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Indepth analysis of the fundamentals and valuation

DLF Limited

CRISIL Independent Equity Research Team

Senior Director S. Venkataraman Analytical Contacts Chetan Majithia Vishal Rampuria Sagar Parikh Nihag Shah Ravi Dodhia Sonali Salgaonkar Sudnya Goel Neeta Khilnani Sector Contacts Nagarajan Narasimhan Ajay D'Souza Manoj Mohta Sachin Mathur Sridhar C Sudhir Nair nnarasimhan@crisil.com adsouza@crisil.com mmohta@crisil.com smathur@crisil.com SridharC@crisil.com snair@crisil.com +91 (22) 6691 3536 +91 (22) 6691 3567 +91 (22) 6691 3554 +91 (22) 6691 3541 +91 (22) 6691 3546 +91 (22) 6691 3526 chetanmajithia@crisil.com vrampuria@crisil.com sparikh@crisil.com ndshah@crisil.com rdodhia@crisil.com ssalgaonkar@crisil.com sgoel@crisil.com nkhilnani@crisil.com +91 (22) 6644 4148 +91 (22) 6691 3525 +91 (22) 6691 3502 +91 (22) 6691 3533 +91 (22) 6691 3508 +91 (22) 6691 3597 +91 (22) 6644 1983 +91 (22) 6644 1882

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Independent Research Report DLF Ltd

Good Fundamentals but Downside valuation Industry: Real Estate Date: September 22, 2009

Land bank gives DLF a competitive edge

DLF has a pan-India presence with reported land resource of 425 million square feet (mn sq land bank will enable DLF to command a healthy margin even during cyclical downturn. DLF has development rights to around 92% of its land bank through subsidiaries, purchase agreements, sole development rights or memoranda of understanding for acquisition. ft) at an average cost of around Rs 445 per sq ft. as on March 31, 2009. The large, low-cost

CFV Matrix
5 Fundamental Grade 4 3 2 1 1 2 3 4 Valuation Grade 5

Higher ability to weather the risks and industry cyclicality

Though the ongoing slowdown in the sector will adversely affect DLFs earning and cash flows in the medium term, we believe that DLF is better placed as compared to its peers in the country to withstand tough times and weather the cyclical risks inherent to real estate industry, due to its low cost land bank and healthy financial profile

Key stock statistics

Fundamental Value (Rs per share) Current Market Price (Rs per share) Shares outstanding (Mn) Market cap (Rs Mn) Enterprise value (Rs Mn) 52 week range (Rs) (H/L) P/E on EPS estimate (FY10E) Beta Free float (%) 356 429 1,697 727,758 892,964 455/124 39.2 1.7 21.3

Residential sales volumes drops in FY09, slow recovery expected

We expect gradual recovery in residential sales bookings to be at 8.8 mn sq ft in FY10 and 11.6 mn sq ft in FY11, as compared with bookings of 6.3 mn sq ft in FY09. The recovery is expected is primarily due to our expectations of improvement in residential demand owing to improvement in affordability, steady economic growth and greater liquidity.

Sales and earnings to disappoint in the medium term

We expect DLFs top line to decline 34% (YoY) to Rs. 66 Bn in FY10, due to drop in sales volumes and average sales realisations. So far, the companys revenue growth was primarily driven by sales to DLF Assets Ltd (DAL), a promoter group controlled company, which contributed more than 40% to DLFs profit till FY09.

Share Price Movement*

250

Office revenues from DAL to dip sharply

In Q4FY09, revenue from DAL declined 83% YoY. No further revenue was recongnised on account of sale to DAL in Q1FY10. We expect slowdown in revenues from DAL to continue due to slowdown in demand for leased office space. Till date, DLF has recorded DALs sales of nearly Rs 102 Bn, out of which, 23% are in the receivables (Refer chart 3 on page 6).

200 150 100 50 -

We assign DLF 3/5 grade on Fundamental and 2/5 on Valuation

DLFs fundamental grade of 3/5 indicates that the fundamentals of the company are Good relative to other listed securities in India. The grading factors in strong management capabilities and DLFs leadership position in the industry. However, the grading is tempered by deteriorating financials prospect of the industry as well that of DLF in the prevailing cyclical downturn. The valuation grade of 2/5 indicates that the current market price of the stock has a Downside (Fundamental Value Rs 356) based on Sum of the Parts (SOTP) approach.

Aug-07

Jan-08

Jun-08 DLF

Nov-08 S&P CNX Nifty

Apr-09

Sep-09

- Indexed to 100

Shareholding as on June09
(per cent)
MFs, FIs, banks & insurance cos. 0.6

FIIs 15.4

Key Forecast
(Rs. Mn) FY07 FY08 FY09 Operating Income 26,374 144,375 100,354 Operating profit 14,897 97,151 55,900 Net profit 19,336 78,120 44,696 EPS-Rs 12.8 46.9 26.2 EPS growth (%) n.a. 267.8 (44.1) BV per share (Rs) 17 112 134 PE (x) 33.6 9.1 16.3 P/BV (x) 25.2 3.8 3.2 ROCE (%) 21.1 43.4 15.9 ROE (%) 54.4 67.2 20.4 EV/EBITDA (x) 26.2 8.5 14.9 Source: Company, CRISIL Equities Estimate FY10E 66,061 28,203 18,570 10.9 (58.3) 143 39.2 3.0 7.5 7.5 28.6 FY11E 79,293 34,539 24,325 14.3 31.0 155 29.9 2.8 10.3 9.3 23.8 FY12E 89,063 40,559 28,973 17.1 19.1 170 25.1 2.5 12.4 10.2 20.5

Non-Institutional 5.3 Indian promoters 78.7

Analytical Contact: Chetan Majithia (Head, Equities) Rajeev Choudhary Sagar Parikh Email : clientservicing@crisil.com 1 +91 22 66444148 +91 22 66913531 +91 22 66913502

Please refer CRISIL Disclaimer on the last page of the report

DLF Ltd

Fundamental Grading
DLFs fundamentals are Good relative to other listed securities in India

Grade: 3/5

We assign DLF a Fundamental Grade of 3/5. This grade indicates that the fundamentals of the company are Good relative to other listed securities in India. The fundamental grade factors in: Strong management capability leading to better market position and established track record in the real estate sector DLF as so far developed over 45 mn sq ft across residential, offices and retail segments and has sold plots of nearly 196 mn sq ft. The company is credited with the development of Indias largest private township, the 3,000 acres DLF City at Gurgaon. DLFs competitive edge due to its large low-cost land bank and superior business profile The company has a pan-India presence with reported land resource of 425 mn sq ft as on March 31, 2009 spread across 32 cities, at a total land cost of Rs 189 Bn. Based on this, the companys average cost of land resource works to around Rs 445 per sq ft. Cyclical downturn in the real estate sector, which is expected to have a significant impact on sales and pricing. We expect DLFs topline to decline 34% (YoY) to Rs. 66 Bn in FY10. We expect gradual recovery in sales due from the middle of FY11 on expectations of improvement in residential demand owing to improvement in affordability, steady economic growth and greater liquidity. Receivables from DLF Assets Ltd, a promoter group controlled company DLFs phenomenal revenue growth in the last two years (FY08 and FY09) was primarily driven by sales to DLF Assets Ltd (DAL), a promoter group controlled company, which contributes more than 40% to DLFs profit till FY09. Till date, DLF has recorded DALs sales of ~ Rs 102 Bn, out of which, 23% are still in the receivables Weakening financial ratios and negative earning growth - DLFs earnings are expected to decline 58% (YoY) to Rs 18.6 Bn in FY10, due to waning revenue and margins. CRISILs assessment of DLFs Corporate Governance: CRISIL Equities assesses the companys disclosure levels, based on balance sheet disclosures, web site information etc as average, which indicates scope for further strengthening. However, the company level of disclosure with respective to its financial performance, land resources and operations are better as compared with its domestic peers.

