Current Scenario Real Estate in India

Real Estate – Analysis and Recommendations

Dr. Shalini Kalra Sahi

Group – 2Heena Pahuja

Minerva KhajuriaMohit maheshwari

Pushp RajSamarpan JenaShashank Sinha

Real Estate - India

Covers residential housing, commercial offices, trading spaces such as theatres, hotels and restaurants, retail outlets, industrial buildings such as factories and government buildings.

Business involves transactions, such as purchase, sale, and development of land, residential and non-residential buildings.

Major players in the real estate market are the land owners, developers, builders, real estate agents, tenants, buyers etc.

In the past real estate was unorganized, fragmented and was dominated by high net worth regional players.

Consequent to the government’s policy to allow Foreign Direct Investment (FDI) in this sector, there was a boom in investment and developmental activities

One of the very important sectors for the overall growth of the economy. Major employment driver, being the second largest employer next only to agriculture. About 250 ancillary industries such as cement, steel, brick indirectly depend on real estate

which amplifies the importance of this sector.

Real Estate – India Contd…..

The Indian real estate industry has been on a roller coaster ride since 2005. The industry achieved new heights during 2007 and early 2008, characterized by a growth in

demand, substantial development and increased foreign investments. The industry in India faced the heat of the global crisis of 2008 in terms of a demand

slowdown and a severe liquidity crunch. Sector managed to emerge without too much distress due to the sound fundamentals of the

economy, some regulatory intervention and an overall better-protected financial regime.

Major Players - DLF

DLF is engaged in the development of residential, commercial and retail properties. The group primarily operates in India

The residential properties segment is engaged in the development of super luxury homes, luxury homes and premium homes.

The commercial properties segment is engaged in the development of commercial complexes including malls and shops in office complexes.

Also involved in the rental business, comprising the leasing of spaces in commercial offices, IT (information technology) parks, IT special economic zones (SEZs), retail malls and shopping centers.

DLF also conducts other businesses including hotels and life insurance.

Major Players – Oberoi Realty

Oberoi Realty Ltd is a Mumbai based real estate development company. The company's primary focus is to develop residential properties. They also develop office space, retail and hospitality projects.

Oberoi Realty is a zero debt company; a feature that no other company in the realty sector can boast of.

Oberoi has got a mix of saleable residential properties as well as malls and office properties which generate a steady cash flow. It also has invested in schools and hospitals. This model takes care of any fluctuation in real estate business to certain extent.

Major Players – Prestige Estate

The company is predominantly present in southern part of country in cities like Mysore, Hyderabad, Chennai, Kochi with major focus on Bengaluru.

Prestige has presence in various segments of real estate such as residential, commercial, hospitality. The major portion of cash flow for brigade comes from residential segment where it is present in all 3 sub segments namely affordable homes, middle income group and luxury segment.

Analysis - DLF

Cost of Equity

Beta

1 year daily return

1.78

3 years weekly return

1.99

Average 1.89

An Average Beta of 1.89 indicates that DLF has lot of systemic risk and is highly volatile. Hence this stock is not suitable for risk averse investors.

Cost of Equity 8.4 + 1.89*9.05 =25.49 %

Investors expect minimum return of 25.49 % on their investment in DLF’s stock which is high because of inherent systematic risk present in this stock.

Cost of Equity = Risk free rate + Beta * Market PremiumRisk free rate = 8.4 %Market Premium = 9.05 %

Cost of Debt & WACC

Year Cost of debt (%)2014 14.852013 12.132012 11.112011 7.882010 5.12Average 10.22

Post tax cost of debt = (1-tax rate) * Pre tax cost of debtTax rate for DLF =27.2 %

Post tax cost of debt (1 - .272) * 10.22 = 7.43 %

Market Capitalization = 157.5*1781.93 = 280653.975 mnValue of Debt = 165,830.31 mnE/V = 62.86 %, D/V = 37.14 %

WACC .62*25.49 +.37*7.43 = 18.78 %

Return on Equity

Year PAT (crores) Equity ROE (%)2014 526 16,643.54 3.17

2013 501 14,614.20

3.43

2012 1041 14,496.56

7.19

2011 1269 13,810.49

9.19

2010 765 12,830.01

5.96

Average

5.79 %

2014 2013 2012 2011 20100123456789

10

3.17 3.43

7.19

9.19

5.96

ROE (%)

ROE (%)

Average Return on Equity for last 5 years is way less than expected return from investors (cost of equity = 25.9%). Hence company is not doing very well in this regard. PAT is consistently going down year by year which is again a concern for company.

