Financial Modeling Real Estate - HDIL

By

Ruchi Jha Roll No. 14

Under the guidance of

Ms. Anupama Khaitan Vice President Corporate Bridge

Prof. Kalpakam Faculty K J SIMSR

K J Somaiya Institute of Management Studies & Research

July,2012

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Table of Contents:
1) Introduction

to Corporate Bridge..09

2) Introduction to Financial

Modeling.09

3) Sector Overview-Realty... .. 21 4) Introduction

to HDIL.. 37

5) HDIL Financials
a) HDIL Summary of Important . 39 b) HDIL Projection of Balance . 40 c) HDIL Projection of Income .. 42 d) HDIL Historical ratios ..45 Sheet Financials..

till

FY16...

statement

till

FY16...

analysis..

e) HDIL Projection of companys performance.. ..49 f) Comparable analysis between players.... .50 6) HDIL

Equity Research Report 53

a) Buy/Sell Recommendation investors.. 53 for

b) Synopsys of Financial Statements. .................53

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c) Key Risks. 54 7) Recommendations... .54 8) Income Statement of HDIL.55 9) Balance Sheet of HDIL.. .56 10) Cash Flow of HDIL ..57 11) Bibliography ..58

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Declaration

I, Ruchi Jha hereby declare that this project report is the record of authentic work carried out by me during the period from 6th May, 2012 to 5th July, 2012 and has not been submitted to any other University or Institute for the award of any degree / diploma etc.

Signature: Name of the student: Manoj Kumar Roll Nos: 14

Date: 10th July, 2012

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(On the letterhead of the Company/ Organisation, given and signed by the concerned authority in the Company / Organisation where student has done the Summer Training. It should also have Company/ Organisation Seal /Stamp.)

Certificate from Industry Guide

This is to certify that Ms. Ruchi Jha, a student of the Post-Graduate Diploma in ManagementFinancial 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 students own effort on the project conducted under our guidance and supervision.

Organizational Guide Designation Organization Address Date

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Certificate from Faculty Guide

This is to certify that Ms. Ruchi Jha, a student of the Post-Graduate Diploma in Management (PGDM-FS), has worked under my guidance and supervision. This Summer Project Report has the requisite standard and to the best of our knowledge no part of it has been reproduced from any other summer project.

Prof Kalpakam G. Faculty K J Somaiya

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Acknowledgement

Its 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 inception till the successful completion of the training.

I am falling short of words for expressing my feelings of gratitude towards my institute guide Prof. Kalpakam for extending his valuable guidance about market and support for literature, critical reviews of project and the report and above all the moral support he had provided me with all stages of this training.

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Executive Summary
This report provides an analysis and evaluation of the current and prospective profitability, financial stability, operating efficiency and liquidity position of Housing and Development Infrastructure Ltd. and the real estate sector as a whole. It also helps in understanding the financial modeling of HDIL and recommends a BUY/SELL. Methods of analysis include financial modeling, trend, horizontal and vertical analyses as well as ratios such as DuPont, solvency and turnover ratios. It also included financial modeling with valuation which included the comparative analysis between the different players in the same sector. Other calculations include rates of return on Shareholders Equity and Total Assets and earnings per share to name a few. HDIL is one of the most diversified groups of companies in terms of operations in the real sector industry. Result of the data analyzed showed that HDIL has a promising growth in the uncertain economic scenario. In spite of high inflation and high interest rate scenario, HDIL has been able to have the highest return on investment in the real estate sector. A decreasing trend is expected in neat future with overall increase in efficiency and improvement in global economic condition along with the significant fall in overall debts expected in near future as debt repayments are due in the coming months. The company is trying to rely more on internal sources of funds and reduce external expenses. Locked in land sales along with the new ones are going to form a part of this. In spite of the weak economic conditions, consistent YOY growth shows the caliber of the company to expand and be the leader from being amongst the top five. The companys 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 companys performance and margin. Based on the past and future performance of HDIL, a buy for the companys stock was recommended. However, the key risks to our view are as follows: Overall economic scenario going down due to current financial crisis is affecting investments in India. The real estate sector is also badly affected.

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Unavailability of some current and past data. The model is based on few assumptions which might change with the change in economic scenario. Delay in the government norms, shortage & skilled labour, high cost of construction, input & labour cost, and legal issues still a major hindrance for the overall sector growth. .

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Objective of the Report The main objective of the study is to get a definite idea about how Financial Modeling plays a vital role in taking an investment decision related to a company. Financial Modeling and Valuation are the key "building block" skills required in today's business, banking and financial services world. Furthermore, the orientation is very useful to detect whether the theoretical knowledge matches with real life scenario or not. Through the title "Financial Modeling - HDIL, the specific objectives are as follows:

To learn importance of Financial Modeling To learn Financial Modeling procedure. To Model a LIVE sample company and prepare final research report in Real estate sector: HDIL

Methodology of Study Analysis has been made on the basis of the objectives mentioned before in the context of "Financial Modeling - HDIL For financial modeling, following steps were employed:
1) As the first step, an industry analysis report of the Real Estate Sector was prepared in

which the impact of various factors was studied.