CRISIL Equities

DLF Ltd

Grading Rationale
Strong market position and established track record augurs well
DLF is the countrys only private developer to have developed a large integrated township, DLF City at Gurgaon

DLF has an established track record in real estate projects across segments. The company has so far developed over 45 mn sq ft across residential, offices and retail segments and has sold plots of nearly 196 mn sq ft; these figures are the highest for any private developer in India. The management has demonstrated a tradition of innovation in the India real estate market and is credited with the development of Indias largest private township, the 3,000 acres DLF City at Gurgaon. Further, DLF is strengthening its execution capability to support its plans; it has formed JVs with international players such as Laing O Rourke for construction and WSP for engineering and project management services. The company has a strong management team and we believe that it is likely to maintain its market leadership over the medium term, given its strong brand, presence across residential, retail and offices business and focus on scaling up its execution capabilities

Land resources give DLF a competitive edge

Pan-India presence with low-cost land bank augurs well for DLFs growth

DLF has a pan-India presence with reported land resource of 425 mn sq ft as on March 31, 2009 spread across 32 cities, at a total land cost of Rs 189 Bn. Based on this, the companys average cost of land resource works to around Rs 445 per sq ft. DLF has development rights to around 92% of its land bank through subsidiaries, purchase agreements, sole development rights or memoranda of understanding for acquisition. These contracts face certain completion and title risk but are within the normal acceptable standards of the real estate industry in India. More than 75% of its land resources are in NCR, Kolkata, Bengalaru and Chennai. The company has paid nearly 99% of its land resource.
Table 1: Details of Land Resource as of March 31, 2009
(In mn sq feet)
SuperMetros Metros 151 72 4 0 32 0 115 72 52 12 34 7 4 5 241 96 57% 23%

Tier-I 48 0 0 48 1 5 2 56 13%

Tier-II 19 0 0 19 2 9 2 32 8%

Total 290 4 32 254 67 55 13 425 100%

DLF has paid nearly 99% of its land resource as on March09

Residential Super Luxury Luxury Mid Income / Villas / Plots Office Retail Hospitality Total

Super Metros: Delhi Metropolitan Region & Mumbai Metros: Chennai, Bengalaru, Kolkata Tier I: Chandigarh, Pune, Goa, Cochin, Nagpur, Hyderabad, Coimbatore & Bhubneshwar Tier-II: Vadodra, Ghandhi Nagar, Ludhiana, Amritsar, Jalandhar, Sonipat, Panipat, Lucknow, Indore & Shimla Source: Company

Most of the DLFs land reserves are available in the form of large, contiguous plots of land. This would enable the company to develop townships similar to DLF city in NCR. We believe that the current size of owned reserves would be sufficient for DLFs planned developments over the next 10 years and the low cost of land will provide it with a competitive edge while protecting it against land price inflation.

CRISIL Equities

DLF Ltd

Exit from Bidadi and Dankuni townships positive for DLF

The company reduced its land bank from 751 msf in Q3FY09 to 425 mn square feet by exiting from Mega township projects, which primarily included Bidadi and Dankuni projects. The Bidadi and Dankuni projects comprises nearly 167 and 105 mn sq ft of land under Bidadi townships (Bengalaru) and Dankuni project (West Bengal), respectively. We view the exiting from Bidadi and Dankuni townships as positive development from the company as these projects were witnessing regulatory clearances issues in land acquisition due to political disturbances in the region. As per Red herring prospectus filed by DLF in June 2007, nearly half of its land reserves comprise agricultural land, for which it has not yet obtained a certificate for change of land use. DLF managements perceives this risk to be theoretical and expects to get the land free of encumbrances to title and obtain a certificate for change of land use, by paying requisite fees as and when the development need arises.

Higher ability than peers to weather the risks and cyclicality inherent to real estate industry
DLF is better placed as compared to its peers to withstand tough times and weather the risks and cyclicality that is inherent to real estate industry, due to its low cost land bank, healthy financial profile and low gearing as compared to other real estate players in the country. The real estate sector is cyclical, and is characterised by volatility in prices. Though the ongoing slowdown in the sector will adversely affect DLFs earning and cash flows in the medium term, we believe that the company superior business profile would, to an extent, help reduce the impact of cyclicality in the real estate market. DLF has a sound capital structure as compared to its peers, with a gearing of 0.7 times as on March 31, 2009.
Table 2: Peers comparison (FY09)
Companies Size (Rs. Mn) Operating Income Net worth Total assets NPM Key Ratios ROE ROCE Sales growth (YoY) PAT growth (YoY) Debt / Equity Source: Prowess, CRISIL Equities DLF 100,354 227,578 488,906 43% 20% 16% -30% -43% 0.7 Unitech 28,883 52,090 262,927 41% 27% 11% -30% -28% 2.0 Parsvnath Developers 6,984 20,027 49,730 16% 6% 5% -61% -73% 1.0 Sobha Developer 9,832 10,874 36,562 11% 11% 4% -32% -52% 1.8

CRISIL Equities

DLF Ltd

Focus on mid-income homes to lead to drop in margins

Development plan is tilted towards low-margin mid-income homes

In the current environment, we expect DLF to increasingly shift its focus to the lower-margin (nearly 34% in FY09) mid-income residential segments from the higher-margin (70%) super luxury and luxury categories. As detailed in the below table, DLF has planned more residential projects in the mid-income category of homes. This change in sales mix coupled with decline in realisations due to the cyclical downturn in the real estate sector would cause margins in residential business to fall to around 32% and stabilise thereafter.
Table 3: Development potential

Gross margin in residential segment to dip to ~ 26% in FY10E from ~ 50% in FY08

Residential Land Resource (mn sq ft) Super Luxury Luxury Mid Income / Villas / Plots Total Source: Company

Super Metros 4 32 115 151

Metros 72 72

Tier-I
48 48

Tier-II 19 19

Total
4 32

254 290

Chart 1: Sales and realization forecasts (residential)

18 16
Residential sales booked ( mn square feet)

Chart 2: Gross margin (residential)

60%

4,114

4,500 4,000 2,856 Avg realisation (Rs/sf) 3,058 3,500 3,000 1.1 2,500 2,000 10.9 10.1 1,500 1,000 500