Capital Structure

Year Debt (mn) Debt/Equity Ratio2010 21676 1.13

2011 21,652.16 0.96

2012 20,222.91

0.87

2013 19,077.25

0.81

2014 16,583.31

0.67

From Year To Year Class Of Share

Authorized Capital

(Crores)

Issued Capital

(Crores)

Paid Up Shares (Nos)

Paid Up Face Value

Paid Up Capital

(Crores)

2013 2014Equity Share 499.5 357.83 1,781,451,307 2 356.29

2012 2013Equity Share 499.5 341.28 1,698,719,077 2 339.74

2011 2012Equity Share 499.5 341.25 1,698,385,719 2 339.68

2010 2011Equity Share 499.5 341.01 1,697,571,794 2 339.51

2009 2010Equity Share 499.5 341.01 1,697,390,890 2 339.48

Debt

Equity

Capital Structure – Analysis

Continuing their efforts of improving D/E ratio, company is financing its need by issuing new equities. Recently SEBI introduced a ban on DLF’s participation in capital market which will adversely affect their capital structure as they will have to rely on debt for financing their needs.

The capital structure of DLF can be understood by static trade off theory. Heavy debt resulted in high cost of financial distress resulting in overall low value of firm. Company is reducing the debt so as to increase the value of firm to maximum point as depicted in trade off theory.

Extra debt increases EPS when EBIT is above a threshold value. In case of DLF, EBIT is continuously decreasing year by year and hence it makes sense for them not to take any more debt.

Dividend Policy

Year DPS Dividend % (face value=2) Dividend Payout2014 2/share 100 64.35%2013 2/share 100 67.59%2012 2/share 100 32.54%2011 2/share 100 27.96%2010 2/share 100 46.53%

Dividend Policy– Analysis

DLF has maintained a consistent dividend percentage (100 %) even though profits have been consistently going down. In 2014, DLF retuned about 65 % of profit back to investors in form of dividends which signals lack of investment opportunities for them in near future.

DLF has not provided any bonus or right issues in last 5 years. As they are looking to improve debt to equity ratio, they can look at this option instead of providing cash dividend as payout ratio as high as 65% is not viable in long term.

Working Capital

2014 2013 2012 2011 2010Current Ratio

1.82 1.78 1.84 2.16 6.59

Receivable days

46.15 78.08 37.34 50.37 61.92

Inventory days

1299.40 1441.88 862.52 933.95 992.85

Payable days

305.87 404.77 170.33 110.32 83.08

Cash Conversion Cycle

1039.68 1115.19 729.53 874 971.69

2014 2013 2012 2011 20100

200

400

600

800

1000

1200

1039.681115.19

729.53

874971.69


Cash Conversion days

Working Capital - Analysis

Real Estate companies traditionally have high conversion cycle because of long gestation period of projects. Days payable for DLF is higher compared to its peers which signifies the power which DLF commands among it suppliers. Conversion cycle of nearly 3 years signifies the issue of liquidity crunch which most real estate players including DLF are facing today.

Analysis – Oberoi Realty

Cost of Equity

Beta

1 year daily return

1.12


1.08

Average 1.10

Cost of Equity 8.4 + 1.10*9.05 =18.38 %

Oberoi Realty has an average Beta of 1.1 which is lower than its peers. This indicates low systematic risk and volatility present in stock. Hence Oberoi Realty is suitable stock for risk averse investors.


Cost of Debt & WACC

Oberoi Realty is a zero debt company; a feature that no other company in the realty sector can boast of.