2) Extracting data from past five years from the annual reports of HDIL, the historical Ratio

analysis was done.

3) In the next stage, forecasting for next five years was done using past data and industry

report data setting certain assumptions.

4) The last step was to prepare a research report for the company and recommending buy/sell

for the same. The report has been written on the basis of information from available Secondary sources and various assumptions required preparing financial modeling of the company. For the completion of the present study, secondary data has been collected. The main sources of secondary data are:

Annual Reports of HDIL Website Of HDIL

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Data Published in Mckinsey Report

Limitation of the Study To make a report various aspects and experiences are needed. But I have faced some barriers for making a complete and perfect report. These barriers or limitations, which hinder my work, are as follows: Difficulty in accessing data of Companys internal operations. Non-Availability of some preceding and latest data. Various Assumptions have been made especially during the preparation of financial modeling.

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INTRODUCTION TO FINANCIAL MODELING

Financial 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
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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 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.

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TYPES OF MODELS 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.

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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.

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.

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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 variables impact on the companys 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 companys return. For instance, a company could evaluate the impact of a high or low risk-free interest rate environment on a companys NPV. Each scenario will affect the companys cash inflow, cash outflows, and cost of capital, thereby resulting in different levels of NPV. A financial analyst can
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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.

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.

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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.

REAL ESTATE SECTOR ANANLYSIS

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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.

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.

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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 countrys 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

Growth Prospects in India Indias 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 Indias core infrastructure.

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Indias Real Estate Sectors 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%.

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

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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

Increase in Urbanization acting as a demand driver

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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.

Commercial office Semand Supply projection(Top seven cities)_______________________

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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, Indias 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. Indias retail market was mainly unorganised until early 2000.

Organized Retail penetration______________________________________________

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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.

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.
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Deployment of Gross Bank Credit

Year On year the loans have increased but the highest growth has been in the housing loan sector House Price Index (Year on year) showing increase/decrease in housing prices

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

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Investment Opportunities Because of the hiked interest rates and reduced lending to the developers by the local banks, private equity seemed a good option for the real estate. It had investments of US $ 1700 million in the year 2011 and continues to grow.

The sector had a lot of different deals in PE and M&A last year. Deals worth around US $ 1.3 billlions took place in contrast to US $ 483 the last year. The sector is likely to witness growing investments.

FDI in Real estate

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Governments Role The Government of India has plans to invest more than US$ 1 trillion in infrastructure over the Twelfth Five-Year period (2012-2017) to improve the infrastructure and make the business environment attractive. Government has increased the interest subsidy of US $ 301.37 on the new home loans of upto US $ 30410.54 for the houses not exceeding US $ 50684.24. Allocation for Bharat Nirman by the governement has been increased to US $ 12.89 billion. Also the relaxed FDI norms would also help in making the Indian market attractive for the foreigners and NRIs. A system called LEED 2011 was introduced to rate the buildings according to their environmental friendliness.

Market players The major players in the real estate sector include: 1) Oberoi Reality 2) Godrej Properties 3) HDIL 4) Indiabulls 5) Prestige Estate 6) Omaxe 7) Sobha developers 8) Parsvnath 9) Sunteck reality The comparative analysis is done on the basis of: Market Capitalization Sales Turnover Net Profit

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Market Capitalization: Market capitalization (Rs. In Company DLF Oberoi Reality Godrej Proper HDIL Indiabulls Prestige Estate Omaxe Sobha developers Parsvnath Sunteck reality cr.) 47,763.29 8,722.80 4,586.35 4,518.96 3,368.65 3,243.01 2,689.42 2,624.19 2,591.50 2,484.65

Sales Turnover
Sales Company DLF Godrej Proper HDIL Indiabulls Omaxe Sobha developers Parsvnath turnover 2,916.08 337.29 1,802.63 159.1 1,141.09 1,456.10 741.31 Page 30

Sunteck reality

14.77

Net Profit
Company Net profit Rs.(In Crores) DLF Godrej Proper HDIL Indiabulls Omaxe Sobha developers Parsvnath Sunteck reality 75.48 6.03 1,269.58 106.15 897.36 45.81 62.51 182.4

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SWOT ANALYSIS
Strengths Employment and training opportunities in the field of construction. Private sector housing boom and commercial building demands Construction of the multi building projects on the feasible locations in the c country Good structured national network facilitates the boom of construction industry. Low cost well- educated and skilled labour force is now widely available across the country. Sufficient availability of raw material and natural resources in the country is supportive for the industry Weakness Distance between construction projects reduces business efficiency.
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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.