14 12 10 8 6 4 2 FY08 Mid Income / Plots FY09 FY10E FY11E 8.9 6.0 8.3 1.1 2,472 0.5 0.3 2,601 0.7

50%

40%

30%

20%

10%

FY12E
0%

Super Luxury and Luxury

Avg realisation (Rs/sf)

FY08

FY09

FY10E

FY11E

FY12E

Source: Company, CRISIL Equities Estimate

Source: Company, CRISIL Equities Estimate

Residential sales volumes drops in FY09, slow recovery expected

DLF s residential sales volume decreased to 6.3 mn sq ft in FY09 as compared with 10 mn sq ft in FY08. During the real estate boom period in FY08 and in FY09, DLFs sales and delivery stood at mere 16.3 mn sq ft and 4.1 mn sq ft, respectively. Therefore, DLF is unlikely to launch more than about 45 mn sq ft over the next 3 years.
Residential sales volume to recover gradually after taking a sharp hit in FY09

We expect gradual recovery in residential sales bookings to be at 8.8 mn sq ft in FY10 and 11.6 mn sq ft in FY11, as compared with bookings of 6.3 mn sq ft in FY09. The recovery is expected is primarily due to our expectations of improvement in residential demand owing to improvement in affordability, steady economic growth and greater liquidity.

CRISIL Equities

DLF Ltd Table 4: Operating statistics (residential)

In mn sq feet Sales booked Delivery Launch FY08 10.0 2.0 5.4 FY09 6.3 2.1 4.1 FY10E 8.8 2.7 12.9 FY11E 11.6 3.7 16.9 FY12E 11.3 3.7 15.1

Source: Company, CRISIL Equities Estimate

Office revenues from DAL to dip sharply

DLF revenues to fall sharply in FY10 in the absence of DAL revenue

DLFs phenomenal revenue growth in the last two years (FY08 and FY09) was primarily driven by sales to DLF Assets Ltd (DAL), a promoter group company, which contributes more than 40% to DLFs profit till FY09. Much of DLFs booked office sales of 13.5 mn sq ft during FY08 to FY09 were on account of sale arrangement with DAL. Accounting for around 38-40% of the total revenues till FY09, DLFs dependence on DAL was significant.

Chart 3: DLF DAL arrangement

Promoter group
Owns 78.7% in DLF
Owns 100% in DAL

DAL - Source of funding

Option 1: Overseas REIT listing Status - Getting delayed due to current economic climate Option 2: Private Equity Investment Status - DE Shaw and Symphony Capital has already invested $1.1 billion in DAL . DAL is scouting for further private equity investors DAL Option 3: Lease Rental Discounting Status - DAL is expected to have 10 mn sq feet of pre leased offices spaces by end of FY09 and can pay some of DLF 's outstanding through LR discounting mode of financing Option 4: Infusion of funds by promoter in DAL Status - The promoter sold their 10% DLF stake for Rs. 38 Bn, of which Rs. 20 Bn was to be used to provide exit to DE Shaw from DAL and Rs. 18 Bn to be infused into DAL , which will in turn be used to pay

Sale of office spaces to DAL till date- Rs 102 Bn

DLF
Amount paid by DAL to DLF till date Rs. 79 Bn.

Amount outstanding to DLF Rs. 23 Bn.

Source: CRISIL Equities

In Q4FY09, sales to DAL to dip 83% YoY. No further revenue was recognised on account of sale to DAL in Q1FY10

However, in the fourth quarter of FY09, revenues from DAL declined by 83% y-o-y and the company has stated that DAL will reduce its purchase from DLF for several quarters due to the slowdown in demand for leased office space. No further revenue was recognised on account of sale to DAL in Q1FY10 Without DAL, DLFs top line and profit after tax (PAT) will be highly eroded. DLF has booked DALs sales of nearly 13.6 mn sq ft till March 31, 2009, at a capitalization rate of 9% (out of the total of nearly 19 mn sq ft, as per agreement with DAL) and delivered nearly 5.1 mn sq ft of pre- leased commercial property to DAL till March 31, 2009.

CRISIL Equities

DLF Ltd

Till date, DLF has recorded DALs sales of ~ Rs 102 Bn, out of which, 23% are still in the receivables. The much-awaited Singapore listing of DLF Office Trust, the real estate investment trust of DAL, has been delayed. So far, DAL has received funding from private equities of $1.05 Bn and is scouting for further investors through private equity or lease discounting route of its rental portfolio.
DAL paid Rs. 25 Bn to DLF in Q1FY10. We believe that the positive development on DAL funding front has ease DLFs liquidity concerns.

As per the recent news DE Shaw has expressed its interest to exit DAL. To provide an exit to DE Shaw and pay DLF, DLFs promoters has sold 10% stake in DLF (168 million shares) and realised nearly Rs. 40 Bn. Part of the sale proceeds was to be used to provide exit to DE Shaw from DAL ( ~Rs. 20 Bn ) and the balance (~ Rs. 20 Bn) to pay DLF. Moreover, if DE Shaw chose not to completely exit from DAL, this would enable DAL to clear more of its outstanding to DLF. Consequently, DAL paid Rs. 25 Bn to DLF in Q1FY10. Besides, DAL is expected to have 10 mn sq feet of pre-leased offices space by end of FY11 and can pay some of DLFs outstanding through lease rental discounting mode of financing. We believe that any positive developments on the DAL funding front will further ease DLFs liquidity concerns.
Table 5: DAL Sales
Office business - Sale to DAL FY08 144.3 53.5 19.4 FY09 100.4 40.0 48.6 FY10E 59.6 0.0 18.6 FY11E 71.4 0.0 8.6 FY12E 79.9 0.0 8.6

Without DAL, DLFs top line and profit after tax (PAT) will be highly eroded

DLF's total sales ( Rs. Bn) Sales to DAL (Rs Bn) DAL receivables (Rs Bn)

Source: Company, CRISIL Equities Estimate

Revenue mix from offices to tilt towards lease

During FY08-FY09, the company has booked lease of 5.8 mn sq ft and sales of 13.1 mn sq ft (primarily to DAL). Considering the deferral of the DAL projects, suspension of various projects announced by the company, and no expectations for any new orders from DAL, we expect the company to launch not more than 8 mn sq ft over the next three years.
Table 6: Operating statistics (office) DLF moving towards stable revenue base by expanding its lease portfolio
In mn sq feet Sales booked Lease booked Delivery FY08 8.7 4.7 5.6 FY09 4.8 1.1 5.0 FY10E 2.0 1.5 4.5 FY11E 2.0 2.0 3.0 FY12E 2.0 2.0 3.0

Source: Company, CRISIL Equities Estimate

We expect the companys lease portfolio in offices to increase gradually to 15 mn sq ft by FY12 from around 10 mn sq ft in FY09 in line with DLFs strategy to move from build and sell to a mix of sale and lease. Sale of offices is likely to decrease to around 2 mn sq ft per annum post the delivery of properties to DAL. The margins in office sales are expected to dip to 70% in FY10 from around 78% in FY08 due to a 15% assumed dip in average sale realisations in FY10.

