Valuation of DLF Ltd.

Project Study

Submitted to:

Prof. Dr. AMITABH GUPTA

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

External Mentor:

PRASHANT GOOTY
Associate Director,
Jones Lang Lasalle,
Mumbai.

Siva Chandra Lochan Kallur

Roll No: 2661, MFC – Part II
DFS, University of Delhi.
 ACKNOWLEDGEMENT

I would like to pay my sincere thanks to Prof. Amitabh Gupta, Department of Financial
Studies, University of Delhi, South Campus for endowing me with the opportunity to work
on this Project. His guidance and supervision have been instrumental in providing me
valuable insights regarding the project.

I am also very grateful to my external guide Mr. Prashant Gooty, Associate Director, Jones
Lang Lasalle, for taking out time from his busy schedule and helping me to develop my
interest and knowledge in this field.

I would also like to thank my parents, friends and other well wishers for their continuous
support throughout the course and making my stay in MFC eventful and memorable.

K Siva Chandra Lochan,

2661, MFC, DFS.

2
 CERTIFICATE

This is to certify that, this study entitled, “Valuation of DLF Ltd” is based on my original
research work and my indebtedness to other works has been duly acknowledged at the
relevant places in this study. Further this work has not been submitted earlier for the award
of any other degree.

K Siva Chandra Lochan,

2661, MFC, DFS.

Prof. Amitabh Gupta Mr. Prashant Gooty

Internal supervisor: External supervisor:
Department of Financial Studies Designation: Associate Director
University of Delhi South Campus Company: Jones Lang Laselle

3
Table of Contents

ACKNOWLEDGEMENT ................................................................................................................ 2
CERTIFICATE ............................................................................................................................... 3
TABLES AND FIGURES................................................................................................................. 5
1. Introduction ........................................................................................................................ 6
1.1 Phases of Real Estate Cycle ......................................................................................... 6
2. Objectives ........................................................................................................................... 8
3. Industry and Company overview ........................................................................................ 9
3.1 Porters Five Factor analysis of the industry ................................................................ 9
3.2 SWOT Analysis for DLF Ltd. ....................................................................................... 15
4. Valuation model ............................................................................................................... 17
4.1 Discounted Cash Flows Valuation ............................................................................. 17
4.2 Assumptions .............................................................................................................. 17
4.3 Key ratios used for projection ................................................................................... 17
5. Financial Statements ........................................................................................................ 19
5.1 Profit and Loss Statement ......................................................................................... 19
5.2 Cash Flow Statement................................................................................................. 20
5.3 Balance Sheet ............................................................................................................ 21
5.4 Calculation of Cost of equity using CAPM ................................................................. 22
5.5 Free Cash Flow Calculation ....................................................................................... 23
6. Conclusion and Recommendations .................................................................................. 25
7. Template for Project Cash flow projections ..................................................................... 26
7.1 Assumptions and Specifications ................................................................................ 26
7.2 Cash outflows or Costs .............................................................................................. 28
7.3 Cash inflows or Revenues.......................................................................................... 28
7.4 Cost and Collection Schedules .................................................................................. 29
8. References ........................................................................................................................ 31

4
TABLES AND FIGURES

Figure 1: Phases of Real Estate Cycle ......................................................................................... 6

Figure 2: Porters Five Forces .................................................................................................... 11
Figure 3: DLF Share price movement ....................................................................................... 25

Table 1: Industry Comparison .................................................................................................. 11

Table 2: Ratios used for Projections ........................................................................................ 18
Table 3: Profit and Loss Statement .......................................................................................... 19
Table 4: Cash Flow Statement ................................................................................................. 20
Table 5: Balance Sheet ............................................................................................................. 21
Table 6: Risk Free rates and WACC .......................................................................................... 22
Table 7: Free Cash Flows .......................................................................................................... 23
Table 8: Assumptions & Specifications (Cash Flow Template) ................................................ 26
Table 9: Sample Cash Flows (Cash Flow Template) ................................................................. 28
Table 10: Construction and Collection Schedule (Cash Flow Template) ................................. 29

5
1. Introduction

The Indian real estate and construction industry is an integral part of Indian economy and
plays an important role in the development of the country’s infrastructure base. The
contribution of the real estate sector to India’s gross domestic product (GDP) has been
estimated at 6.3 per cent in 2013, and the segment is expected to generate 7.6 million jobs
during the same period. It is also expected to generate over 17 million employment
opportunities across the country by 2025. The real estate sector of India is expected to post
annual revenues of US$ 180 billion by 2020 as compared to US$ 66.8 billion in 2010-11,
registering a compound annual growth rate (CAGR) of 11.6 per cent. In fact, the demand is
expected to grow at a CAGR of 19 per cent between 2010 and 2014, with tier I metropolitan
cities projected to account for about 40 per cent of this. The country is ranked 20th among
the top global markets for real estate investment in 2012, with investments worth US$ 3.4
billion during the year, according to a latest report by Cushman & Wakefield. It is also
estimated that foreign direct investment (FDI) into real estate in India will increase to US$
25 billion over the next 10 years.
1.1 Phases of Real Estate Cycle