Value of Debt = 0E/V = 100.00% %, D/V = 0 %

WACC .1*18.38% = 18.38%

Return on Equity

Year PAT (crores) Equity ROE (%)2014 295 2,734.12 10.79

2013 327 2,506.38 13.05

2012 254 2,245.06 11.31

2011 170 2,061.10 8.25

2010 24.28 923.99 2.63

Average

9.21 %

Oberoi Realty has shown a consistent increasing trend in ROE but it is still less than required cost of equity(18.38%)

2014 2013 2012 2011 20100.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

10.79%

13.05%

11.31%

8.25%

2.63%

ROE(%)

ROE(%)

Capital Structure


Authorized Capital

(Crores)

Issued Capital

(Crores)


Paid Up Face Value

Paid Up Capital

(Crores)

2013 2014Equity Share 425 328.23 328233262 10 328.23

2012 2013Equity Share 425 328.23 328233262 10 328.23

2011 2012Equity Share 378.5 328.23 328233262 10 328.23

2010 2011Equity Share 378.5 328.23 328233262 10 328.23

2009 2010Equity Share

378.5 288.67 288671262 10 288.67

Oberoi realty is debt free for the last 5 years

Debt

Equity

Capital Structure – Analysis

Oberoi Realty seems to be following pecking order theory as company has not raised any debt or released any new equity share for last 4 years.

Management believes in using internally generated cash for its operations Consolidated balance sheet of Oberoi Realty for year 2014 shows total debt of 76 crores

after years of zero debt which shows that management is finally ready to raise funds through debt. The reason may be attributed to low CFO for last few years which forced company to raise debt.

Dividend Policy

Year DPS Dividend % (face value=10) Dividend Payout2014 Rs.2.0/share 20 22.25%

2013 Rs.2.0/share 20 20.08%

2012 Rs.2.0/share 20 25.85%

2011 Rs.1.0/share 10 19.31%

2010 Rs.0.2/share 2 23.55%

Dividend Policy– Analysis

Oberoi Realty has increased dividend from 2 to 20 percentage but has maintained a dividend payout of about 20 %. Oberoi Realty has not provided any bonus or right issues in last 5 years.

Working Capital

2014 2013 2012 2011 2010Current Ratio 2.61 2.14 2 4.06 1.89

Receivable days 27.68 19.73 22.35 16.8 84.12

Inventory days 429.05 303.88 314.6 224.79 1692.02

Payable days

61.99 18.33 50.55 33.92 413.72


394.74 305.28 286.4 207.67 1362.42

2014 2013 2012 2011 20100

200

400

600

800

1000

1200

1400

1600

394.74305.28 286.4

207.67

1362.42




Cash Conversion cycle is lower for Oberoi Realty compared to its peers. Inventory day is about a year which is very good as far as real estate is concerned. Company should look to improve payable days so as to further improve their conversion cycle.

Analysis – Prestige Estate

Cost of Equity

Beta

1 year daily return

1.13


1.47

Average 1.30

An Average Beta of 1.3 indicates that Prestige realty has some amount of systemic risk and is highly volatile. Hence this stock is suitable for investors with medium risk appetite.

Cost of Equity 8.4 + 1.30*9.05 =20.18 %

Investors expect minimum return of 20.18 % on their investment in Prestige’s stock which is high because of inherent systematic risk present in this stock.


Cost of Debt & WACC

Year Cost of debt (%)2014 8.16

2013 6.15

2012 6.77

2011 8.11

2010 10.81

Average 8.00

Post tax cost of debt = (1-tax rate) * Pre tax cost of debtTax rate for Prestige Estates =35.04 %

Post tax cost of debt (1 - .35) * 8.00 = 5.20 %

Market Capitalization = 262.7*375 = 98512.5 mnValue of Debt = 28054.9 mnE/V = 77.83 %, D/V = 22.17 %

WACC . .78*20.18 +.22*5.20 = 16.86 %

Return on Equity

Year PAT (crores) Equity ROE (%)2014 340.02 2,971.07 11.44

2013 276.07 2,708.40 10.19

2012 129.07 2,127.02 6.07

2011 203.54 2,043.69 9.96

2010 141.73 627.62 22.58

Average

12.05%ROE for Prestige Estates has been highly volatile ranging from 6 to 22 %. ROE is lower than cost of equity (20.18%)for 4 out of last 5 years clearly stating that Prestige has underperformed in recent times.