CRISIL Equities

DLF Ltd

Chart 4: Lease - Revenue forecasts

65 18 15 12 9 6 9 3 FY08 FY09 FY10E FY11E FY12E 10 11 13 15 53 55 55 58

Chart 5: Office sales Revenue and volume forecasts

10 8,211 7,773 8,400 8,200 7,800 7,328 8.7 6,979 6,979 7,600 7,400 7,200 7,000 4.8 2.0 FY08 FY09 FY10E 2.0 FY11E 2.0 FY12E 6,800 6,600 6,400 6,200 8,000

Avg Lease Rental ( Rs/sf per month )

60.0 50.0 40.0 30.0 20.0 10.0 -

7 6 5 4 3 2 1 0

Lease portfolio (msf)

Avg. lease Rental ( Rs/sf per month)

Office Sales booked (msf)

Avg realisation (Rs/sf)

Source: Company, CRISIL Equities Estimate Note: Average lease rental reflects the average lease rental for fresh lease booked during the year

Source: Company, CRISIL Equities Estimate

Retail sales to dip due to cyclical downturn

During FY08-FY09, DLF booked lease of 0.9 mn sq ft and sales of 4.3 mn sq ft. We expect the company to launch not more than 6 mn sq ft over the next three years given the current cyclical downturn in retail.
Table 7: Operating statistics (retail)
In mn sq feet Sales booked Lease booked Delivery FY08 3.1 0.7 1.4 FY09 1.3 0.3 0.2 FY10E 1.6 0.4 1.9 FY11E 1.8 0.4 2.0 FY12E 1.9 0.4 2.0

Source: Company, CRISIL Equities Estimate

Going forward, we expect DLFs outright retail sale to decrease and margins to dip to about 60% in FY10 from 70% in FY08 due to a 15% assumed dip in FY10 average realization.
Chart 6: Retail sales - Revenue forecast
4 3 14,530 16,000 14,000

3 6,918 2 8,139 2 1 1.6 1 0 FY08 FY09 FY10E FY11E FY12E 1.3 3.1 6,918 7,264

10,000 8,000 6,000

1.8

1.9

4,000 2,000 -

Retail sales booked (msf)

Avg realisation (Rs/sf)

Source: Company, CRISIL Equities Estimate

CRISIL Equities

Avg realisation (Rs/sf)

Sales booked (msf)

12,000

Avg realisation (Rs/sf)

Lease portfolio (msf)

Sales booked (msf)

DLF Ltd

Financial Outlook
Sales volume and realisation to disappoint in the medium term
DLFs sales booking to decline, primarily due to reduction in volumes of office sales to DAL

We expect DLFs topline to decline 34% to Rs 66 Bn in FY10. This significant decline is mainly due to the anticipated drop in sales volumes and average sale realisations. We believe that the company experienced one of its best years in FY08, when its revenues rose by 447% YoY to Rs 144 Bn. This growth was driven by healthy sales realisations and bookings, mostly helped by sales to DAL. We have already seen revenue shrinking in the FY09 to Rs. 100 Bn in FY09, mainly due to declining sales to DAL. Sales volumes are expected to decline to nearly 12.4 mn sq ft in FY10, mainly due to decline in office sales volume to DAL. The companys average realization is expected to decline sharply due to change in the sales mix and the projected decline in property prices in FY10.
Chart 7: Revenue and sales booking trend
160 140 20 25

21.8

Revenue ( Rs. Bn)

12.4 100 80 60 100 40 20 0 FY08 FY09 Revenue FY10E 66 12.4 144

15.4

15.2 15

10 79 89 5

0 FY11E Sales booked (msf) FY12E

Source: Company, CRISIL Equities Estimate

Table 8: Sales volume forecasts

Sales booked (mn sq ft) Residential Retail Office Total
FY08 10.0 3.1 8.7 21.8

FY09
6.3 1.3 4.8 12.4

FY10E 8.8 1.6 2.0 12.4

FY11E 11.6 1.8 2.0 15.4

Sales booked (msf)

120

FY12E 11.3 1.9 2.0 15.2

Source: Company, CRISIL Equities Estimate

DLFs low cost land bank would enable the company to sustain healthy margins

Margins to decline but remain healthy even during cyclical downturn

We expect DLFs margins and earnings to drop because of the shift in sales mix towards low margin residential segment and decline in realisations due to the cyclical downturn in the sector. However, the company would be able to command a healthy margin even during the downturn due to its low-cost land bank (approximately Rs 445 per sq ft). We believe the company will be able to sustain its operating margins at around 45% in the medium term.

CRISIL Equities

DLF Ltd

Chart 8: Operating Margin

80 70 67 56 46

Operating Margin (%)

60 50 40 30 20 10 0 FY08

43

44

FY09

FY10E Operating margin

FY11E

FY12E

Source: CRISIL Equities Estimate

...but profitability is expected to dip significantly

DLFs earnings are expected to decline 58% (YoY) to Rs 18.6 Bn in FY10, due to waning revenue and margins. The earnings are very sensitive to changes in average realisation. We have assumed a fall of 15% in average realisation in FY10. The table below describe the sensitivity of our earning estimates to changes in realisation.
Table 9: Earning sensitivity to changes in realisation (FY10)
Assumed dip in realisation Net profit (Rs. Bn) EPS Source: CRISIL Equities Estimate -20% 16 9.6 -15% 19 10.9 -10% 23 13.7 -5% 28 16.4 0% 32 19.1

CRISIL Equities

10

DLF Ltd

Management and Corporate Governance

CRISILs fundamental grading methodology includes a broad assessment of corporate governance and management quality, apart from other key factors such as industry and business prospects, and financial performance. In this context, CRISIL Research analyses shareholding structure, board composition, typical board processes, disclosure standards and related-party transactions. Any qualifications by regulators or auditors also serve as useful inputs while assessing a companys corporate governance. Management DLFs management, led by Mr. K P Singh, Chairman and Mr. Rajiv Singh ( Vice chairman and son of Mr. KP Singh), bring to the table sound business and technical leadership, as well as long years of relevant experience.. The managements sound track record is reflected in the portfolio of projects executed by the management and the low cost land bank that the company has built up over the years. The management of DLF has been credited with the development of Gurgaon region. Corporate Governance The DLF board consists of 12 directors, of which 6 are non-executive independent directors. As the chairman of the DLF board is an executive director, by having 50 percent of the directors as independent directors, the company meets the regulatory requirement. CRISIL Equities assesses the companys disclosure levels, based on balance sheet disclosures, web site information etc as average, which leaves scope for further strengthening. However, the company level of disclosure with respective to its financial performance, land resources and operations are better as compared with its peers. The transaction related to DAL, a promoter group controlled company, can be a potential area of conflict.

