Cr.  

Area Statement      

Saleable Area of Apartments 826,316 sq. ft.  Basement Parking 165,263 sq. ft.  Total Built-up Area including Basement 991,579 sq. ft.  

Product Mix      

Saleable Area – FSI 543,629 sq.ft.  Saleable Area of TDR 309,868 sq.ft.  Total Saleable Area of Apartments 853,497 sq.ft.  Average Size of Apartments 1,400 sq.ft.  Total No. of Apartments 610 sq.ft.  

Sales      

Launch Price of Apartments 5,800 Rs./ sq. ft.  Other income on Apartments 500 Rs. / sq. ft.  Increase in Sales Price 8.0% % Per annumIncrease in Sales Price 3.9% % Semi Annually

Consultant / Development Expenses      Consultant Fees (Architect, structural, plumbing & electrical)

50 Rs./ sq. ft.  

Approval & Liasioning Cost 100 Rs./ sq. ft.  

Sample Flat, Villa and Sales Gallery 1.0 Rs. Cr.  

Initial Advertising Expense 3.0 Rs. Cr.  

Construction Costs      Apartment Construction Cost 2,400 Rs./ sq. ft.  Basement Parking Cost 600 Rs./ sq. ft.  Increase in Construction Costs 5.0% % Per annumIncrease in Construction Costs 2.5% % Semi Annually

Other Cost      

Marketing & Advertising Expenses 3% % of Sales  Overheads - Administration, PMC etc 6% % of COC  Consultant Fee 1.5 Rs. Cr.  

Debt Costs      

Debt Cost   % Per annumDebt Cost 0.0% % Per quarter

Tax      

Marginal Tax Rate 32.4% %  

Investment      

Developer Contribution 10 Rs. Cr.Investor Contribution   Rs. Cr.  Total Investments   Rs. Cr.  

Return Requirement      

Distribution Upto 25%       Investor   %   Developer   %  

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       Distribution After 25%       Investor   %   Developer   %  

1.13 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.

1.14 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>

Project Cash Flow Ending

Apr-13

Jul-13

Oct-13

Jan-14

….. Jul-16

Oct-16

Jan-17

Apr-17

Jul-17

Rs. Cr.

Quarter Q0 Q1 Q2 Q3 ….. Q13 Q14 Q15 Q16 Q17 Total

Sales Value - FSI Rs. Cr.   0 0 0 ….. 15 0 0 0 0 342Other income - FSI Rs. Cr.         …..         27 27Total Sales Value - FSI Rs. Cr.   0 0 0 ….. 15 0 0 0 27 369Sales Value - TDR Rs. Cr.   0 0 0 ….. 44 44 45 45 47 225Other income - TDR Rs. Cr.         …..         15 15Total Sales Value - TDR Rs. Cr.   0 0 0 ….. 44 44 45 45 63 240Total Sales Value - Project Rs. Cr.   0 0 0 ….. 59 44 45 45 90 610PROJECT CASH INFLOW Rs. Cr.   0 0 0 ….. 39 47 65 87 153 610Total Land Cost Rs. Cr. (85)       …..           (85)Total TDR Cost Rs. Cr.         ….. (22)         (22)Developer Non-refundable Deposit

Rs. Cr. 10      …..

          10

Consultant Fees (Architect, structural, plumbing & electrical)

Rs. Cr.   (1.1) (1.1) (0.1)…..

(0.1) (0.1) (0.1) (0.1) (0.1) (4)

Sample Flats and Sales Gallery

Rs. Cr.       (1)…..

          (1)

Initial Advertising Expense Rs. Cr.       (3) …..           (3)Construction Cost Rs. Cr.       0 ….. (24) (24) (24) (24) (27) (214)Basement Parking Cost Rs. Cr.       0 ….. (1) (1) (1) (1) (1) (10)Marketing & Advertising Expenses

Rs. Cr.       0 …..

(2) (1) (1) (1) (3) (18)

Overheads - Administration, PMC etc

Rs. Cr.       0 …..

(1) (1) (1) (1) (2) (13)

Consultant Fee Rs. Cr. (1.5)       …..           (2)PROJECT CASH OUTFLOW Rs. Cr. (76) (1) (1) (4) ….. (49) (27) (27) (28) (33) (361)

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NET CASH FLOW Rs.Cr. (76) (1) (1) (4) ….. (10) 19 38 59 120 248

Project IRR (Annual, Pre Tax)

% 53.0%

1.15 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   Q0-3 Q4 Q5 Q6 …. Q14 Q15 Q16 Q17

Cost of Construction - Apartments

Rs. Psf

  (2400) (2400) (2400) …. (2520) (2520) (2582) (2582)  

Cost of Construction - Basement

Rs. Psf

  (600) (600) (600) …. (630) (630) (646) (646)  

% Completion/CoC Incurrence - FSI

%   2% 3% 5% …. 6% 6% 6% 8% 100.0%

% Completion/CoC Incurrence - TDR

%         …. 20% 20% 20% 20% 100.0%

Construction Area - FSI sq.ft   10,873 16,309 27,181 …. 32,618 32,618 32,618 43,490 543,629Construction Area - TDR sq.ft   0 0 0 …. 61,974 61,974 61,974 61,974 309,868Construction Area - Total sq.ft   10,873 16,309 27,181 …. 94,591 94,591 94,591 105,464 853,497

Sale Schedule - Residential

  Q0-3 Q4 Q5 Q6 …. Q14 Q15 Q16 Q17

Sales Price - ApartmentsRs. Psf

  5,800 6,028 6,028 …. 7,031 7,306 7,306 7,593  

Sales - FSI %   15% 15.0% 10.0% ….         100.0%Sales - TDR %         …. 20% 20% 20% 20% 100.0%Collection - FSI %   15% 10.0% 6.0% …. 6.0% 6.0% 7.0% 8.0% 100.0%Collection - TDR %         …. 20.0% 20.0% 20.0% 20.0% 100.0%

Saleable Area - FSIsq. ft.

  81,544 81,544 54,363 …. 0 0 0 0 543,629

Saleable Area - TDRsq. ft.

  0 0 0 …. 61,974 61,974 61,974 61,974 309,868

Saleable Area - Totalsq. ft.

  81,544 81,544 54,363 …. 61,974 61,974 61,974 61,974 853,497

Apartments Sold per quarter

nos.   58 58 39 …. 44 44 44 44 610

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.

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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.

8. References

www.capitalline.com

Annual reports of DLF Ltd

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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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