Analysis Report : DLF Ltd. (Estimated Price : Rs. 121.67 per share)

INTRODUCTION:

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 around 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.

Development Business:

The development business of DLF includes Homes and Commercial complexes. The development business at present has 247 msf of development potential.

Annuity Business:

The annuity business consists of rental businesses of offices and retail. The company has land resource of 48 msf for retail and office development.

DLF got a hit by economic slowdown, resulting into slipping of GDP growth from 9.7% in 2010 to 4.3% in 2013. This slowdown was largely attributed to the slowdown in policy initiatives during the recent parliamentary elections. Besides that, high interest regime, enforced to rein in inflation had an impact on slowing down of investments.

According to RBI and contingent upon the desired inflation outcome, real GDP growth is projected to pick up from a little below 5 per cent in 2013-14 to more sustained levels which will help in bringing more growth to the overall economy.

The newly formed government has given some signals of moving along development agenda that will push for reforms and are necessary to revitalize the economy.

The Company visualizes a pick-up in real estate demand beginning from the second half of FY’15.

THE INDIAN REAL ESTATE SECTOR:

The year 2013-14 proved to be a challenge for real estate sector due to poor macro economic conditions, slowing income growth, high cost of borrowing both for industry and consumers, inflation and slowdown in policy initiatives. But instead of this, the Indian real estate sector may benefit from the formation of stable government, positive market sentiments and growth prospects for all business.

According to the Economic Survey of India, 2012-13, the real estate sector contributed 5.9% of the India’s total GDP in 2011-12, registering a growth of 7.2% from the previous year, which clearly signifies the important contribution of the sector towards the economy.

BUSINESS AND FINANCIAL PERFORMANCE & OUTLOOK:

Strategy:

The company is now seeking to target certain key geographic markets and to achieve a suitable product and price combination in these markets. The company is also investing in the development of supporting urban infrastructure in certain select, strategic locations to ensure the high quality of developments. The company’s current strategy is aimed at developing its core business, rationalizing its costs and reducing its levels of indebtedness. The company continue to build on its core business of real estate development and leasing, and believes that it is well placed to reduce its indebtedness, execute its real estate development and leasing operations.

The key elements of its business strategy are as follows:

( a)    Focus on its core business of real estate development and leasing

The company intends to continue outsourcing most of its construction related activities as well as project management to high quality third party contractors and firms with an aim to improve execution timetables, to enable focus on the Company’s core activity of real estate development and embark on more complex and ambitious projects.

DLF has divided its real estate business in two parts:

·         DevCo, under which all residential projects fall.

·         RentCo, which is the rental business from office and retail projects.

b) Launch certain select residential and commercial projects

The company plans to focus on the development and launch of residential projects, certain commercial and shopping complexes in certain key Metro and Tier I locations.

(c)    Continue to focus on the growth of lease business

The company proposes to increase its leased commercial and retail portfolio properties in order to meet increased demand over the medium term. The company also believes that high quality infrastructure and convenient location will help it to differentiate from its competitors.

(  d)   Planned divestiture of selected non-core assets and businesses

The company plans to make select divestitures to fund any capital expenditure/operating shortfalls in the short term.  It realized proceeds of approximately Rs. 4,067 crores during FY’14 from the divestment of non-core assets and businesses.

The Company also raised Rs. 1,863 crores through the Institutional Placement Programme during the year, primarily to reduce the Promoters’ shareholding to 75% in compliance with extant guidelines.

(e) Reduce Debt

The company intends to finance any capital expenditure through selective divestures to maintain the net debt at the similar level in the medium term. As of 31^st March, 2014, the company’s net debt amounted to Rs. 18,526 crores.

(f) Rationalize Costs and Capital Expenditure

The Company will continue to incur capital expenditure for the completion of existing commercial projects. The company has also introduced an escalation clause in some of its development projects in order to mitigate the risks relating to commodity inflation and rising labour costs.

(g) Rationalize its Land Reserves and Increase Presence in Strategic Locations

The company seeks to concentrate on and expand its operations in certain key strategically important geographic markets and continue to focus on rationalizing portions of its land reserves that it does not consider having significant development potential. In order to achieve this, the company has acquired additional land parcels in Chandigarh Tri City and New Gurgaon during the last year.