CRISIL Equities

11

DLF Ltd

Valuation

Grade:2/5

We expect the company to post earnings per share (EPS) of Rs 10.9 and Rs 14.3 in FY10 and FY11, respectively. Based on the Sum of the Parts (SOTP) valuation we arrive at price objective of Rs 356 for the DLF stock. Consequently, we initiate coverage on DLF with a Valuation Grade of 2/5. This grade indicates that the current market price of the stock has a Downside to our fair value assessment based on Sum of the Parts (SOTP) approach. The key components to our valuation are: i) Discounted value of estimated free cash flow from the projects under construction from FY10 to FY12 ii) Lease portfolio as of FY12 (estimated at 19 mn sq ft) has been valued at 10% capitalisation basis. iii) The remaining land resources of 375 mn sq ft as of FY12 have been valued at Rs 1200 per sq ft which we believe is reasonable given some portion of agricultural land and the associated title risk. Our valuation is sensitive to changes in the land value and lease cap rate; the same has been explained in the table below.
Table 10: Valuation sensitivity to changes in land value and lease cap rate
Value / share Lease cap rate 8% 9% 10% 11% 12% Land value ( Rs/sf) 800 284 275 267 261 256 1,000 329 319 311 305 300 1,200 373 363 356 349 344 1,400 417 408 400 394 388 1,600 461 452 444 438 433

Valuation is sensitive to changes in land value

Source: CRISIL Equities Estimate

Table 11: Peers - Valuation Indicators

Companies
Market Cap.

Net Profit (Rs. Mn) FY09

44,696

EPS (Rs) FY09

26.2

Price/Earnings(x) FY11
14.3

Price/Book(x)

( Rs. Mn)
727,758

FY10
18,570

FY11
24,325

FY10
10.9

FY09
16.3

FY10
39.2

FY11 FY09 FY10 FY11

29.9 3.2 3.0 2.8

DLF (CRISIL Equities Estimates) Consensus Estimates DLF Unitech Ltd Parsvnath Developers Sobha Developers Source: Bloomberg

727,758 267,499 22,644

44,696 10,223 1,126 1,377

18,465 8,665 1,132 774

22,101 10,421 1,210 1,031

26.2 6.2 6.1 17.5

11.0 4.3 6.0 10.3

13.0 5.0 6.6 14.0

16.3 18.0 20.0 15.5

39.4 26.0 20.6 26.3

32.9 22.5 18.7 19.3

3.1 3.8 1.1 1.8

2.8 2.9 1.1 1.7

2.7 2.6 1.0 1.6

19,687

CRISIL Equities

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DLF Ltd

Company Overview
DLF, Indias largest real estate company in terms of revenues, earnings, market capitalization and developable area, has been in the real estate business since 1946. The company has developed some of the first residential colonies in Delhi such as Krishna Nagar in East Delhi, South Extension, Greater Kailash, Kailash Colony and Hauz Khas. Following the passing of the Delhi Development Act in 1957, the state assumed control of real estate development activities in Delhi, which resulted in restrictions on private real estate colony development. Subsequently, DLF acquired land at relatively low costs outside the area controlled by the DDA, particularly in Gurgaon, leading to the development of its landmark project - DLF City. DLF City is spread over 3,000 acres in Gurgaon and is an integrated township which includes residential and commercial properties in a modern city infrastructure, with schools, hospitals, hotels, shopping malls and a leading golf and country club. As on March 31, 2009, the company stated its land resource at 425 mn sq ft, with majority of its land at NCR, Kolkata, Bangalore and Chennai
DLF has demonstrated a tradition of innovation in the Indian real estate market and is credited with growth of Gurgaon

DLF is Indias largest real estate player in India in terms of its revenues, earnings, market capitalisation and developable area

DLFs primary business is development of residential, commercial and retail properties. Its operations span all aspects of real estate development, from the identification and acquisition of land, the planning, execution and marketing of projects, to the maintenance and management of completed developments. The companys line of business can be divided into three main lines - residential, offices and retail. In the residential business, DLF builds and sells a wide range of properties including plots, houses, duplexes and apartments. The current environment has led to a shift in the companys strategy from catering to the premium and luxury segment to building for the mid-income segment. In the office and retail businesses, the company sells or leases commercial space, with a focus on development of SEZ properties and leasing of shopping malls, which include multiplex cinemas. In the past, DLFs main focus was on the sale of commercial property, but it is now adopting a build and lease model. DLF is also venturing into other sectors related to real estate, like hotels, where it has entered into a joint venture with Hilton, a leading international hotel company, and with Bharat Hotels.

CRISIL Equities

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DLF Ltd

Business Overview
DLFs primary business can be divided into residential, offices and retail. The company has developed approximately 240 mn sq ft, inclusive of 196 mn sq ft of plots, and proposes to launch 425 mn sq ft over the next 15 years.
Chart 9: Business Overview

DLF (Primary Business)

Residential

Offices

Retail

Build and Sell - Higher dependance on market conditions (launch and pricing) - Asset light business model - Adopted percentage of completion method of accounting

Build and Lease - Ensure stable cash flows - Upfront capital requirement - Increase in Fixed assets and depreciation

High Margin segment - Offices: Sale of IT/ITES, IT SEZ office space - Retail: Sale of shoping centers, retail malls and stores - Residential: Super Luxury / Luxury apartments

Low Margin segment - Residential: Sale of homes in Mid Income category and Plots.

Offices - IT/ITES, IT SEZ and Non SEZ office space and building Retail - Luxury and Super luxury retail malls , shopping centers and stores

Source: CRISIL Equities

Table 12: DLF Development plans

Business line Plots Residential (Incl. Plots ) Office Retail Hospitality Total Source: Company 240 Completed development as on FY09 196 217 18 5 Development Potential as on March09

290 68 54 13 425

CRISIL Equities

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DLF Ltd

Residential business
The residential business accounts for ~ 68% of DLFs total land resources.

DLF ventured into residential business with the Krishna Nagar project located in Delhi, which was completed in 1949. Though majority of its residential projects are concentrated in Gurgaon, in the last couple of years, the company has expanded its footprints across India with projects in Kolkata, Chennai, Indore etc. To date, DLF has developed approximately 217 mn sq ft, comprising residential colonies and townships, including 196 mn sq ft of plots. As on March 31, 2009, the residential business accounted for 68% (290 mn sq ft) of DLFs total land resources, out of which 18 mn sq ft is under construction. The residential business is divided into three categories: super luxury, luxury, and mid-income, with margins being the highest in first category and lowest in the last. DLF plans its residential projects on creating new suburbs through large-scale developments, as well as developing luxury and super luxury accommodation on a relatively small scale at metros and super metros, such as Delhi, Mumbai, Chennai, Bangalore, and Kolkata. DLF had been focusing on the luxury and super luxury categories. But now the company has aggressive development plans (88% of its residential land resource) in the mid-income category.

Chart 10: Development potential ( by geography) : Residential

Tier-II 7%

Chart 11: Development potential ( by category) : Residential

Super Luxury 1%

Luxury 11%

Tier-I 17%

Super M etros 51% M et ros 25%

M id Income / Villas / Plot s 88%

Source: Company

Source: Company

Office business
Office business accounts for around 16% of DLFs total land reserves

DLF has developed 17 mn sq ft of office spaces till date, and follows an outright sale or lease model for its commercial and retail properties. Under the outright sale arrangement, the company develops the property and sells it to a single or multiple buyers; while under the lease model, the property is leased out to tenants, who pay lease rental per month. Normally, the lease agreements are for three years, with an escalation clause of 15% after every three years. DLFs office business development includes large IT/ITES facilities, including IT SEZ properties, multi-tenant corporate office buildings, built to suit properties and integrated commercial complexes. The company has dominant presence in NCR and has planned aggressive launches in metros and super metros.

