CORPORATE FINANCE

Financial analysis of UNITECH and DLF Company

10/9/2012

Report on Financial Analysis of UNITECH and DLF Company

Prepared by Group No4

208 Abhinav Khanduja 209 Aayush Sharma 215 Nalini Katiyar 220 Mohit Rathi 236 Kriti Singh 261 Keshav

Submitted to:

Prof. Ashish Garg

Acknowledgement

This report is made under the guidance of Prof. Ashish Garg. We would like to thank our teachers, parents and dear friends for helping us in this project.

Index
S.N.
1 2 3 4 5 6 7 8 9 10 11 12 13 14

Topic

Page no. 5 6 7 10 13 15 16 17 22 25 26 29 30 31

Objective Source of data About the company Risk and return analysis Portfolio Risk and Return analysis Covariance and analysis Correlation analysis Cost of Capital analysis Net Working Capital Analysis Leverage policy Dividend policy Valuation of company Recommendations References and Bibliography

Objective
The Objective of the project is to understand & study the financial aspects of UNITECH including risk, return, cost of capital, leverage analysis, dividend policy and working capital in comparison with DLF (competitor).

Source of Data The study is done on the basis of data of share prices taken from Yahoo finance for the period August 1, 2008 to July 31, 2012. The Balance sheet and Profit & Loss Statements are taken from Annual reports of companies for the years 2006-07 to 2010-11.

ABOUT COMPANY UNITECHEstablished in 1972, Unitech is today a leading real estate developer in India. Known for the quality of its products, it offers the most diversified product mix comprising residential, commercial/IT parks, retail, hotels, amusement parks and SEZs. It is the first real estate company to be part of the National Stock Exchange's NIFTY 50 Index. Recently the Company has ventured into the infrastructure business by launching Unitech Infra, thus leveraging its decades of experience and expertise in real estate.

DLFThe DLF Group was founded in 1946. We developed some of the first residential colonies in Delhi such as Krishna Nagar in East Delhi, which was completed in 1949. DLF has over 60 years of track record of sustained growth, customer satisfaction, and innovation. The company has 345 msf of planned projects with 48 msf of projects under construction. DLF's primary business is development of residential, commercial and retail properties. The company has a unique business model with earnings arising from development and rentals. Its exposure across businesses, segments and geographies, mitigates any down-cycles in the market. From developing 22 major colonies in Delhi, DLF is now present across 15 states-24 cities in India. The development business of DLF includes Homes and Commercial Complexes

10

Risk & Return AnalysisCalculation Steps: The daily stock prices for the duration of 4 years are taken from the yahoo finance. The return is calculated for each day using the formula: = New day price Previous day price / Previous day price The return is the daily return of the asset and is calculated by the calculating the average of the returns. The Daily Return is annualized using the formula: ( ) The Risk is calculated by calculating the variance of the returns. The daily risk is then annualized using the same ( ) Beta is calculated using the formula: Covariance of security and market / Variance of market

formula:

RESULTSUNITECH Beta 1.67 Risk (Daily) .23 % Risk (Annualized) 74.05 % Return (Daily) -0.09 % Return (Annualized) -20.04 % DLF 1.51 .14 % 42.35 % -0.02 % -4.58 % BSE 1 .03 % 8.27 % 0.03 % 8.32 %

11

INTERPRETATIONIf we compare these two companies than we can say that UNITECH is more risky and yields less return on the basis of following points Risk (daily & annualized) is higher than that of DLF. Return (daily & annualized) provided is lesser than what DLF has provided. Yet both of the companies are giving negative returns. BETA of UNITECH is higher than that of DLF. It means if we add shares of UNITECH in our portfolio then it is more risky than DLF. So here none of these two is investable but if we are to prefer one among these two then the better option of investment is to invest in DLF as it has higher return and lesser risk.

