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

Page 1

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

Page 2

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

Page 3

(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

Page 4

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

Page 5

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.

Page 6

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.

Page 7

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.

.

Page 8

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

Page 9

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.

Page 10

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

Page 11

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

Page 12

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.

 

Page 13

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

Page 14

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.

Page 15

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.

Page 16

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.

Page 17

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

Page 18

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%.

Page 19

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

Page 20

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.

Page 21

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.

Page 22

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.

Page 23

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

Page 24

House Price Index (Year on year) showing increase/decrease in housing prices

Affect on realty sector stocks due to fall in growth and profitability

Page 25

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

Page 26

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

Page 27

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

Page 28

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

Page 29

Page 30

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.

Page 31

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

Page 32

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.

Page 33

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.

Page 34

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_____________________________

Page 35

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

Page 36

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.

Page 37

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

Page 38

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

Page 39

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.

Page 40

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

Page 41

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

Page 42

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.

Page 43

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.

Page 44

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.______________________________________

Page 45

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

         

Page 48

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.

Page 50

Income statement of HDIL showing current and future prospects

Page 51

Income statement of HDIL showing current and future prospects

Page 52

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

Page 54