Figure 1: Phases of Real Estate Cycle

6
Recession - Property is cheap and bargains are everywhere, prices are depressed. Home
builders are going out of business; real estate agents are leaving the business. The media is
completely negative.
Recovery - Real estate prices are slowly rising along with demand. The media becomes more
and more optimistic about real estate. Investors on the sidelines start jumping in. The
market starts to feed upon itself, causing prices and demand to continue to rise. Soon
double digit rates of appreciation are the norm.
Expansion - In this phase prices reach a market cycle peak and flatten out. Real estate is
overpriced. Everyone that is going to get in the market is already in, so there are fewer and
fewer buyers. Sellers try to hold out without reducing prices until a few are forced to
reluctantly lower their prices a little bit.
Contraction - In phase 4 things start to unravel and continued lack of demand causes prices
to fall. This is the most dangerous time to be invested in real estate. Even though prices are
starting to fall, sellers are still in denial. They hold out and think things will turn quickly
around. Eventually, reality sets in and more and more sellers are forced to lower prices.
Incentives from home builders and sellers become the norm but it’s not enough to create
demand, prices continue to fall even further.

7
2. Objectives

Developing interest during my summer internship at CAPSTAR, Essel Financial Services Ltd, I
wish to continue my project study in the Indian real estate sector

The objectives of this project study are broadly divided into the following two:

1. Valuation of DLF Ltd – to value DLF Ltd using DCF valuation method and to find
whether it is overvalued or undervalued.
2. Preparing a template for project valuation – a generic template useful in evaluating a
project value.

This template provides a generic tool to capture all the assumptions, costs, revenues, cash
flows over the project period, sales and collection periods, IRR and other project financials
for a project which help an investment analyst in taking investment and advisory decisions.

This report demonstrates the application of the basic valuation method namely the
Discounted Cash Flow to determine future value of the DLF Ltd company on a 5 year
planning horizon from the perspective of potential investors and shareholders.

From a quantitative perspective, investing in real estate is somewhat like investing in stocks.
In order to profit in real estate investments, investors must determine the value of the
properties they buy and make educated guesses about how much profit these investments
will generate, whether through property appreciation, rental income or a combination of
both.

8
3. Industry and Company overview

With growing trends in young and earning population, real estate sector in India has always
been the center of attraction for many big players across the industries. Though it was
lopsided journey for majority of the players over the years, analysts and reports say that this
sector would be cautiously encouraging for the potential entrants and existing players.

3.1 Porters Five Factor analysis of the industry

The analysis of 5 Forces model has been done to determine whether the Indian Real Estate
sector will remain profitable in the years to come

Threat of New Entrants:

 There will be a decrease in profitability due to increase in the number of entrants.

 As a result of the economic downturn around the globe, it has been difficult for the
new entrants to get a hold because of cost reduction in expansion plans by corporate
in real estate, little scope in commercial construction, and strong rivalry between
existing firms.

 Result: Relatively weak threat of new entrants

Bargaining power of Buyers:

 Powerful customers are able to exert pressure to drive down prices, or increase the
required quality for the same price, and therefore reduce profits in an industry.

 Customers significantly influence the business operations in real estate.

 Customers do possess a threat of integrating backwards.

 Consequently, the bargaining power of the buyers is strong.

Bargaining power of suppliers:

 An important category of suppliers is the bank. They have the power to decide
whether to fund a venture or not and at what rate.

9
  Banks have now become highly conservative especially after the economic
downturn.

 Are significantly affected by the monetary regulations like the Repo rate & CRR
formulated by the Central Bank of the country. This is in turn affects the real estate
sector.

 Consequently the bargaining power of suppliers is very strong

Threat of Substitute products and services:

 In real estate business, substitute might be some type of totally new retail space,
some new location for office space or rehabilitation instead of new construction.

 The threat of substitute in real estate business and its impact on profitability of the
industry is quite ambiguous and difficult to establish given the economic downturns
and the recovery mode of the real estate business cycle.

Rivalry among existing competitors:

 Rivalry is strong due to the large no. of real estate firms operating in India (65 in
total) and the difficulty to differentiate

 The services offered by real estate companies cannot be differentiated because

these firms don’t offer a product, other than the facilities they lease and this itself is
very difficult to quantify.

 In the current economic crisis, there is minimal profitability and only companies with
large cash reserves are likely to survive.

Considering all the 5 forces, it can be said that the real estate industry is not very profitable
at this stage as it was before the subprime crisis of US in 2008

But considering the fact that the real estate cycle is in the recovery stage right now and
given that the demand for real estate is growing at a CAGR of 19%, it can be said that there
are still bright prospects ahead in a country like India.