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DLF Ltd

As on March 31, 2009 the office business accounted for 16% (67 mn sq ft) of DLFs total land resources; of which around 15 mn sq ft is under construction. The company suspended around 20 mn sq ft of its office projects towards the second half of FY09, due to lack of project financing and delay in projects for DAL
Chart 12: Development potential (by geography): Office
Tier-I 1% Tier-II 3%

M etros 18%

Super M etros 78%

Source: Company

Retail Business
Retail business accounts for ~ 13% of the DLFs total land resources

DLF established its retail business in 1940s and has completed the development of 5 mn sq ft of retail space, primarily in DLF city, Gurgaon. As in the case of offices, DLF has adopted a mix of sale and lease with plans to expand its lease portfolio. As on March 31, 2009, the retail business accounted for 13% (55 mn sq ft) of the companys total land resources, out of which 4.5 mn sq ft is under construction, catering to middle and high end segments. DLFs malls are characterised by high quality infrastructure as well as leisure and entertainment options such as multiplex cinemas, food courts and restaurants. The company ventured into the multiplex business in 1999 to realize the synergy with its mall development business through its subsidiary, DT Cinemas. DT Cinemas currently operates a total of six multiplex cinemas with 26 screens, at Gurgaon, New Delhi and Chandigarh DLF has entered into strategic tie-ups with renowned corporate houses such as Trent and Metro Cash & Carry to help them further expand. Through its subsidiary, DLF Brands, the company has also partnered with premium and luxury lifestyle brands such as Armani, Boogi etc to bring these brands to its malls in India. These ventures will help DLF earn premium lease rentals as well as share revenues with the tenants in some cases.

DLF Emporia, the first luxury mall in India, to house premium brands such as Armani, Dior, Louis Vuitton etc

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DLF Ltd Chart 13: Development potential (by geography): Retail

Tier-II 16%

Tier-I 9% M et ros 13%

Super M et ros 62%

Source: Company

DLF forming various alliances to diversify its product mix

New ventures are critical for diversification, but it is too early to factor in the benefits

DLF has entered into various alliances, to enhance its design and construction capabilities, and explore various opportunities in related businesses, such as infrastructure and SEZ development and hotels. The company is also foraying into new business areas in airport development and management and insurance and asset management. While the new ventures are critical for product and market diversification, we believe that it is too early to factor in the benefits. However, the company stands to benefit from these ventures in the long term.

Table 13: Major JVs and other arrangement made by DLF to diversify its product mix
Company Laing O' Rourke Plc ( A leading UK based construction company) Purpose and nature of agreement To engage in Infrastructure development and leverage on Laing O' Rourke construction expertise on various infrastructure projects Product/Technology Synergies The JV agreement enables DLF to cut down construction time of its projects and also explore business opportunities to participate in infrastructure projects such as roads, railway tracks, airport terminals, port etc. Plans to set up chain of hotels in India

Hilton , a leading hospitality company Prudential International Investments Corp Prudential Insurance Source: Company, CRISIL Equities

To set up chain of hotels and serviced apartments in India To establish an asset management joint venture company in India with a focus on Indian capital markets
To promote market and sell life Insurance products in India

Exploring new businesses

Special Economic Zone

Special Economic Zones (SEZ), a new business concept introduced in 2005, provides attractive incentives for both developers and tenants. It has received inprinciple approval for a multi-product SEZ in Ludhiana, covering 2,500 acres, and at Amritsar, covering 1,087 acres. DLF has also received approvals from the Haryana Investment Promotion Board for setting up two SEZs in Gurgaon and Ambala covering an area of 20,000 acres and 3,000 acres, respectively. Due to the global economic turmoil and cyclical downturn in real estate sector, developers are planning to delay their SEZ plans by either seeking de-notification of SEZs or looking for buyers for their projects. DLF has de-notified 5 IT/ITES SEZs and the plans for multi-product SEZs have been put on hold for the time being. Thus, we do not expect SEZs to yield any material benefits in the medium term.

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DLF Ltd

Hotels
DLF is also foraying into other real estate-related segments like hotels, where it has entered into joint ventures with Hilton and with Bharat Hotels. In 2007, DLF acquired a controlling stake in Singapore-based Aman Resorts, which owns and operates 22 luxury hotels in 12 countries. Aman Lodhi, a super luxury hotel in Delhi is already operational. Hilton Garden Inn, also located in Delhi, is scheduled to open in FY10. In light of the prevailing market conditions, DLF has announced suspension of the hotel projects due to unavailability of project finance.

Property management services

DLF provides management and maintenance servicessuch as power backup and distribution, water supply, infrastructure maintenance etcof its properties in residential, commercial, and retail business through its subsidiary, DLF Services. The company has outsourced most services to vendors experienced at them and who can meet international quality standards. The pricing in such maintenance service contracts are normally cost plus 1520%.

DLF Power
Through its subsidiary, DLF Power, the company operates five power plants in Eastern India. The captive power reserves would enable DLF to derive competitive advantage in the development of large townships and infrastructure projects.

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DLF Ltd

Industry outlook
Residential Real Estate
The Indian residential real estate market has seen good growth in the past few years, backed by a multitude of factors such as increasing nuclear families, rising disposable incomes, easy availability of finance, a favorable tax regime, and buoyant financial markets. However, the current scenario is far from optimistic and we believe that demand for houses has been adversely affected by the deteriorating affordability levels (as measured by the ratio of property cost to annual income).

Property values rose by 25-30% on an average annually, since 2005

From 2005 to 2008, average residential capital values in the 51 micro-markets studied by CRISIL Research have increased by 25-30% annually. Capital values registered an annual increase of 43-56% (2.7x) in the top 10 micro-markets, and 716% in the bottom 10 markets. The year 2007 was indeed a good year for developers, when residential capital values increased by an average of 25-30% across the analyzed 51 micro-markets. However, of the micro-markets studied, only Gurgaon Golf course/DLF City and Noida saw their values fall by 3% and 7%, respectively.

However, high capital values affecting the overall demand

doused affordability levels,

The considerable decline in affordability levels has decreased the demand for houses. Affordability, as measured by the ratio of property cost to annual income, worsened from 7.1 in 2005 to 9.3 in 2007. The deterioration is due to the sharp increase in residential capital values outpacing income growth, over the past few years. Further, affordability has been affected by the steep (500bps) rise in interest rates in the last three years. However, 2008 saw a significant drop in demand from investors. Further, the escalating residential capital values, and expectations of their imminent fall, have prompted investors to withdraw from reality markets across cities.