2014 2013 2012 2011 20100

5

10

15

20

25

11.4410.19

6.07

9.96

22.58

ROE (%)

ROE (%)

Capital Structure

Year Debt (mn) Debt/Equity Ratio2010 1,601.50 2.022011 1,517.53 0.52012 1,758.37 0.532013 2,420.02 0.562014 2,805.49 0.6


Authorized Capital

(Crores)

Issued Capital

(Crores)


Paid Up Face Value

Paid Up Capital

(Crores)

2013 2014Equity Share 400 350 350000000 10 350

2012 2013Equity Share 400 350 350000000 10 350

2011 2012Equity Share 400 328.07 328073770 10 328.07

2010 2011Equity Share 400 328.07 328073770 10 328.07

2009 2010Equity Share

400 262.5 262500000 10 262.5

Debt

Equity

Prestige has slowly increased the number of outstanding shares from 26.2 to 35 millions in period of 5 years.

Dividend Policy

Year DPS Dividend % (face value=10) Dividend Payout2014 Rs.1.5/share 15 15.44%

2013 Rs.1.2/share 12 15.21%

2012 Rs.1.2/share 12 30.50%

2011 Rs.1.2/share 12 19.34%

2010 No Dividend - 0.00%

Prestige Estates has not provided any bonus or right issues in last 5 years

Working Capital

2014 2013 2012 2011 2010Current Ratio 1.08 1.14 1.22 1.52 1.85Receivable days 129.06 192.67 451.11 185.28 124.63Inventory days 302.15 324.71 505.5 217.89 288.81Payable days 87.42 87.42 131.44 57.2 78.09Cash Conversion Cycle 343.79 429.96 825.17 345.97 335.35

2014 2013 2012 2011 20100

100

200

300

400

500

600

700

800

900

343.79429.96

825.17

345.97 335.35




Cash Conversion cycle is lower for Prestige Estates compared to its peers. Inventory day is less than a year which is very good as far as real estate is concerned. Company should look to improve payable days so as to further improve their conversion cycle.

Summary and Recommendations

DLF

DLF has been one of the worst performing stock in CNX realty sector in past 5 years which is clearly seen by consistently decreasing profit and ROE.

The reason can be attributed to both macroeconomic factors (unfavorable conditions for real estate in NCR region where DLF is primarily located) as well as systemic factors (management, political issues, court litigations).

Diversify to other parts of countries like Mumbai where real estate conditions are better Concentrate on bottom line and ROE.

Paying out 65 % of profit back to investors in form of dividend and then raising fund at high cost doesn’t make sense.

Company should look for other options such as bonus or right issue Government emphasis on REITS can prove to be a lifeline for DLF as they have large amount

of stable rental providing assets which can provide much needed liquidity to company

Summary

Recommendations

Oberoi Realty

Oberoi Realty has been an outperformer in realty sector. Favorable market conditions in Mumbai real estate sector, experienced management and

large land bank all contributed to outstanding performance of this stock. Company has maintained a constant dividend payout which is again a positive. Oberoi Realty is mainly concentrated in residential segment and hence may not be able to leverage REITS which is applicable only for commercial rental paying

assets as of now.

Diversify in commercial segment Company may need urgent funds as their land bank is at dangerously low level. Raise debt to fund the requirement.

Summary

Recommendations

Prestige Estates

Prestige Estates is primarily based out of Bangalore which has been the fastest growing city in last 10 years.

Prestige has a perfect mix of residential and commercial assets (malls, tech parks) and hence this model takes care of any major fluctuation in real estate business to a certain extent.

Rapid growth in Bangalore has invited various established players to Bangalore which has increased the price completion. Company should diversify to other parts in south India such as Chennai, Mangalore etc.

Summary

Recommendations

Thank You

Current Scenario Real Estate in India

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