10
 Figure 2: Porters Five Forces

The following table gives a quick snapshot of the existing player’s financials in India and
their performance in the recent past:

Table 1: Industry Comparison

North West South

Godrej Oberoi Sobha Purvankara
Detail DLF Unitech Group Realty Developers Group Prestige
Market Cap (Cr) 29421.00 4186.00 3340.00 6271.00 3291.00 1758.00 5493.00
Income Statement
Sales (Cr) 7772.00 2444.00 1037.00 1047.00 1864.00 1245.00 1947.00
EBITDA (Cr) 3911.00 416.00 296.00 711.00 553.00 603.00 642.00
Net Profit (Cr) 341.00 250.00 138.00 505.00 217.00 243.00 285.00
Revenue / Employee
(lacs) 299.00 220.43 314.28 205.00 64.76 122.63 -
Profit/Employee(lacs) 13.14 22.58 41.95 98.89 7.55 23.96 -
Growth Position
3 Yr CAGR Sales % 1.55 -5.87 62.28 9.87 18.17 37.59 23.88
3 Yr CAGR Profit % -41.13 -27.48 105.98 3.32 17.57 18.77 29.80
Valuation
P/E 53.42 13.66 20.57 14.07 14.38 6.83 19.70

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

With a track record of 64 years, DLF Ltd. is India’s largest real estate company in terms of
revenues, earnings, market capitalization and developable area. It currently has pan India
presence across 30 cities with approximately 250 million sq ft of completed development
and 500 million sq ft of planned projects, of which 60 million sq ft of projects are under
construction. Creating records with its IPO inception at Rs. 550 per share in June 2007, DLF
Ltd has been through a tough journey so far. Following is the timeline of DLF Ltd:

 1963 - Incorporation of American Universal Electric (India) Ltd

 1979 - DLF United Limited amalgamates with American Universal Electric (India)
Limited to form DLF Universal Electric Limited
 1981 - DLF Universal Electric Limited changes name to DLF Universal Limited
- DLF Universal Limited obtains its first licence from the State Government of
Haryana and commences development of the 'DLF City' in Gurgaon, Haryana
 1985 - We initiated plotted developments, self first plot in Gurgaon, Haryana.
Consolidate the development of DLF City for township development.
 1991 - Construction of our first office complex, 'DLF Centre', at New Delhi
 1993 - Completion of our first condominium project, 'Silver Oaks', at DLF City,
Gurgaon, Haryana
 1996 - Construction of 'DLF Corporate Park', our first office complex at DLF City,
Gurgaon, Haryana.
 1999 - Development of the DLF golf course
 2000 - The Scheme of Merger/Amalgamation of DLF Industries Limited with M/s. DLF
Universal Ltd., which was approved by the Hon'ble High Court of Delhi at New Delhi
and by the Hon'ble High Court of Punjab and Haryana at Chandigarh came into effect
on 09.10.2000.
 2002 - We venture into retail development in Gurgaon, Haryana.
- We offer integrated family entertainment centers with the commencement
of operation of 'DT Cinemas' at Gurgaon, Haryana

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 2003-04 - Development of 'DLF Cybercity', an integrated IT park measuring
approximately 90 acres at Gurgaon, Haryana.
 2005 - Acquisition of 16.62 acres (approx) of mill land in Mumbai
- Received 'Corporate Buildings Award' instituted by 'Indian Architect and
Builder', a publication of Jasubhai Media Group, Mumbai
- Received 'Superbrand' award from Hon'ble Minister for Civil Aviation, Mr.
Praful Patel.
 2006 - Construction joint venture signed between DLF Universal Limited and U.K.
based Laing O'Rourke Plc to form DLF Laing O'Rourke (India) Limited
- DLF Universal Limited changes name to DLF Limited
- Alliance agreement signed between DLF and Hilton International Co. to
incorporate a joint venture company in India to develop, own and acquire 50
to 75 hotels and services apartments.
- DLF enters into a joint venture with WSP Group Plc. for the purposes of
providing engineering and design services, environmental and infrastructural
facilities and also project management services.
 2007 - DLF enters into a joint venture with Prudential Insurance to establish a joint
venture company to undertake life insurance business in India.
- DLF launches Rs. 9,188 crores issue.
- The US-based Hilton Hotels Corporation has declared that it will develop 10
hotel projects in the country in alliance with DLF Ltd.
- Company has changed its name from DLF Universal Ltd. to DLF Ltd.
 2008 - DLF inked a memorandum of understanding with the infrastructure company
Gayatri Projects Ltd (GPL) to develop roads, highways and bridges across the
country.
- DLF Ltd and the Tamil Nadu Industrial Development Corporation (TIDCO)
have forayed into an alliance agreement for a Rs 1,500-crore Information
technology Special Economic Zone (SEZ).
- Commences operations of India's first Luxury Mall - Emporio Clinches the
Title Sponsorship of IPL