12

RISK 1) Systematic risk- This risk arises on account of the economy wide uncertainties and the tendency of individual securities to move together with changes in market. This part of risk is undiversified and also known as market risk. It can be calculated by following formula-

2)

Unsystematic Risk

This risk arises from the unique uncertainties of

individual securities. This part of risk is diversifiable. It is = Total risk systematic risk
80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% UNITECH DLF (daily) Systematic risk (daily) Unsystematic risk

UNITECH Systematic risk (daily) Unsystematic risk (daily) INTERPRETATION22.95% 51.10%

DLF 18.76% 23.59%

It is very clear that UNITECH is riskier in terms of both systematic and unsystematic risk than DLF.

13

PORTFOLIO RISK & RETURN (Equal weights) Portfolio return is the weighted average return on individual securities. Portfolio risk depends on the co-movements of return of two securities. It can be calculated by following formula - (in case of 2 securities) =
2 2 xW x +
2

2 yW y+

2 Wx Wy

y Corxy

RESULTSRISK UNITECH DLF TOTAL 74.05 % 42.35 % RETURN -20.04 % -04.58 % WEIGHTS .50 .50 29.15 % PORTFOLIO RISK PORTFOLIO RETURN -10.02 % -02.29 % -12.31 %

INTERPRETATION-

If we give equal weight to both securities in our portfolio then our risk will get reduced to 29.15 % and return will be around - 12.31 %. However it is not the minimum risk or maximum return which we can have from different combinations of portfolio of these 2 securities. Still it may be feasible to invest major part in DLF as it will reduce risk and improve return.

14 MINIMUM VARIANCE PORTFOLIO It gives the best combination of two securities so that the portfolio variance is minimum. It is done by diversifying risk among securities. However it depends on the risk preference of investors which portfolio they prefer.

Calculation of weights-

W*x =

y Cov

xy /

x+

y -2

Cov xy

RESULTSRISK UNITECH DLF TOTAL 74.05 % 42.35 % RETURN -20.04 % -04.58 % WEIGHTS .3635 .6365 27.00 % PORTFOLIO RISK PORTFOLIO RETURN -7.28 % -2.92 % -10.20 %

INTERPRETATIONIt gives us the least risky available combination of securities of portfolio which has risk of 27% and return of 10.20%. The table shows that as UNITECH is more risky one so it is better to diversify investment from UNITECH to DLF which has reduced risk.

15 COVARIANCE ANALYSISCovariance of return of two assets measures their co-movements. It can be calculated by following formula. Covxy =
x y Corxy

RESULTSUNITECH 1 0.0012 0.00054 DLF 0.0012 1 0.00049 BSE 0.00054 0.00049 1

UNITECH DLF BSE

INTERPRETATIONCovariance basically tells us how much and in which direction change will take place in other security because of change in one security. If it is positive then it means both are changing in same direction while if it is negative then it means change in one security is positive and other one is negative. Here all Covariances are positive. Covariance of UNITECH and DLF is less with BSE than with each other. However still this is very negligible it means shares of these two companies do not play major role in total price of BSE.

16 CORRELATION ANALYSISCorrelation measures the degree of association between two variables. The coefficient of correlation lies between +1 and -1. Where + 1 means perfectly positive correlation and 1 means perfectly negative correlation and if it is 0 it means they are not related to each other. RESULTSUNITECH DLF BSE INTERPRETATIONTable indicates correlation between securities and with BSE is positively correlated. It shows high degree of correlation between them. It means any increase / decrease in securities or BSE will simultaneously lead to increase / decrease in other security and BSE. It does not define how much change will take place; it just shows degree of relation. There is good degree of correlation between share prices of UNITECH and DLF as it is 0.66 UNITECH 1 0.66 0.63 DLF 0.66 1 0.71 BSE 0.63 0.71 1