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

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HOUSING

DEVELOPMENT

AND

INFRASTRUCTURE LIMITED
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 Indias 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
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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 its 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 its 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.

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,
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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.

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. HDILs 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. HDILs 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.

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Summary of HDILs Important Financials

Market Cap (M INR) Price/Book (mrq) Price/Sales (ttm) PEG Ratio (3 year exp.) Estimated PEG Ratio EV (m INR) EBITDA EV / EBITDA (ttm) EV / Revenue (ttm) EPS (INR) (ttm) P/E Ratio (ttm) 36,432.40 0.3326 1.7093 13.0528 15.0965 59,442.88 15,058.90 3.95 2.96 19.33 4.2344

FINANCIALS OF HDIL
Steady and robust growth seen in all financial numbers_____________________________

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
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Long term growth story intact

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 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.
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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.

Financial Ratio Overview

HDIL FY09 FY10 FY11 FY12 E FY13 FY14 E E FY15E Forec ast FY16E

Income Histor Sheet ical

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EPS (%YoY) RoAE (%) RoACE (%) Net (%) P/E (x) P/CE (x) P/B (x) EV/Ebitda (x) Dividend yield (%) FCF Yield Gearing

-62.96% 16.65% 9.52% 44.07% 14.80 1.16 2.25 16.83 0.76% 0.27

34.57% 9.98% 6.28% 27.57% 12.18 0.63 0.99 12.47 0.00% 0.29

24.27% 9.95% 7.26% 25.40% 2.69 0.16 0.23 5.49 0.00% 1.90

28.87% 6.34% 8.57% 11.67% 5.68 0.25 0.34 3.84 0.53% -0.18

22.31% 7.95% 9.52% 11.36% 5.80 0.32 0.43 4.11 0.52% 0.54

16.29% 9.11% 10.32% 9.94% 6.23 0.39 0.53 4.32 0.48% 0.46

17.59% 10.20% 11.14% 7.56% 6.63 0.47 0.62 4.45 0.45% 0.39

14.30% 10.84% 11.62% 5.21% 7.25 0.54 0.72 4.61 0.41% 0.35

Projected ratio reflects a positive outlook on the overall companys 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 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
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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 residential and commercial space to the slum rehabilitation which made an increasing
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contribution in the sales of FY11. The total sales increased in FY08 by two fold. IN FY09 and FY10 sales has been decreasing due to low demand. In FY11 sales again increased. Administrative expense increased significantly in FY08 and FY09 but after that it becomes constant. The expenses such as work in progress, cost of construction and financial charges increased considerably because of increase in construction. EBIDTA had a negative growth in FY09 because of high construction cost and project specific charges. EBIT also had a negative growth in FY09 because PBT decreased in FY09 due to low sales because of the economic turmoil. PAT was negative in FY09 and in FY 10 but, the PAT improved in FY11 because of increase in the slum rehabilitation sales. In FY09and FY10 because of lower net income, the profit attributable to shareholders was negative but with increase in sales, the profit for shareholders increased.

Vertical Analysis Work in progress increased significantly in FY08. EBIDTA as a percent of sales increased in FY 08 and then has been reducing because of increased construction and development cost and project specific charges. PBT has decreased because of increase financial charges. Interest cost rise very high in FY08 but decreased in FY09 and FY10, but in FY11 it increased due to high interest charges. There was increase in indigenous raw materials consumption due to increase in sales. Due to decrease in the net income the net profit as % of sales decreased till FY10 but then has increased.

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Balance Sheet Horizontal Analysis HDIL has issued share warrants in FY10 and FY11. 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.
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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 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 hasnt been much change in the ratio. It didnt 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. Income Sheet Margins Gross Margin (excluding D&A) EBITDA Margin EBIT Margin

FY09

FY10

FY11 Historical

FY12E

FY13E

FY14E

FY15E

FY16E

51.64% 48.15% 47.66%

58.82% 54.89% 50.08%

65.72% 62.35% 57.81%

90.00% 62.50% 59.99%

90.00% 62.50% 59.62%

90.00% 62.50% 59.28%

90.00% 62.50% 59.01%

90.00% 62.50% 58.80%

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Net Income Margin

38.85%

38.09%

44.69%

25.51%

29.61%

31.60%

33.51%

34.01%

Operating Profitability

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 holders 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 holders 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.
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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.

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 its 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

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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.

Financial leverage is expected to fall in near future and expected to be on an average 0.75.Interest burden is likely to remain steady over the next few years but expected to fall after FY16.