(h) Continue to develop supporting infrastructure for its key developments

The company intends to develop supporting infrastructure in certain key strategically important markets and believes that this will benefit its customers and enhanced the quality of its leased portfolio properties resulting in higher lease income from such developments as well as an appreciation in value of the existing and future residential developments in the vicinity.

Challenges:

The company faces several challenges which includes uncertain economic, regulatory and taxation environment.

FINANCIALS:

The company also saw the decrease in its total liabilities. The total liabilities reduced by 4.33% in the past financial year in comparison to the year 2012-13, this decrease in total liabilities is mainly due to decrease in total long term borrowings. During year 2013-14, total assets of the company decreased by a very small percentage, i.e. 0.19%. The decrease in the assets is mainly due to the company’s decision of divestment to increase liquidity to invest in new projects and to pay the debts.

Summarised Balance Sheet for previous five years

(Rs. In croress)	2010	2011	2012	2013	2014
Share capital	6,259.34	2,149.78	2,138.88	2,138.94	2,155.49
Reserves and surplus	24,173.39	24,182.32	25,097.04	25,388.75	27,038.58
Total Equity	31,060.50	26,907.30	27,656.57	27,929.71	29,396.38
Long-term borrowings	19,301.59	18,307.63	16,824.16	15,541.53	13,579.29
Total long-term borrowings	21,928.14	20,780.85	19,194.47	17,847.10	15,849.13
Short-term borrowings	3,112.04	3,344.53	3,398.74	3,535.72	3,004.03
Short-term trade payables	1,524.93	2,263.63	2,580.70	2,698.14	2,280.98
Total current liabilities	8,777.13	13,129.56	16,538.40	18,849.96	19,256.84
Total Liabilities	30,705.27	33,910.41	35,732.87	36,697.06	35,105.97

(Rs. In croress)	2010	2011	2012	2013	2014
Total Net Block	16,558.86	17,873.19	18,714.05	18,286.53	17,637.83
Total Non Current Assets	21928.141	20780.845	19194.4671	17847.101	15849.132
Inventories	12,480.59	15,038.76	16,175.57	17,645.53	18,488.62
Trade Balance	1,618.96	1,565.97	1,765.91	1,653.25	1,561.23
Cash And Bank Balances	928.23	1,321.78	1,506.23	1,844.14	2,442.03
Total Current Assets	27305.763	28,243.65	29,459.24	31,532.04	34,422.95
Total Assets	61765.769	60817.7132	63389.4424	64626.769	64502.352

Annual Revenues from operations for the financial year 2013-14 is increased by 6.76% to Rs. 8298.04 crores. EBITDA margin is increase by .29%. It is Rs.3956.28 crores in comparison to Rs. 3944.94 crores during last year. Cost of revenues increased by 15.62% in the FY’14. The cost of revenues for the financial year 2013-14 is Rs. 3880.34 crores as compare to Rs. 3355.88 crores in the last year. The same kind of trend was witnessed in the general, selling and administrative expenses. The company’s general, selling and administrative expenses saw a growth of 13.51% from Rs. 1195.04 crores to Rs. 1356.51 crores. While the company’s establishment cost declined by 3.32% in the FY’14. The establishment cost for the year 2013-14 is Rs. 575.93 crores as compare to Rs. 595.71 crores for the financial year 2012-13. The company also saw decline in profit after tax due to high inflation rate, high cost of borrowing and policy paralysis due to the indecisiveness of bureaucrats. The profit for the year is Rs. 582.61 crores, a decline by 12.16% as compare to Rs. 663.29 crores during the last year.