13
 2009 - DLF Ltd launched Capital Greens, the Largest private sector residential project
in Delhi.
- Foundation stone laid for DLF-IL&FS Metro In Gurgaon - India's first public rail
trasport system to be built & run by a private Company
- DLF conferred Best Global Developer Award, 2009 by Euromoney
- DLF sells DT Cinemas, enters into a long term strategic alliance with PVR
 2010 - DLF Ltd Launched plots in Gurgaon after a decade, creating a new suburb-
'New Gurgaon'
- DLF Ltd announced the launch of the first phase of its 200-acre project in
Panchkula with an investment of nearly Rs 2,200 crore.
- DLF launching ultra-rich homes in Shimla and Goa
- DLF, Country's largest realty firm, has sold 150 plots, garnering over Rs 500
crore, in a township project at Gurgaon. DLF launched a 100-acre township
'Alameda' in Gurgaon.
 2011 - DLF Ltd Delivered Delhi's first Automated Car Parking in Sarojini Nagar.
- DLF Pramerica Life Insurance, the insurance arm of India's largest realty
developer, DLF announced that it hired over 3,000 additional financial
advisors in 2010-11 for boosting its sales and growth. The insurance firm's
workforce grew from 2,115 in 2009-10 to 5,119 in
- DLF Ltd has decided to sell off the property in Gurgaon as an effort to
minimise the debt of the company, which stood at Rs 21,524 crore as on 30
June 2011.
- DLF's arm DLF Hotel Holdings Ltd acquires 26% stake from Aro Participation
Ltd and Splendid Property Company Ltd, affiliates of Hilton International
Company.
- India's largest real estate developer, DLF Ltd along with its JV partner
Hubtown have sold 100 per cent of their respective share holding in DLF
Ackruti Info Parks to private equity fund, Blackstone for Rs 810 crore.
 2012 - DLF Ltd Marks footprint in Infrastructure.It has Launched an 8.3km
expressway project in Gurgaon and delivered Delhi's second Automated Car Parking
in Connaught Place, New Delhi.

14
 - DLF sells hotel subsidiary as divested its entire shareholding in Adone Hotels
and Hospitality Limited for Rs 567 crore.
- DLF LTD seeks association in the latest upcoming trends in sports and games,
the country's largest realty firm DLF has exited the five year long alliance as
IPL sponsor.
- DLF LTD along with its three wholly-owned subsidiaries - i) DLF Cyber City
Developers Ltd., ii) DLF Universal Ltd. and iii) Jawala Real Estate Pvt. Ltd.
(‘Jawala’), have entered into an agreement with Lodha Developers Limited
(‘Lodha’) for divesting the entire stake of the Company, DLF Cyber City
Developers Ltd. and DLF Universal Ltd. in ‘Jawala’ for an enterprise value
estimated to be Rs. 2700 crores.
- DLF LTD promoter Pia Singh offloads 1.04-cr shares in DLF to other
promoters.
3.2 SWOT Analysis for DLF Ltd.

SWOT analysis (alternatively SWOT Matrix) is a structured planning method used to

evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a project or in a
business venture. A SWOT analysis can be carried out for a product, place, industry or
person. It involves specifying the objective of the business venture or project and identifying
the internal and external factors that are favorable and unfavorable to achieving that
objective.

Setting the objective should be done after the SWOT andalysis has been performed. This
would allow achievable goals or objectives to be set for the organization.

Strengths: characteristics of the business or project that give it an advantage over others.

Weaknesses: characteristics that place the business or project at a disadvantage relative to

others

Opportunities: elements that the project could exploit to its advantage

Threats: elements in the environment that could cause trouble for the business or project

SWOT Analysis

1. Largest real estate company in India

Strengths 2. Its exposure across businesses, segments and geographies

15
 reduces the impact of economic cycles
3. Experience of over many decades in Indian retail sector with an
expertise in the field
4. Strong management team

1.Affected due to lack of regulations and effective policies

Weaknesses 2.Majorly present only in India and limited global exposure

1.Reduction in interest rates

2.Tax incentives for housing investments
Opportunities 3.Shortage of houses in urban areas

1.Increasing interest rates

2.Economic downturn
Threats 3.Volatility in financial markets

Competition

1.Oberoi Realty
2.Godrej Properties Limited
Competitors 3.Shobha Developers

16
4. Valuation model

4.1 Discounted Cash Flows Valuation

In discounted cash flows valuation, the value of an asset is the present value of the expected
cash flows on the asset, discounted back at a rate that reflects the riskiness of these cash
flows.

Basis for Approach

The value of an asset is not what someone perceives it to be worth but it is a function of the
expected cash flows on that asset. Put simply, assets with high and predictable cash flows
should have higher values than assets with low and volatile cash flows. In discounted cash
flow valuation, we estimate the value of an asset as the present value of the expected cash
flows on it.

4.2 Assumptions

Revenue is the amount of money that is brought into a company by its business activities.
The amount of money that a company actually receives during a specific period, including
discounts and deductions for returned merchandise.
Revenue per unit is assumed to be growing at 24% per annum initially and then it is brought
down to long term GDP growth rate, which is assumed to be 5%.
Capital Expenditure is forecasted with the help of gross block.
Depreciation rate is taken as a percentage of gross block.
Tax rate is taken as 33.9%
Risk Free rate is taken to be the current 10-yr bond rate i.e. 8.92%.

