10/9/2012

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Report on Financial Analysis of UNITECH and DLF Company

Prepared byGroup No4

208 Abhinav Khanduja

209 Aayush Sharma

215 Nalini Katiyar

220 Mohit Rathi

236 Kriti Singh

261 Keshav

Submitted to:

Prof. Ashish Garg

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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.

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Index

S.N. Topic Page no.

1 Objective 5

2 Source of data 6

3 About the company 7

4 Risk and return analysis 10

5 Portfolio Risk and Return analysis 13

6 Covariance and analysis 15

7 Correlation analysis 16

8 Cost of Capital analysis 17

9 Net Working Capital Analysis 22

10 Leverage policy 25

11 Dividend policy 26

12 Valuation of company 29

13 Recommendations 30

14 References and Bibliography 31

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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).

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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.

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ABOUT COMPANY

UNITECH-

Established 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.

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DLF-

The 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

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Risk & Return Analysis-

Calculation 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:

Annualized Return=(1+Daily return )n−1where n is thenumber of the tradingdays .

The Risk is calculated by calculating the variance of the returns. The daily risk is then annualized using the same formula:

Annualized Risk=(1+Daily risk )n−1

Beta is calculated using the formula: Covariance of security and market / Variance of market

RESULTS-

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

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INTERPRETATION-

If 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.

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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- ¿ β2 X σ2market

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

UNITECH DLF0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

Unsystematic risk (daily) Systematic risk (daily)

INTERPRETATION-

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

UNITECH DLFSystematic risk (daily) 22.95% 18.76%Unsystematic risk (daily) 51.10% 23.59%

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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)

=σ2xW

2x +

σ 2y W2y +2 WxWy

σxσ

y Corxy

RESULTS-

RISK RETURN WEIGHTS PORTFOLIO RISK

PORTFOLIO RETURN

UNITECH 74.05 % -20.04 % .50 -10.02 %

DLF 42.35 % -04.58 % .50 -02.29 %TOTAL 29.15 % -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.

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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 = σ 2y – Cov xy /σ 2x + σ 2y -2 Cov xy

RESULTS-

RISK RETURN WEIGHTS PORTFOLIO RISK

PORTFOLIO RETURN

UNITECH 74.05 % -20.04 % .3635 -7.28 %DLF 42.35 % -04.58 % .6365 -2.92 %

TOTAL 27.00 % -10.20 %

INTERPRETATION-

It 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.

COVARIANCE ANALYSIS-

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Covariance of return of two assets measures their co-movements. It can be calculated by following formula.

Covxy =σx σy Corxy

RESULTS-

UNITECH DLF BSEUNITECH 1 0.0012 0.00054

DLF 0.0012 1 0.00049

BSE 0.00054 0.00049 1

INTERPRETATION-

Covariance 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.

CORRELATION ANALYSIS-

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Correlation 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.

RESULTS-

UNITECH DLF BSEUNITECH 1 0.66 0.63DLF 0.66 1 0.71BSE 0.63 0.71 1

INTERPRETATION-

Table 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

COST OF CAPITAL ANALYSIS-

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Also 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 Debt2) Calculation of Cost of Equity3) WACC (Weighted Average Cost of Capital) Method to calculate cost of

capital.

COST OF DEBT

Cost of debt is calculated using the following formula:

cost of debt (kd )=∫erest X(1−t)debt

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 - In Rs. Crores

UNITECH DLF

Interest 145.46 1705.62

Total debt 5850.74 23990.27

Tax rate 33.99 % 33.99 %

Kd 1.64 % 4.69 %

INTERPRETATION –

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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 company’s report specific rates were not given for loans of different terms.

COST OF EQUITY

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The Cost of Equity is calculated using the CAPM model (Capital Asset Pricing Model).

In this model the formula used is:

Cost of Equity ( ke)=RF +( RM−RF )∗β

Where Rf = Risk free rate (T. Bill rate as on)

Rm= Market Return β = Beta of the company

RESULTS-

INTERPRETATION-

Cost of equity of both the company’s 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.

Weighted Average Cost of Capital (WACC):

UNITECH DLFBeta 1.67 1.51Rf 7.30 7.30Rm 8.32 8.32Ke 9.00 8.84

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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.

