Overview of Financial Report of Real Estate Companies(DLF and Unitech)

Real Estate
The size of the Construction industry was around 2.1 trillion in 2008. The Construction sector in India is the second largest economic activity after agriculture and provides employment to about 33 million people.The Real Estate segment contributes around 24% to the Construction GDP of India while Infrastructure segment 76%. Real Estate consists of Residential,Commercial and Special Economic Zones(SEZs)

Segments
1.Residential 2.Commercial/Retail 3.SEZ

1.Residential
Real estate construction industry in India is reviving itself from the global economic downturn of last year, and is showing signs of growth in future. The current size of real estate construction industry in India is estimated to be approximately US$15 billion. The industry is expected to witness an annual average growth rate of approximately 26 percent till 2014. It is constituted of the Residential, Commercial and real estate activities of Special Economic Zones. Growing urbanization is also a major demand driver for residential buildings. The main focus area of almost all real estate companies is the affordable housing, which controls more than 50 percent of residential sales in key residential areas such as Chennai, Gurgaon and Mumbai. It is not only the listed players, but also the unlisted players that have realized that affordable housing is the way to grow. The residential segment is again sub-divided into: a)Low cost : According to the Times of India, "a majority of Indians have per capita space equivalent to or less than a 10 feet x 10 feet room for their living, sleeping, cooking, washing and toilet needs.". The average is 103 sq ft per person in rural areas and 117 sq ft per person in urban areas.

44 percent of rural households have access to electricity. Although cities have better facilities than villages, except for the major metros no city in India provides full-day water supply. A 2007 study by the Asian Development Bank showed that in 20 cities the average duration of supply was only 4.3 hours per day. The longest duration of supply was 12 hours per day in Chandigarh, and the lowest was 0.3 hours per day in Rajkot. Some 400 million Indians do not have access to a proper toilet and the situation is even worse in slums across Indian cities. The national and state governments are running programs, some funded by the World Bank, to improve conditions. Bharat Nirman is targeting clean water; the Jawaharlal Nehru Urban Renewal Mission is building public toilets and sewage systems. The private sector including companies such as Tata, have started to enter the low-income residential projects. b)Middle class: India s middle-income group (popularly called middle-class) is about 25% of the total population base. Of this segment about 4% are extremely rich and about 10% have just graduated into the middle class and are feeling their way through the material world. In addition about 1% of the poor in the country are graduating into this middle-income group every year for the last ten years. This trend not only will continue but also will get accelerated. The forgoing is a remarkable achievement. By the year 2025 a significant proportion of poor would have moved out of dollar a day income (Western media concoction) into a decent life style. The nation has a pent-up demand for half a million homes in the mid-tier segment, where houses cost 2 million rupees ($44,000) to six million rupees each. That s likely to widen by up to 100,000 homes each year. c)High class: Realtors are now focusing on their luxury projects as upper middle class buyers in every part of the country are suddenly coming into part two of that phase again - that of increasing disposable incomes. To name a few, developers like Omaxe, DLF, Ashiana, Ansal API, Assotech, Unitech, CHD Developers and Gulshan Homz are launching or have already launched luxurious housing projects where a single unit costs between Rs 1 crore and Rs 7 crore. The price range of apartments varies from place to place; metros would cost the most, that is, above Rs 2.5 crore and luxury flats in tier II cities can start with Rs 1 crore and then move on towards greater heights. Luxury projects have become a style statement for the upper middle class segment and evidence for this is the stupendous response developers are receiving for their ultra-luxury projects. Also, as the job market has picked up, people have regained confidence to invest their money in luxury housing. According to studies done by Cushman & Wakefield, over 8,000 residential

units in the luxury segment are expected to be ready by 2013.The total supply expected this year will be 85,000 units of, which about 14 per cent will be luxury projects. For a buyer, luxury housing generally means branded, comfortable as well as safe housing, which is offered to him after a heavy investment; whereas the definition of luxury housing varies if one considers the other side - that of the developer. Every developer considers luxury to be something other than what his colleagues deem fit. Financial Times spoke to a cross section of developers about their take the concept of luxury housing. In reply, they made it clear that such projects are only meant for higher middle class and rich segments.