17 COST OF CAPITAL ANALYSISAlso known as hurdle rate it is that minimum rate of return which a company would like to earn on its investment of capital. The cost of capital includes the cost of debt and cost of equity and preference shares. We have calculated cost of capital using following steps: 1) Calculation of Cost of Debt 2) Calculation of Cost of Equity 3) WACC (Weighted Average Cost of Capital) Method to calculate cost of capital. COST OF DEBT Cost of debt is calculated using the following formula: ( ) ( )

1) Interest is the amount paid by the company as an interest on the Debt in the current year. 2) Debt is long term debt which we have taken from the Balance Sheet of the Company. 3) The tax rate is the corporate tax rate and is equal to the 33.99 %.( 30%+10%+3%) RESULTS UNITECH Interest Total debt Tax rate Kd 145.46 5850.74 33.99 % 1.64 % In Rs. Crores DLF 1705.62 23990.27 33.99 % 4.69 %

18 INTERPRETATION There is direct relation between cost of debt and cost of capital. The higher the cost of debt (Kd ) the higher will be cost of capital. If we compare these two companies then DLF has higher cost of debt than UNITECH has. The ironical thing here is the interest rate on debt. It is lesser for UNITECH which is more risky and even the rate is too low it is 1.64% for UNITECH and 4.69% for DLF. Actual reason behind it is that we have calculated interest rate by dividing total interest rate (1-tax rate) by total debt. But the companies have calculated it by considering different terms loans at different rates which would results in rate at around 9-10 %. The reason we could not exactly calculate the rate was that in companys report specific rates were not given for loans of different terms.

19 COST OF EQUITY The Cost of Equity is calculated using the CAPM model (Capital Asset Pricing Model). In this model the formula used is: ( ) ( )

Where Rf = Risk free rate (T. Bill rate as on) Rm= Market Return = Beta of the company

RESULTSBeta Rf Rm Ke INTERPRETATIONCost of equity of both the companys is more or less same it is because of little difference in their beta. We have taken risk free rate as simple average of last 4 years from July 2008 to July 2012 because it is plausible to use historical rate as we have calculated market premium rate on the basis of historical data of last 4 years. This cost of equity interprets that shares of UNITECH are riskier. UNITECH 1.67 7.30 8.32 9.00 DLF 1.51 7.30 8.32 8.84

20 Weighted Average Cost of Capital (WACC): Calculation Steps 1) After taking book value of Equity, Debt and Reserves from the Balance sheet the weights of each is calculated. 2) This weight is multiplied by cost. 3) The sum of the product of weights and cost is called as Cost of Capital. RESULTSCost of Capital using WACC of UNITECH Amount Weights Cost Equity 523.26 0.030 9.00 % Debt 5850.74 0.346 1.64 % Reserves 11060.36 0.634 9.00 % Total

WACC 0.27 % 0.55 % 5.71 % 6.53 %

Cost of Capital using WACC of DLF Amount Weight Cost Equity 339.51 0.007 8.84% Debt 23,990.27 0.477 4.69% Reserves 24,156.15 0.480 8.84% Preference Shares 1810.26 0.036 0.00% Total

WACC 0.06% 2.24% 4.25% 0.00% 6.54%

21
7 6 5 4 3 2 1 0 UNITECH DLF

Weighted Cost of reserve Weighted Cost of debt Weighted Cost of equity

INTERPRETATIONOn the basis of book value weights WACC has been calculated which comes to be 6.53% for UNITECH and 6.54% for DLF. This is the minimum rate of return which a company will earn by making investment in any project. In other words company will invest only if gets at least this rate of return. As DLF did pay dividend to its preference shareholders cost of preference share is 0.

22 NET WORKING CAPITAL ANALYSIS Net working capital refers to excess of current assets over current liabilities. In other words it is difference of current assets and current liabilities.