RESULTS-

Cost of Capital using WACC of UNITECHAmount Weights Cost WACC

Equity 523.26 0.030 9.00 % 0.27 %Debt 5850.74 0.346 1.64 % 0.55 %Reserves 11060.36 0.634 9.00 % 5.71 %Total 6.53 %

Cost of Capital using WACC of DLFAmount Weight Cost WACC

Equity 339.51 0.007 8.84% 0.06%Debt 23,990.27 0.477 4.69% 2.24%Reserves 24,156.15 0.480 8.84% 4.25%Preference Shares 1810.26 0.036 0.00% 0.00%Total 6.54%

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UNITECH DLF0

1

2

3

4

5

6

7

Weighted Cost of reserveWeighted Cost of debtWeighted Cost of equity

INTERPRETATION-

On 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.

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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.

Results-

2010-11 2009-10 2008-09 2007-08 2006-07

UNITECH N.W.C.10,743.92

12,113.77

10,627.18 10,269.26 6,420.73

% Change in N.W.C. -11.31% 13.99% 3.49% 59.94%  

DLF N.W.C.20,333.60

18,277.13

23,841.63 19,348.45 8,207.45

% Change in N.W.C. 11.25% -23.34% 23.22% 135.74%  

2006-07 2007-08 2008-09 2009-10 2010-110.00

2,000.00

4,000.00

6,000.00

8,000.00

10,000.00

12,000.00

14,000.00

UNITECH

N.W.C.

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2006-07 2007-08 2008-09 2009-10 2010-110.00

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

30,000.00

DLF

N.W.C.

INTERPRETATION-

Table 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. Company’s 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 RBI’s 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

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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.

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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) = % change∈EBIT% change∈Sales

Financial Leverage (DLF) =% change∈EPS% change∈EBIT

Total Leverage (DCL) = % change∈EPS% change∈Sales = DOL* DLF

RESULTS - In Rs.Crores

UNITECH2010-11 2009-10 2008-09 2007-08 2006-07

EBIT 1,028.89 1,166.93 2,063.80 2,415.79 1,969.79SALES 3,187.09 2,836.36 2,848.79 4,114.85 3,288.95EPS 2.23 2.78 7.36 10.28 16.09

%Change in EBIT -11.83% -43.46% -14.57% 22.64%%Change in Sales 12.37% -0.44% -30.77% 25.11%%Change in EPS -19.78% -62.23% -28.40% -36.11%

DOL -0.96 99.60 0.47 0.90DLF 1.67 1.43 1.95 -1.59DCL -1.60 142.62 0.92 -1.44

DLF2010-11 2009-10 2008-09 2007-08 2006-07

EBIT 4,370.60 3,944.06 6,013.52 9,999.64 2,907.38SALES 9,627.28 7,459.08 10,047.27 14,498.27 2,613.73EPS 9.65 7.93 26.5 45.87 12.66

%Change in EBIT 10.81% -34.41% -39.86% 243.94% %Change in Sales 29.07% -25.76% -30.70% 454.70% %Change in EPS 21.69% -70.08% -42.23% 262.32%

DOL 0.37 1.34 1.30 0.54 DLF 2.01 2.04 1.06 1.08 DCL 0.75 2.72 1.38 0.58

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INTERPRETATIONS-

It 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.

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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 - In Rs. Crores

UNITECH

RETENTION RATIOPAYOUT RATIO

DLF

RETENTION RATIOPAYOUT RATIO

UNITECH DLFAnnual dividends paid 30.4 797.25Number of shares 261.63 169.76Dividend per share 0.116195 4.696336Book Value per share 44.27 144.3 Dividend Yield 0.002625 0.032546Earnings 583.4349 1638.184 Dividend Payout ratio 5.21% 48.67%Retention ratio 94.79% 51.33%

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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.

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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

Results- In Rs. Crore

UNITECH DLFNet Operating Profit 923.86 3,906.34Capitalization Rate 6.53% 6.54%

Total Firm Value as per NOI Approach 14144.15 59700.03Debt 5,850.74 23,990.27

Market Value of Equity 8,293.41 35,709.76No. of Shares in Issue 261.63 169.76

Intrinsic Value per Share 31.70 210.35Market Value as on 6 September 2012 18.5 192.95

Undervalued or Overvalued Undervalued UndervaluedINTERPRETATION-

Whether 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.

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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.

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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