2.Commercial/Retail:
The rapid growth of the Indian economy has had a significant impact on the demand for commercial property to meet the needs of business, by way of offices, warehouses, hotels and retail shopping centres. Growth in commercial office space requirement is led by the burgeoning outsourcing and information technology (IT) industry and organised retail. Ranking India fifth in the retail sector from amongst 30-emerging global retail markets, Knight Frank, a global real estate consulting group predicts a 20% growth rate for the organised retail segment by financial year 2012, indicating the retail industry will witness over a Rs. 100-billion investment up to FY-10. Presently, 30-million sq. ft. of available mall space in India is expected to increase to 100-million sq. ft. by end of FY-10. Of the total mall space to be developed, around 75% is in cities like Mumbai, Pune, Bangalore, Hyderabad and NCR. The rest will be in Tier-II and Tier-III cities of Nagpur, Ahmedabad, Chandigarh and Ludhiana.

3.Special Economic Zones:

Special Economic Zones (SEZs) are being heavily encouraged by the government of India and they are expected to be the forefront of the growth in investments in Indian industry. India has over 1022 SEZ units currently under the structural formatting. It has more than 9 fully functional SEZs and over 7 Export Processing Zones (EPZs) which have been transformed into SEZs. Each entirely functional SEZs has a standard dimension of 200 acres and are spread in different parts of India. Hence, SEZs provide vast opportunities for real estate development.

UNITECH

Established in 1972, we are amongst India s leading builders, with an outstanding track record in large-scale, integrated real-estate development. Our strong engineering heritage allows us to successfully address the enormous potential of the infrastructure sector. We are India s most geographically diversified real estate developer with properties in Gurgaon, Noida, Bangalore, Chennai, Kolkata, Lucknow, Mysore, Mohali, Ambala, Rewari and Bhopal. Our land reserves of thousands of acres have some of the most premium apartments, luxury villas & wellplanned townships in Noida, Gurgaon, Kolkata, Bangalore and Chennai. Unitech luxury homes are crafted and designed especially for the aficionados of luxury. The Villas in Uniworld Resorts, Gurgaon is a stunning example of the same. Our residential developments span the entire value chain - from top-of-theline luxury apartments in Noida to premium residential apartments in Gurgaon to affordable apartments (Unihomes) in 2nd tier cities like Ambala, Rewari and Bhopal. Our strong foundation of design and engineering excellence allows us to be extremely flexible. From CEOs looking for villas in Gurgaon to families seeking to buy flats in Bangalore, Chennai, Mohali or Noida Expressway, we have successfully addressed the needs of our diverse audiences. Owning a Unitech property is a matter of great pride and with our plethora of luxury residential properties across India buying your dream home is just a step closer. Spread over sprawling acres of green some of our most premium apartments in Gurgaon are Crest View Apartments and Exquisite. We offer club class living on Noida Expressway in our well known ultra luxury golf township called Unitech Golf and Country Club. We have spread our footprint in fully integrated self sustainable townships, with Uniworld City in Chennai & Mohali. 4-5 bedroom luxury villas in Palace Court, Mysore have taken luxury to new heights. Our latest launch, Uniworld Resorts consists of 3 & 4 bedroom plush luxury apartments (duplex & simplex) in the heart of Electronic City, Bangalore.

With a wide range of ready to move in apartments, independent villas, penthouses and luxury apartments, now buy homes which suit your budget and taste. At Unitech, our hallmark is distinctive and sustainable integrated developments that create vibrant communities and offer a new way of living and working. The trust bestowed on us by our valued customers makes us the 1 of the best real estate developers in India.

OBJECTIVES
1. Short term lending 2. Long term lending 3. Short term investment 4. Long term investment 5. Strategic point of view y Short term operations y Long term operations y Short term financials y Long term financials

SHORT TERM LENDING

DLF and Unitech are two of the biggest real estate firms of the country with a pan India presence. However owing to the slow growth of the economy and higher costs of borrowing, all the developers have witnessed a drop in sales. Therefore to meet the short term cash flow needs to meet operating expenses the two companies have approached for a short term loan. In spite of the fact that DLF has a higher current ratio as compared to Unitech developers, DLF has clearly shown a better utilization of its current assets. The inventory turnover is higher in case of DLF, which shows that DLF has been able to sell its inventory better. Similarly DLF has a better Receivable turnover ratio which shows that a greater part of its revenues are coming via direct sales as compared to lending. This has significantly reduced the risk of uncertainty in future earnings as receivables do not form a major part of the sales. DLF has had to sell a part of its land bank in Gurgaon, to generate cash flows to meet the interest payments in both the last 2 quarters. This proves that DLF has very high debt burden on its Balance Sheet. However DLF has a higher EBITDA per share as compared to Unitech which again manifests the belief that it has better sales prospects. DLF also has higher land bank across the country. Therefore from a short term lending perspective DLF seems to be a safer investment.