Results2010-11 UNITECH N.W.C. % Change in N.W.C. DLF N.W.C. % Change in N.W.C. 2009-10 2008-09 2007-08 2006-07

10,743.92 12,113.77 10,627.18 10,269.26 6,420.73 -11.31% 13.99% 3.49% 59.94%

20,333.60 18,277.13 23,841.63 19,348.45 8,207.45 11.25% -23.34% 23.22% 135.74%

UNITECH
14,000.00 12,000.00 10,000.00 8,000.00 6,000.00 4,000.00 2,000.00 0.00 2006-07 2007-08 2008-09 2009-10 2010-11 N.W.C.

23

DLF
30,000.00 25,000.00 20,000.00 15,000.00 10,000.00 5,000.00 0.00 2006-07 2007-08 2008-09 2009-10 2010-11

N.W.C.

INTERPRETATIONTable shows that net working capital of UNITECH was increased at around 60 % in the year 2007-08 but later on decreased it was because of high amount of inventory with the company in 2007-08 which was peak period of USA bubble. Companys inventory increased by around 5000 crore in that year. Also the government of India and RBI had intervened in 2008-09 to boost the real estate sector in India. Stimulus packages by Central Govt., coupled with RBIs monetary policy interventions, had a positive impact on the real estate sector in India. Lower interest rates helped to revive demand for housing in India. RBI allowed banks to treat refinanced loans to realty developers as standard assets instead of making high provisioning and treating them as NPA. This enabled developers to reschedule loans from banks. All these policy initiatives helped to increase working capital funding for developers. Apart from this UNITECH had also changed its policies to check the decreasing sales. The Four-pronged Strategy strategy of UNITECH aimed at

24 I- Improving operational cash flows: By changing the mindset from maximization of realizations to maximization of volumes (by focusing on affordable housing segment from the existing high end projects) II- Reducing the capital intensity of business: By shifting the strategy from Land banking to banking on land (by focusing only on undertaken projects and by shifting from lease model to sale model) III- Monetization of non-core assets: By de-leveraging through sale of assets like hotels, offices and infusion of private equity at individual project level IV- Debt management: Despite challenging environment, through its proactive approach UNITECH has been able to successfully manage its debt obligations (by rescheduling loans with near term maturities, collateralizing unsecured loans, replacing short term loans with long term ones) All this accounted for the net working capital increase of 2009-10. In case of DLF there is significant decrease in the net working capital in 2009-10 which is because company made large amount of provisions in that year.

25 LEVERAGE ANALYSIS The leverage analysis consists of: 1) Operational Leverage defined by Degree of Operational Leverage. 2) Financial Leverage defined by Degree of Financial Leverage. 3) Total leverage defined by Degree of Combined Leverage. Operational Leverage (DOL) = Financial Leverage (DLF) = Total Leverage (DCL) = RESULTS = DOL* DLF In Rs.Crores

UNITECH
EBIT SALES EPS %Change in EBIT %Change in Sales %Change in EPS DOL DLF DCL 2010-11 2009-10 2008-09 2007-08 2006-07 1,028.89 1,166.93 2,063.80 2,415.79 1,969.79 3,187.09 2,836.36 2,848.79 4,114.85 3,288.95 2.23 2.78 7.36 10.28 16.09 -11.83% 12.37% -19.78% -0.96 1.67 -1.60 -43.46% -0.44% -62.23% 99.60 1.43 142.62 -14.57% -30.77% -28.40% 0.47 1.95 0.92 22.64% 25.11% -36.11% 0.90 -1.59 -1.44

DLF
EBIT SALES EPS %Change in EBIT %Change in Sales %Change in EPS DOL DLF DCL 2010-11 2009-10 2008-09 2007-08 2006-07 4,370.60 3,944.06 6,013.52 9,999.64 2,907.38 9,627.28 7,459.08 10,047.27 14,498.27 2,613.73 9.65 7.93 26.5 45.87 12.66 10.81% 29.07% 21.69% 0.37 2.01 0.75 -34.41% -25.76% -70.08% 1.34 2.04 2.72 -39.86% -30.70% -42.23% 1.30 1.06 1.38 243.94% 454.70% 262.32% 0.54 1.08 0.58