Outlook
Going forward, factorssuch as excess supply, lowered affordability levels and decelerating economy, in India as well as globallywill affect the slowdown in the residential real estate market. During 2008-2010, we expect the absorption of 614 mn sq ft, as against the total planned supply of 895 mn sq ft, indicating a 31% excess supply. However, the planned supply is unlikely to entirely materialize due to the credit crunch, shortage of skilled labor, and sluggish demand. We anticipate actual supply to be around 729 mn sq ft, creating a 16% excess supply. Further, over the next 12 months, CRISIL Research expects residential capital values across the 51 micro-markets to fall by an average of 10-15% from the current levels.
CRISIL Equities

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DLF Ltd Chart 14: Planned supply across cities: 2008-2010 (895 mn sq ft)
(per cent)
Kochi Kolkata 4 8

Chart 15: Absorption across cities: 2008-10 (614 mn sq ft)

(per cent) Chennai 7 NCR 30 Bengaluru 10

Mumbai 20

Pune 11 Hyderabad 9 Kolkata 8

Hyderabad 10 Pune 9 Bengaluru 10 Chennai 6 NCR 33

Mumbai 21

Kochi 4

Source: CRISIL Research Estimates

Source: CRISIL Research Estimates

Commercial Real Estate

The last few years have been encouraging for the commercial office space market in India. Demand from the IT/ITeS sectors has transformed Indias urban landscape. Currently, these sectors jointly account for 80% of all commercial office space. But consequently, the office space market across cities has been affected as these sectors have postponed their expansion plans due to the overall slowdown in domestic as well as global economy.

Lease rentals up 30% annually over the last three years

Lease rentals across cities have increased by 30% annually over the last three years. During 20052007, lease rentals registered 75% average annual increase in the top five micro-markets. Further, in this period, no micro-market saw stable or declining lease rentals.

However, excess supply during 2008-2010 likely to lead to 15% more decline in lease rentals
From 20082010, CRISIL Research expects an absorption of 196.6 mn sq ft across the eight cities, as against the planned supply of 704 mn sq ft, indicating an excess supply of 72%. Considering the credit crunch, shortage of skilled labor, and sluggish demand, likely to cause a delay in the planned supply, CRISIL Research forecasts actual supply of around 300 mn sq ft. Even then, there would be a 34% additional supply. CRISIL Research expects lease rentals to fall by 10-15% across cities from 20082010, due to the huge supply planned.

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DLF Ltd Table 13: Commercial real estate Movement of lease rentals: 2005 to 2007
Highest increase in lease rentals Regions as per CRISIL Research Delhi Gurgaon City Includes areas CAGR: 2005-07 94% 86%

Outlook on lease rentals: 2008-2010

Highest expected fall in lease rentals Regions as per CRISIL Research Gurgaon Navi Mumbai City Includes areas

NCR NCR

In and around Okhla Industrial Estate Gurgaon

NCR Mumbai

Gurgaon Airoli, Rabale, Electronicsadan, Panvel & Khargar Hi-tech city, Madhapur, Gachibowli OMR(R J Salai), GST Road, Sriperumbudur

Noida Central Mumbai

NCR Mumbai

Noida Elphinstone, lower parel & Prabhadevi Kakkanad, Kalamserry

81% 70%

Peripheral

Hyderabad

Peripheral Business Chennai District In and around Whitefield

Around Kakkanad

Kochi

41%

Bengaluru

KR Puram, Mahadevapura, Krishnarajapuram, Hudi, Old Madras Road Salt Lake

Salt Lake Source: CRISIL Research Estimates

Kolkata

Retail Real Estate

The organized retail market in India is expected to grow at a CAGR of 28% from Rs. 679 Bn in 20062007 to Rs.2,366 Bn by 20112012. A good opportunity, coupled with relatively low penetration (currently at nearly 5%), has prompted several domestic industrial houses as well as global majors to start retail operations in India. With the entry of numerous players, the demand for quality retail space has far outpaced the supplyleading to soaring real estate prices and thereby increased rentals. Lease rentals in metros have grown at a CAGR of 2050% across major India cities during 20052007. In certain areas of Mumbai, rentals have increased at a CAGR of 26% in the last two years.
Chart 16: NCR - Retail lease rentals
1,000 800 600 43% 400 200 Rajouri garden Gurgaon Noida Faridabad Connaught Place Ghaziabad Greater Noida 33% 27% 36% 20% 0% 40% 75% 56% 59% 60% 100% 80%

Chart 17: Mumbai - Retail lease rentals

600 500 CAGR (2005 - 2007) Rs. per sq feet pm. 400 300 200 100 0 Lower Parel Linking Road Lokhandwala Mulund Malad 25% 20% 21% 14% 7% 0% 24% 31% 29% 42% 35% 28% CAGR (2005 - 2007)

Source: CRISIL Research Estimates

Rs. per sq feet pm.

Source: CRISIL Research Estimates

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DLF Ltd

Chart 18: Bangalore - Retail lease rentals

400 350 Rs. per sq feet pm. 300 250 23% 200 150 100 50 0 Commercial St. Brigade Rd. M.G Rd. Jayanagar Malleshwaram Indiranagar 35% 38% 28% 22% 42% 49% 42% CAGR (2005 - 2007)

Chart 19: Kolkata - Retail lease rentals

360 49% 300 Rs. per sq feet pm. 240 180 18% 120 60 0 Camac Street EM Bypass Park Street Salt Lake Rajarhat 14% 20% 10% 0% 47% 40% YOY 2006-07 40% 30% 60% 50%

35% 28% 21% 14% 7% 0%

Source: CRISIL Research Estimates

Source: CRISIL Research Estimates

Note: Lease rentals shown above are applicable to vanilla retailers in malls. Anchor tenants, who tie up for large mall space, pay rentals 3040% lower than vanilla retailers. The figures considered above are for calendar years.

Rising mall rentals in the last two to three years have led to numerous developers entering into sector. Also, changes in the regulatory environment, such as allowing 100% FDI in construction and rising investments by private equity players in real estate companies and projects, are fuelling the increase in supply of mall space. From 20082010, CRISIL Research expects 48 mn sq ft added retail space in the four major metros, with 20 mn sq ft in Mumbai alone. The increased supply of mall space is expected to pull down retail rentals in most metros and Tier-I cities in the near future.
Chart 20: Upcoming mall space
50

40

20.0

mn sq ft.t

30 15.4 20 3.4 2.0 10.0 0 Upto 2007 (Existing) 2008-10 (Upcoming) 5.2 11.1

10

12.2

NCR

Kolkata

Bengalaru

Mumbai

Source: CRISIL Research Estimates

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DLF Ltd

Rentals to expected to further correct by 1015%

High rentals, currently charged in malls, are not sustainable in the short to medium term. Over the next two years, CRISIL Research expects rentals to fall by 1015% annually in major cities, driven by demand as well as supply factors: On the demand side, CRISIL Research believes that retailers will pay rentals based on the revenue-earning potential in each vertical. If current rentals persist, business compulsions will force existing retailers to exit from malls in some cases and halt their expansion plans. On the supply side, large supply of mall space (48 mn sq ft in Indias four major cities expected to come up in the next two to three years) would pressurize rentals. However, the liquidity crunch currently faced by the developers can pose significant execution risks and delay the project completion. In such a scenario, we believe that the fall in lease rentals would be 78% annually.