All other growth estimates, forecasts of cash flows, depreciation rates, debtors etc are taken
from the analyst and research reports. Also various reports on real estate in India supported
these forecast estimates.
4.3 Key ratios used for projection

The following set of ratios has been used to project the financial statements of the DLF Ltd
Company:

17
 (All Figures in Crores)
Table 2: Ratios used for Projections

Ratios 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Stable
Inventories as
% of sales 64% 105% 159% 148% 158% 194% 170% 150% 130% 125% 120% 115%
Sundry
Debtors as %
of sales 13% 21% 21% 15% 17% 18% 18% 18% 18% 17% 18% 18%
Current
Liabilties as %
of sales 50% 75% 112% 73% 81% 105% 83% 88% 90% 87% 89% 90%

Profit and Loss

Statement
Ratio's 2011 2012 2013 2014 2015 2016 2017 2018 Stable
Revenue 10144.4 10223.9 9095.7 8822.9 8858.1 8999.9 9179.9 9409.4 9644.6
Growth 29% 1% -11% -3% 0.4% 1.6% 2% 2.5% 2.5%
Manufacturing
Expenses as %
of Revenue 0.266% 0.535% 0.888% 0.481% 0.481% 0.481% 0.481% 0.481% 0.481%
Tax as a % of
PBT 33% 36% 54% 33.90% 33.90% 33.90% 33.90% 33.90% 33.90%
Dividend as %
of PAT 46% 43% 68% 38% 35% 33% 32% 30% 30%

Balance
Sheet items 2011 2012 2013 2014 2015 2016 2017 2018 Stable
Gross Block
as % of
Revenue 209% 224% 253% 245% 243% 240% 240% 240% 240%
Gross Block 21211.7 22919.7 23017.6 21616 21525.3 21599.7 22031.7 22582.5 23147.1
Cum
Depreciation 1955.6 2580.9 3169 3458.6 3723.9 3758.4 3921.7 4064.9 4166.4
Depreciation
as a % of
Gross Block 9% 11% 14% 16% 17% 17% 18% 18% 18%
Capital
Work-in-
Progress 10234.4 8992.8 7834.3 9011.1 9547.6 9018.2 8846.5 8852.8 9105.8
Total Debt 26463.8 27436.1 27106.9 27106.9 27106.9 27106.9 27106.9 27106.9 27106
Interest 1705.6 2246.5 2314.1 2429.8 2551.2 2678.8 2812.7 2953.4 3101.0
Interest as a
% of Debt 6% 8% 9% 11% 11% 11% 11% 11% 11%

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5. Financial Statements

5.1 Profit and Loss Statement

Profit and loss account is the account whereby a company determines the net result of its
business transactions. It is the account, which reveals the net profit (or net loss) of the
company. The profit and loss account is opened with gross profit transferred from the
trading account (or with gross loss which will be debited to profit and loss account). After
this all expenses and losses (which have not been dealt in the trading account) are
transferred to the debit side of the profit and loss account. If there are any incomes or gains,
these will be credited to the profit and loss account. The excess of the gain over the losses is
called the net profit and that of the loss over the gain is called the net loss. Transferring the
net profit or loss to capital account of the company closes the account.
(All Figures in Crores)
Table 3: Profit and Loss Statement

19
5.2 Cash Flow Statement

(All Figures in Crores)

Table 4: Cash Flow Statement

20
Complementing the balance sheet and income statement, the cash flow statement (CFS), a
mandatory part of a company's financial reports, records the amounts of cash and cash
equivalents entering and leaving a company in the corresponding year.
5.3 Balance Sheet

(All Figures in Crores)

Table 5: Balance Sheet

21
It is a financial statement that summarizes a company's assets, liabilities and shareholders'
equity at a specific point in time. These balance sheet segments give investors an idea as to
what the company owns and owes, as well as the amount invested by the shareholders.
Capital Expenditure and Working Capital Forecasting: Gross block for the next 5 years are
forecasted taking CAGR over the past 5 years. Working capital is forecasted using its average
ratio with sales/COGS as mentioned before. Moreover, in calculating working capital we
have excluded Cash and marketable securities and notes payable. The related spreadsheets
are shown above.
5.4 Calculation of Cost of equity using CAPM

WACC is calculation of a firm's cost of capital in which each category of capital is

proportionately weighted. All capital sources - common stock, preferred stock, bonds and
any other long-term debt - are included in a WACC calculation. All else equal, the WACC of a
firm increases as the beta and rate of return on equity increases, as an increase in WACC
notes a decrease in valuation and a higher risk. The WACC equation is the cost of each
capital component multiplied by its proportional weight and then summing.
To calculate the cost of equity we first calculate the beta of DLF Ltd through a regression on
the stock price of DLF with NIFTY price over last 3 years. Now risk free rate Rf is taken as10-
Yr bond rate. Market return, which is, is calculated by annualizing the NIFTY market
returns over the last 3 years. The cost of equity is calculated using the formula