26

INTERPRETATIONSIt we look at the data in the table than we find that EBIT and SALES of both of the companies increased till 2007-08 than decreased drastically till 2009-10. Reason behind it was the bursting of bubble in USA. as both companies are real state companies they directly got affected by it. However companies showed little improvement in the year 2010-11. In case of UNITECH there is a significant change in DOL from year 2008-09 to 2009-10 and then to 2010-11. First it increased drastically then decreased drastically; it was because of extra manufacturing expenses of around 750 crore by the company in the year 2009-10.This was due to the change in Company policies in 2008-09 to shift to affordable housing segment which required huge initial expenses. It is for the same reason that DOL went negative in 2010-11. It implies that sales were not able to cover the costs i.e. increase in expenses were greater than the sales increase. The increasing DFL through the years shows that the company was taking more and more debt. While in case of DLF DOL has decreased significantly from the year 2009-10 to 2010-11 it was also because of the high interest and extra manufacturing expenses of around 1800 crore by the company in the year 2010-11. The increasing DFL through the years shows that the company was taking more and more debt.

27

DIVIDEND POLICY ANALYSIS Dividend yield equals = Dividend per share / book value per share Dividend Payout ratio equals = Dividend paid / total earnings Retention ratio equals = 1 dividend payout ratio RESULTS UNITECH 30.4 261.63 0.116195 44.27 0.002625 583.4349 5.21% 94.79% In Rs. Crores DLF 797.25 169.76 4.696336 144.3 0.032546 1638.184 48.67% 51.33%

Annual dividends paid Number of shares Dividend per share Book Value per share Dividend Yield Earnings Dividend Payout ratio Retention ratio

UNITECH
RETENTION RATIO PAYOUT RATIO

DLF
RETENTION RATIO PAYOUT RATIO

28 INTERPRETATION Dividend policies used by both the companies are pretty different from each other. Where on one hand UNITECH is having higher retention ratio on the other hand DLF is focusing on high dividend payout ratio. Rationality behind high retention ratio may be that UNITECH wants to secure money for future contingencies or to invest in other better investment projects and behind high dividend payout ratio is that DLF wants to turn its rate of return from negative to positive by paying high dividend to its shareholders.

29 VALUATION OF COMPANIES Value of both the companies has been calculated by NOI approach. Value of company equals to = Net operating profit / cost of capital ResultsIn Rs. Crore

Net Operating Profit Capitalization Rate Total Firm Value as per NOI Approach Debt Market Value of Equity No. of Shares in Issue Intrinsic Value per Share Market Value as on 6 September 2012 Undervalued or Overvalued

UNITECH 923.86 6.53% 14144.15 5,850.74 8,293.41 261.63 31.70 18.5 Undervalued

DLF 3,906.34 6.54% 59700.03 23,990.27 35,709.76 169.76 210.35 192.95 Undervalued

INTERPRETATIONWhether a company is undervalued or overvalued is decided by comparing market value and intrinsic value of share. If market value is greater than intrinsic value that means company is overvalued and vice versa. Here both the companies are undervalued as their market values are lesser than their intrinsic values. In order to get it valued rightly company may take help of stock dividend or stock split.

30

RECOMMENDATIONS
It would be wise to invest neither in UNITECH nor in DLF as based on the past data both are giving negative returns Between the two, UNITECH is worse performer as its has higher risk (74% for UNITECH v/s 42% for DLF) and more negative returns (-20% for Unitech v/s -4.6% for DLF) Dividend loving investors would like to invest in DLF as it has higher dividend payout ratio in comparison to UNITECH.

31

REFERENCES
www.moneycontrol.com www.yahoofinance.com www.rbi.org.in

Bibliography
Corporate Finance, Second Edition by Aswath Damodaran Financial management, Ninth edition by I M Pandey