Summarized P&L for previous five years

(Rs. In croress)	2010	2011	2012	2013	2014
Revenue from Operations (Net)	7422.87	9560.56	9629.37	7772.84	8298.04
EBITDA	3924.18	4416.42	4492.65	3944.94	3956.28
Finance cost	1110.04	1705.61	2246.48	2314.04	2463.25
Depreciation and Amortization	324.93	630.71	688.82	796.23	662.93
Profit before tax	2489.21	2080.1	1541.37	801.71	500.24
Current  tax expense	776.16	653.23	555.97	514.67	366.21
Profit for the year	1708.26	1638.02	1168.7	663.29	582.61

Debt to equity ratio during the financial year 2013-14 remains at .68. Return on capital employed improved to 7.3% this year as compare to 6.9% last year. The Days Inventory Outstanding (DIO) decreased from 1919.204 days to 1739.112 days during the financial year. The Days Sales Outstanding (DSO) also came down to 68.67 days as compare to 77.63 days in the last year. The Days Payable Outstanding (DPO) of company reduced by 78.9 days. Overall, Cash Conversion Cycle (CCC) decreased to 1593.22 days in the financial year 2013-14 from 1703.38 days in the previous year.

Ratio analysis for previous five years

	2010	2011	2012	2013	2014
Debt Equity Ratio	0.721612	0.80469454	0.7312152	0.6830451	0.6830451
RoCE	.068	.079	.081	.069	.073
Days Payable	215.7755	192.1477	237.42	293.461	214.5579
Days Receivable	79.60828	59.78521	66.9364	77.63403	68.67263
Days Inventory	1765.987	1276.564	1488.123	1919.204	1739.112

                                                                    

Using the Discounted Cash Flow method, the estimated price per share comes out to be Rs. 121.67. We assumed the annual growth rate of 15% for the period of 2015-17 and thereafter 20% for the next two years keeping in mind the current industry and company outlook. The current market share price of DLF Ltd. is         Rs. 146.40.

Projected Balance Sheet for next five years

(Rs. In croress)	2015	2016	2017	2018	2019
Share capital	2,155.49	2,155.49	2,155.49	2,155.49	2,155.49
Reserves and surplus	27,073.75	27,394.45	28,029.81	29,140.66	30,805.08
Total Equity	29,431.54	29,752.23	30,387.60	31,498.44	33,162.86
Long-term borrowings	13,595.53	13,743.67	14,037.17	14,550.31	15,319.16
Total long-term borrowings	15,817.01	15,965.15	16,258.65	16,771.79	17,540.65
Short-term borrowings	3,007.62	3,040.393	3,105.32	3,218.84	3,388.93
Short-term trade payables	2,623.13	3,016.59	3,469.08	4,162.90	4,995.48
Total current liabilities	19,602.58	20,028.82	20,546.24	21,353.57	22,356.24
Total Liabilities	35,419.59	35,993.97	36,804.88	38,125.36	39,896.88

(Rs. In croress)	2015	2016	2017	2018	2019
Total Net Block	16,674.60	15,915.35	15,156.09	14,396.84	13,637.59
Total Non Current Assets	21,889.58	21,130.33	20,371.08	19,611.82	18,852.57
Inventories	19,455.34	19,723.86	20,157.74	20,887.14	21,917.92
Trade Balance	1,795.41	2,064.72	2,374.43	2,849.32	3,419.18
Cash And Bank Balances	9,779.72	10,896.21	12,358.15	14,344.44	16,938.99
Total Current Assets	42,961.54	44,615.87	46,821.40	50,011.98	54,207.18
Total Assets	64,851.12	65,746.20	67,192.48	69,623.80	73,059.75

Projected P&L for next five years

(Rs. In croress)	2015	2016	2017	2018	2019
Revenue from Operations (Net)	9542.746	10974.28	12620.28	15144.34	19081.87
EBITDA	2858.049	3286.756	3779.77	4535.724	5442.869
Finance cost	2141.233	2143.794	2167.153	2213.433	2294.347
Depreciation and Amortization	759.252714	759.252714	759.25271	759.25271	759.2527
Profit before tax	-42.4369	383.7096	853.3636	1563.038	2389.268
Current  tax expense	-14.0042	126.6242	281.61	515.8024	788.4586
Profit for the year	-28.4327	257.0855	571.7536	1047.235	1600.81

PRICE PERFORMANCE INDEX:

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About the Author

This report has been authored by Suyasha Shah and Gagan Singhal. Both are pursuing MBA from Institute of Management, Nirma University, Ahmedabad, Gujarat, India.

Disclaimer

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment.

The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidelines only.