( ) ( )
Where,
E(R) = cost of equity
= Risk free rate
= Market return (NIFTY)
β = beta
Table 6: Risk Free rates and WACC

Beta (B) 1.794

10 yr Bond Rate (Rf) 8.92%
Default Spread for DLF Ltd 2.30%
Cost of Debt Before Tax (Kd) 11.22%
Tax Rate (t) 33.90%
22
 Cost of Debt After Tax [Kd(1-t)] 7.42%
Cost of Equity {Ke=[Rf+B*(Rm-Rf)]} 18.57%
Market Return (Rm) 14.30%

5.5 Free Cash Flow Calculation

To calculate the share price of DLF Ltd using the FCF Method, we used the EBIT calculated
from the P&L Sheet. This EBIT is adjusted for tax purpose using the average tax rate to
calculate the NOPLAT. Now this is further adjusted for depreciation to calculate the Gross
Cash Flow. The Gross Cash Flow is adjusted for the change in working capital. In current
assets we did not include the ‘Cash and bank balance’. Now this cash flow is further
adjusted for capital expenditure.
Free Cash Flow to the Firm = NOPLAT + Depreciation – (Changes in Working Capital) –
Capital Expenditures.
Where,
NOPLAT = EBIT*(1-t)
Changes in Working Capital = -
Now these free cash flows are discounted using the WACC to calculate the present value of
the cash flows. The value of the firm is directly divided by the total no. Of shares since there
is no debt.
NOPLAT – Net Operating Profit Less Adjusted Taxes
EBIT – Earnings Before Interest and Tax
FCF – Free Cash Flow
WACC – Weighted Average Cost of Capital
(All Figures in Crores)
Table 7: Free Cash Flows

2013 2014 2015 2016 2017 2018 Stable

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

23
EBIT 6944.52 7369.24 7429.44 7804.51 7858.85 8112.46 8393.42
Marginal Tax Rate 33.90% 33.90% 33.90% 33.90% 33.90% 33.90% 33.90%
Nopat 4590.33 4871.07 4910.86 5158.78 5194.70 5362.34 5548.05
Depreciation 796.24 289.60 265.32 34.47 163.29 143.21 101.62
Changes In
Operating Working
Capital -1643.24 -2162.34 -1922.25 -70.68 -523.04 -488.14 -360.62
Capex -224.78 445.83 -455.03 260.28 557.13 817.60 545.00
Free Cash Flow 3968.11 2552.50 3708.96 4862.29 4277.82 4199.81 4744.05
Total Equity 27527.69 28211.88 28615.60 29054.59 29506.21 30060.50
Total Debt 27106.86 27106.86 27106.86 27106.86 27106.86 27106.86
Total Capital 54634.55 55318.74 55722.46 56161.45 56613.07 57167.36
Equity% 50% 51% 51% 52% 52% 53%
Debt% 50% 49% 49% 48% 48% 47%

Cost of Equity 18.57% 18.57% 18.57% 18.57% 18.57% 18.57%

After Tax Cost Of
Debt 7.42% 7.42% 7.42% 7.42% 7.42% 7.42%
WACC 13.04% 13.10% 13.14% 13.19% 13.23% 13.28%

Year Count 0.5 1.5 2.5 3.5 4.5

Discounting Factor 0.94 0.83 0.73 0.65 0.57
PV of FCF 2400.08 3081.80 3567.44 2769.28 2396.19

Terminal Value 29517.00

Total Pv of FCF 43731.79
Debt 27,508.88
Excess Cash 1,844.14
FCF to Equity 18067.05
Divide by No of Equity Shares(in Crores) 158.1426747

Fair Value Per Share(in Rs) 114.25

Present Market Value(in Rs) 140.05

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6. Conclusion and Recommendations

DLF Ltd stock is overvalued according to DCF valuation method. The current market price is
Rs. 140.05, according to valuation we obtained a value of Rs. 114.25. This variation could be
because of highly overpriced assets and investments during the early stages of operation.
Also the real estate sector scenario in Indian market stabilized better when compared to the
last decade resulting in the reduced profits for DLF Ltd.
The following graph shows the last 5 year’s high and low along with the movement of the
DLF Ltd price:

Figure 3: DLF Share price movement

The graph clearly depicts the volatile movement of the DLF Ltd share price from around 480
in mid 2009 to 120 in mid 2013 and again 150 in early 2014. This shows that the market for
this real estate giant clearly stabilized over a period but again raises many questions over
and over again!
Hence, we recommend selling the stock considering its focus on tapping new market,
investing behind new product introductions and reducing its cost of production.