Retailers and mall developers may adopt rental model, based on revenue share
With large retail space coming up in large cities in India, and low profitability for retailers, CRISIL Research expects retailers and mall developers to shift to a rental model based on revenue share or a minimum guarantee (whichever is higher). This will ensure that retailers pay rentals based on the revenue they generate, while allowing the mall developers to participate in any potential upside a retailer may benefit due to the attractiveness of the location and cap the downside risk by ensuring minimum guarantee payments. Based on discussions with retailers and mall developers, in this model, we expect small store operators to have rentals of 8 10% of their operating income, while for anchor tenants it could be 56%.

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DLF Ltd

Annexure: Financials
Income Statement (Rs. Mn) Operating Income Operating profit Depreciation Interest Other Income PBT PAT FY07
26,374 14,897 578 3,076 14,159 25,402 19,336

FY08
144,375 97,151 901 3,100 2,464 95,614 78,120

FY09 100,354 55,900 2,390 5,548 3,960 51,922 44,696

FY10E
66,061 28,203 3,324 3,077 3,109 24,912 18,570

FY11E
79,293 34,539 3,471 1,545 3,109 32,632 24,325

FY12E
89,063 40,559 3,913 888 3,109 38,867 28,973

Balance Sheet (Rs. Mn) Equity (Including reserves) Preference Share Capital Debt Deferred Tax Liability/(Asset) Minority Interest Capital Employed Goodwill Net Fixed Assets Capital WIP Investments Loans and advances Inventory Working capital ( Excl. cash .advances and Inventory) Cash & Bank Balance Applications of Funds FY07
26,051 9,498 99,327 197 92 135,165 8,935 15,632 26,219 2,107 52,258 56,799

FY08
187,387 9,496 122,771 359 3,895 323,907 20,931 48,191

FY09
227,578 13,960 163,201 (414) 6,336 410,662 22,651 79,124 56,882 14,025 97,120 109,282 19,622 11,956 410,662

FY10E
242,465

FY11E
263,106 9,385 50,291

FY12E
288,395 9,385 20,291

9,385
90,291

(414)
6,450 348,177 22,651 72,973 55,592 14,025

(414)
6,599 328,968 22,651 78,152 58,003 14,025 67,120 96,416

(414)
6,777 324,435 22,651 83,261 60,681 14,025 67,120 89,423

51,840
9,102 73,686 94,544 4,192 21,421 323,907

67,120
103,497

(30,941)
4,155 135,165

(3,020)
15,340 348,177

(27,054)
19,654 328,968

(37,722)
24,996 324,435

Ratios FY07 Sales growth (%) Operating profit growth (%) EPS growth (%) Operating profit Margin (%) PAT Margin (%) Return on Capital Employed (RoCE) (%) Return on Equity (RoE) (%) Earnings Per Share (Rs) Book Value Per Share (Rs) Debt-Equity Current Ratio Interest Coverage Price to Earnings (x) Price to Book (x) EV/EBITDA (x) n.a. n.a. n.a. 56.5 47.7 21.1 54.4 12.8 17 2.8 2.8 4.7
33.6 25.2 26.2

FY08 447.4 552.1 267.8 67.3 53.2 43.4 67.2 46.9 112 0.6 3.7 31.0
9.1 3.8 8.5

FY09

FY10E (34.2) (49.5) (58.3) 42.7 26.8 7.5 7.5 10.9 143 0.4 3.4 8.1
39.2 3.0 28.6

FY11E 20.0 22.5 31.0 43.6 29.5 10.3 9.3 14.3 155 0.2 2.6 20.1
29.9 2.8 23.8

FY12E 12.3 17.4 19.1 45.5 31.4 12.4 10.2 17.1 170 0.1 2.3 41.3
25.1 2.5 20.5

(30.5) (42.5) (44.1) 55.7 42.8 15.9 20.4

26.2 134 0.7 4.0 9.6 16.3 3.2 14.9

Source: Company, CRISIL Equities Estimate Note: RoE and RoCE is calculated on average equity and capital employed respectively from FY08 onwards.

CRISIL Equities

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Explanation of CRISIL Fundamental and Valuation (CFV) matrix

The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade)

Fundamental Grade
CRISILs Fundamental Grade represents an overall assessment of the fundamentals of the company graded in relation to other listed equity securities in India. The grade facilitates easy comparison of fundamentals between companies, irrespective of the size or the industry they operate in. The grading factors in the following: Business Prospects: Business prospects factors in Industry prospects and companys future financial performance Management Evaluation : Factors such as track record of the management, strategy are taken into consideration Corporate Governance : Assessment of adequacy of corporate governance structure and disclosure norms The grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) CRISIL Fundamental Grade 5/5 4/5 3/5 2/5 1/5 Assessment Excellent fundamentals Superior fundamentals Good fundamentals Moderate fundamentals Poor fundamentals

Valuation Grade
CRISILs Valuation Grade represents an assessment of the potential value in the company stock for an equity investor over a 12 month period. The grade is assigned on a five-point scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from the CMP). CRISIL Valuation Grade 5/5 4/5 3/5 2/5 1/5 Assessment Strong upside (>25% from CMP) Upside (10-25% from CMP) Align (+-10% from CMP) Downside (negative 10-25% from CMP) Strong downside (<-25% from CMP)

Disclaimer:
This Company-sponsored Report (Report) is based on data publicly available or from sources considered reliable. CRISIL Ltd. (CRISIL) does not represent that it is accurate or complete and hence, it should not be relied upon as such. The data / Report is subject to change without any prior notice. Opinions expressed herein are our current opinions as on the date of this Report. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The subscriber / user assumes the entire risk of any use made of this data / Report. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information only of the authorized recipient in India only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person especially outside India or published or copied in whole or in part, for any purpose.

About CRISIL Limited

CRISIL is India's leading Ratings, Research, Risk and Policy Advisory Company

About CRISIL Research

CRISIL Research is India's largest independent, integrated research house. We leverage our unique, integrated research platform and capabilities spanning the entire economy-industry-company spectrum to deliver superior perspectives and insights to over 600 domestic and global clients, through a range of subscription products and customised solutions.

Mumbai
1061, Solitaire Corporate Park, Andheri-Ghatkopar Link Road, Andheri (East), Mumbai - 400 093 Phone: +91 (22) 6758 8000 Fax: +91 (22) 6758 8088

Bangalore
W-101, 1st floor, Sunrise Chambers, 22, Ulsoor Road, Bangalore - 560 042 Phone: +91 (80) 2558 0899/ 2559 4802 Fax: +91 (80) 2559 4801

Kolkata
Horizon, Block-B, 57, Chowringhee Road, Kolkata - 700 071 Phone: +91 (33) 2289 1949/ 2289 1950 Fax: + 91 (33) 2283 0597

Chennai
Thapar House, 43/ 44, Montieth Road, Egmore, Chennai 600 008 Phone: +91 (44) 2854 6205/ 06 Fax: +91 (44) 2854 7531

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