Company Valuations Overview

Strong FCFF expected YOY in near future.______________________________________

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COMPARISION PLAYERS

BETWEEN

THE

VARIOUS

The major players in the real estate sector include: 1) 2) 3) 4) 5) 6) 7) 8) 9) DLF Godrej Proper HDIL Indiabulls Prestige Estate Omaxe Sobha developers Parsvnath Sunteck reality

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DLF is clearly the market leader of Reality Sector

Different Companies having different business models and working in different segments

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EPS of Rs. 18.92, highest among its peers in FY12. P/E ratio of 4.60(Industry: 24.96), lowest among its peers.

COMPANY HDIL DLF INDIABULLS Parsvnath Prestige

STOCK PRICE 72.05 187.10 56.00 60.9 118.4

52-WK High / Low 52.05/178.40 169.75/261.20 40/125.5 32.40/82.25 57.55/144

EQUITY VALUE 94,870.38 2,63,320.99 91,727.53 27,327.0 23,382.3

ENTERPRISE VALUE 29,947.03 5,49,809.99 52,133.91 50,836.9 57,681.8

EPS of HDIL is best in the industry

Although DLF is the clear market leader, HDIL also enjoys being amongst the top five.

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Also, the past performance of HDIL clearly shows that it has plans for aggressive expansion. HDILs 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.

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Synopsys of financial statements:Future prospects of HDIL Income Statement: In spite of high inflation and high interest rate scenario, HDIL has been able to have the highest return on investment in the real estate sector. A decreasing trend is expected in neat future with overall increase in efficiency and improvement in global economic condition. EPS is expected to increase at a steady rate and will be higher than peers and other industry players YOY till FY16 projections. HDIL is expected to maintain a healthy margin in coming years and will be best in the industry. Events like global economic crisis, persistent high inflation and weak fiscal policy of GOI in near future, can adversely affect its performance. However currently probability of any such events is less.

Balance Sheet Statement: HDIL has substantially reduced its long term debts in FY12 and is maintaining a guidance of 20% additional reduction in the debt by FY13.Over the years HDIL has been able to put a check on overall debts. Significant fall in overall debts is expected in near future as debt repayments are due in the coming months. This signifies company is trying to rely more on internal sources of funds and reduce external expenses. Locked in land sales along with the new ones are goin to form a part of this. With improvement in overall economic scenario, inventory levels are expected to improve in coming years. Currently it is at little higher level but less compared to its peers. However HDIL is currently more efficient than its peers in terms of managing overall inventory levels.

Cash Flow Statement: Negative cash flow from operating activity is still a major issue for HDIL, as well as for the other players in the industry. However with much better improvement in overall
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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.

Recommendations
1) 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. the profit of HDIL would be hugely impacted.

3) HDIL enjoys political advantage in Mumbai. In case of saturation in Mumbai real estate,

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Income statement of HDIL showing current and future prospects

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Income statement of HDIL showing current and future prospects

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HDIL
Cash Flow Statement

FY12E

FY13E

FY14E

FY15E
Forecas t

FY16E

Operating Activities

Net Income Depreciation Amortization Change in Working Capital Change in Other Long Assets & Liabilities Cash Flow Activities from

6413.68 594.71 6.65 16415.3 6 Term -5872.44

9223.8 8 874.77 11.55 16720. 27 -511.83 7121.9 0

12330. 42 1234.5 3 14.95 19981. 64 -567.74 6969.4 9

Operating 17557.9 7

16386. 09 1690.8 1 18.83 23060. 08 631.61 5595. 96

20885. 02 2265.7 3 23.73 28198. 48 -705.42 5729.4 1

Investment Activities

Capital Expenditures 2330.98 Additions to Intangibles 11.65 Cash Flow from Investing Activities 2342.64

2937.0 4 14.69 2951.7 2 4170.1 7

3700.6 7 18.50 3719.1 7 3250.3 1

4662.8 4 23.31 4686.1 6 909.8 0

5875.1 8 29.38 5904.5 6

Cash Flow Available for Financing Activities Financing Activities

19900.6 1

175.15

Proceeds from/ (repayment of) Revolver Issuance of Long Term Debt (Repayment) of Long Term Debt -7863.49

5673.0 8 8000.0 0 276.72 2603.6

-917.29 10000. 00 369.91 9452.6

917.29 12500. 00 491.58 12074

-917.29 15625. 00 626.55 15334.

Issuance/ (Repurchase of) Equity 6400.00 Dividends 192.41 Option Proceeds Cash Flow from Financing Page 56

Activities Effects of Cash Exchange Rates on

1271.08

.29

26

Net Change in Cash Beginning Cash Balance Ending Cash Balance

18629.5 3 2296.97 20926.4 9

1566.5 4 20926. 49 19359. 95

6202.3 1 19359. 95 25562. 26

11164. 49 25562. 26 36726. 76

15509. 41 36726. 76 52236. 16

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

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www.bloombergutv.com www.beta.profit.ndtv.com www.deadpresident.blogspot.com http://www.rupya.com

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