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7. Template for Project Cash flow projections

Valuating a company, firm or group of companies can be done using the financials available
easily through the quarterly, annual mandatory financial statements. But how does real
estate companies like DLF Ltd etc., go about finalizing a project or development? What are
the various costs involved for a project, does the timing of different costs effect the decision
on taking up a project or not, how one forecasts the cash flows for a development project
with differential mix (joint venture, joint development, equity or debt), does one need to
take sales or collections as cash inflows, what should be the ideal return expected from the
project? These questions can be easily answered using the following template.
This project cash flow projections template has 4 major sections:
a) Assumptions and Specifications
b) Cash outflows or Costs
c) Cash inflows or Revenues
d) Cost and Collection Schedules
All the data forecasts from the project specifications is used to compute project IRR using
which the investment analysts for the firm, analysts from both the sell and buy side can
make informed decisions on investing in a particular project.
7.1 Assumptions and Specifications

This section captures all the specifications of the project such as the total area, constructed
area, saleable area, FSI, no. of flats, different costs involved etc., Also the assumptions such
as the projected growth in costs, sales, collections, tax projections etc., will be captured for
the specific project. The snapshot of this section for a sample project is provided below:
Table 8: Assumptions & Specifications (Cash Flow Template)

ASSUMPTIONS
<Project Name> <Date>
Particulars Value Unit Remarks
Location
Location Sample
Land Details
Plot Size 3.84 Acres
Plot Area 167,270 sq. ft.
Plot Size for development 158,907 sq. ft.
FSI available 3.25 nos.
TDR 1.95 nos.

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TDR 309,868 sq. ft.
FSI achievable 5.2 nos.
Cost of Land 4,750 Rs. / sq. ft.
Cost of TDR 700 Rs. / sq. ft.
Total Land Cost 79 Rs. Cr.
Total TDR Cost 22 Rs. Cr.
Registration & Stamping Cost 5 Rs. Cr.
Total Cost of Land including TDR and
106 Rs. Cr.
Registration
Area Statement
Saleable Area of Apartments 826,316 sq. ft.
Basement Parking 165,263 sq. ft.
Total Built-up Area including Basement 991,579 sq. ft.
Product Mix
Saleable Area – FSI 543,629 sq.ft.
Saleable Area of TDR 309,868 sq.ft.
Total Saleable Area of Apartments 853,497 sq.ft.
Average Size of Apartments 1,400 sq.ft.
Total No. of Apartments 610 sq.ft.
Sales
Launch Price of Apartments 5,800 Rs./ sq. ft.
Other income on Apartments 500 Rs. / sq. ft.
Increase in Sales Price 8.0% % Per annum
Increase in Sales Price 3.9% % Semi Annually
Consultant / Development Expenses
Consultant Fees (Architect, structural,
50 Rs./ sq. ft.
plumbing & electrical)
Approval & Liasioning Cost 100 Rs./ sq. ft.
Sample Flat, Villa and Sales Gallery 1.0 Rs. Cr.
Initial Advertising Expense 3.0 Rs. Cr.
Construction Costs
Apartment Construction Cost 2,400 Rs./ sq. ft.
Basement Parking Cost 600 Rs./ sq. ft.
Increase in Construction Costs 5.0% % Per annum
Increase in Construction Costs 2.5% % Semi Annually
Other Cost
Marketing & Advertising Expenses 3% % of Sales
Overheads - Administration, PMC etc 6% % of COC
Consultant Fee 1.5 Rs. Cr.
Debt Costs
Debt Cost % Per annum
Debt Cost 0.0% % Per quarter
Tax
Marginal Tax Rate 32.4% %
Investment
Developer Contribution 10 Rs. Cr.
Investor Contribution Rs. Cr.
Total Investments Rs. Cr.
Return Requirement
Distribution Upto 25%

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 Investor %
Developer %

Distribution After 25%

Investor %
Developer %

7.2 Cash outflows or Costs

This section contains the forecasts of all the cash outflows or costs involved for the specific
project during the tenure of the project. The timing of these costs is critical as this would
alter the IRR.
7.3 Cash inflows or Revenues

The sales forecasts for the specific project along with any other income are captured in this
section. These two sections together determine the net cash flows for the project, very
important in calculating the return from the project. The cost per sq.ft for the project and
net sales price per sq.ft can be easily calculated using the net cash outflow and inflow
respectively.
Table 9: Sample Cash Flows (Cash Flow Template)

CASH FLOWS
<Project Name> <Date>
Apr- Jul- Oct- Jan- ….. Jul- Oct- Jan- Apr- Jul- Rs.
Ending
Project Cash Flow 13 13 13 14 16 16 17 17 17 Cr.
Quarter Q0 Q1 Q2 Q3 ….. Q13 Q14 Q15 Q16 Q17 Total
Sales Value - FSI Rs. Cr. 0 0 0 ….. 15 0 0 0 0 342
Other income - FSI Rs. Cr. ….. 27 27
Total Sales Value - FSI Rs. Cr. 0 0 0 ….. 15 0 0 0 27 369
Sales Value - TDR Rs. Cr. 0 0 0 ….. 44 44 45 45 47 225
Other income - TDR Rs. Cr. ….. 15 15
Total Sales Value - TDR Rs. Cr. 0 0 0 ….. 44 44 45 45 63 240
Total Sales Value - Project Rs. Cr. 0 0 0 ….. 59 44 45 45 90 610
PROJECT CASH INFLOW Rs. Cr. 0 0 0 ….. 39 47 65 87 153 610
Total Land Cost Rs. Cr. (85) ….. (85)
Total TDR Cost Rs. Cr. ….. (22) (22)
Developer Non-refundable …..
Rs. Cr. 10 10
Deposit
Consultant Fees (Architect, …..
structural, plumbing & Rs. Cr. (1.1) (1.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (4)
electrical)
Sample Flats and Sales …..
Rs. Cr. (1) (1)
Gallery
Initial Advertising Expense Rs. Cr. (3) ….. (3)
Construction Cost Rs. Cr. 0 ….. (24) (24) (24) (24) (27) (214)
Basement Parking Cost Rs. Cr. 0 ….. (1) (1) (1) (1) (1) (10)
Marketing & Advertising …..
Rs. Cr. 0 (2) (1) (1) (1) (3) (18)
Expenses

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Overheads - Administration, …..
Rs. Cr. 0 (1) (1) (1) (1) (2) (13)
PMC etc
Consultant Fee Rs. Cr. (1.5) ….. (2)
PROJECT CASH OUTFLOW Rs. Cr. (76) (1) (1) (4) ….. (49) (27) (27) (28) (33) (361)
NET CASH FLOW Rs.Cr. (76) (1) (1) (4) ….. (10) 19 38 59 120 248
Project IRR (Annual,
% 53.0%
Pre Tax)

7.4 Cost and Collection Schedules

The timing of the cash inflows and outflows is very critical in projecting the returns for a
project. The sales schedule would differ from the actual collections schedule in reality.
Hence it is very important - to capture the construction schedule to determine the costs, to
maintain sales and collections schedule to check the cash inflows. The template provides an
easier way to capture the timing of the cash flows which also facilitates for any changes in
the project schedule as they can be accommodated easily.
Table 10: Construction and Collection Schedule (Cash Flow Template)

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

Cost of Construction - Rs.
(2400) (2400) (2400) …. (2520) (2520) (2582) (2582)
Apartments Psf
Cost of Construction - Rs.
(600) (600) (600) …. (630) (630) (646) (646)
Basement Psf
% Completion/CoC
% 2% 3% 5% …. 6% 6% 6% 8% 100.0%
Incurrence - FSI
% Completion/CoC
% …. 20% 20% 20% 20% 100.0%
Incurrence - TDR
Construction Area - FSI sq.ft 10,873 16,309 27,181 …. 32,618 32,618 32,618 43,490 543,629
Construction Area - TDR sq.ft 0 0 0 …. 61,974 61,974 61,974 61,974 309,868
Construction Area - Total sq.ft 10,873 16,309 27,181 …. 94,591 94,591 94,591 105,464 853,497

Sale Schedule -
Q0-3 Q4 Q5 Q6 …. Q14 Q15 Q16 Q17
Residential
Rs.
Sales Price - Apartments 5,800 6,028 6,028 …. 7,031 7,306 7,306 7,593
Psf
Sales - FSI % 15% 15.0% 10.0% …. 100.0%
Sales - TDR % …. 20% 20% 20% 20% 100.0%
Collection - FSI % 15% 10.0% 6.0% …. 6.0% 6.0% 7.0% 8.0% 100.0%
Collection - TDR % …. 20.0% 20.0% 20.0% 20.0% 100.0%
sq.
Saleable Area - FSI 81,544 81,544 54,363 …. 0 0 0 0 543,629
ft.
sq.
Saleable Area - TDR 0 0 0 …. 61,974 61,974 61,974 61,974 309,868
ft.
sq.
Saleable Area - Total 81,544 81,544 54,363 …. 61,974 61,974 61,974 61,974 853,497
ft.
Apartments Sold per
nos. 58 58 39 …. 44 44 44 44 610
quarter

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Using the cash flow forecasts from the above sections, an analyst can easily calculate the
project return taking into account most of the influencing factors like timing of the cash
flows, different costs and revenues, etc.,
This template can also be used to present the project specific data to any other investor,
third party interested in the project, banks etc., while looking for project finance.
As the template is cyclically referenced with different calculations, any small changes to the
construction schedule, sales or collections schedule, changes in cash inflows and outflows
are instantly reflected.
Further the template can be modified to capture the levered cash flows with minor changes
in case of a levered firm.

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8. References

 www.capitalline.com
 Annual reports of DLF Ltd
 Investment Valuation – Aswath Damodaran
 www.moneycontrol.com
 JLL real estate blog, analysts reports on Indian real estate.
 “ The valuation of Real Estate Serving as collateral for Securitised Instruments” ,
(2006), International Valuation white paper, July 1 2006, IVSC

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