Basic EPS

The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability. Calculated as:

When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period. Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number.

Net profit ratio

Recievable Turnover ratio

An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets. Formula:

Some companies' reports will only show sales - this can affect the ratio depending on the size of cash sale

LONG TERM LENDING

The developers need a long term loan to meet long term obligations which may range from expansion of operations to development on existing land banks. In this case both the companies have very high debt burdens on their balance sheets. So as a lender we must try to examine all the relevant aspects of DLF s and Unitech s business before we take any lending decision. The present macroeconomic scenario calls for credit tightening, which means that the borrowers would be charged higher interest rates. Therefore we must analyze the interest serving capability of the borrowers. DLF has a very high debt to equity ratio which is precisely greater than 1. Moreover Long term debt forms a large chunk of debt burden on the company. The debt burden has only grown over the last few years. Interest coverage ratio has dropped significantly over 2009. Asset turnover has fluctuated over the last 3 years. All this combined with persistently high inflation resulting into higher costs of borrowing do not give a rosy picture for the sales prospects of the company. Off late the company has also earned a bad name in the market as it has not been able to deliver some of its key projects on time and eventually been fined by CCI. These developments do hurt market sentiments and eventually impact sales. Unitech has better long term prospects as compared to DLF. The debt burden is significantly lesser than that of DLF and company also has healthier interest coverage ratio. The asset turnover adds to the confidence that the company is efficiently utilizing the resources. However Unitech also has suffered a lot in terms of market reputation in the last one year, owing to its alleged involvement in 2G spectrum scam. As a result the stock price of the company has also taken a beating. All in all, financials suggest that Unitech is a safer investment in the long run. However while lending, the covenants should be stringent as the credibility of Unitech management has been put to test in the last one year.

Fixed assets turnover ratio

A financial ratio of net sales to fixed assets. The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues. The fixed-asset turnover ratio is calculated as:

Interest Coverage Ratio

A ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) of one period by the company's interest expenses of the same period:

SHORT TERM INVESTMENT

As a prospective investor, one should see the short term risk involved in investing in a company. This can be recognized by analysing various ratios such as Operating Profit ratio. The operating profit margin ratio indicates how much profit a company makes after paying for variable costs of production such as wages, raw materials, etc. Phrased more simply, it is the return achieved from standard operations and does not include unique or one time transactions. Thus, DLF has maintained high operating profit ratio in its past five years and hence it is pretty efficient in making profits. While Unitech also is maintaining a high operating margin its operating profit ratio is decreasing. But in the short run investors can expect good returns. Return on Equity The ROE is useful for comparing the profitability of a company to that of other firms in the same industry. It measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. Hence, DLF s RoE had been reducing in the past 5 years but it has regained stability and with a current RoE of 9.19 it seems fairly attractive for short-term investing. While Unitech s RoE has drastically reduced from 84 to 5.5 in recent years. Thus we can see a rise in money invested by shareholders and hence investing in its shares would yield lower returns. Basic EPS Earnings per share is generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the price-to-earnings valuation ratio. So, DLF s EPS has increased to 7.48 signifying that it is generating enough profits to be appropriated for payments of dividends and hence lucrative for investing in its shares. Unitech s EPS has drastically reduced from from 12.2 to 1.95 in recent years. Net Profit Ratio Both DLF and UNITECH have high net profit margins and therefore investors can be rest assured that the companies are fairly efficient in handling their financial charges and expenses and ensuring that enough profits are being generated which can attributed towards paying dividends or increasing the market price of their share.

Operating Profit Ratio

A ratio that shows the efficiency of a company's management by comparing operating expense to net sales. Calculated as:

The smaller the ratio, the greater the organization's ability to generate profit if revenues decrease. When using this ratio, however, investors should be aware that it doesn't take debt repayment or expansion into account.

Return on Equity

The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. ROE is expressed as a percentage and calculated as: Return on Equity = Net Income/Shareholder's Equity Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to preferred stock.) Shareholder's equity does not include preferred shares. Also known as "return on net worth" (RONW)

BASIC EPS

NET PROFIT RATIO

A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings. Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentage; a 20% profit margin, for example, means the company has a net income of $0.20 for each dollar of sales.

LONG TERM INVESTMENT

Is it safe to invest in such a volatile sector?

In long term investment a layman or an investor would seek and analyze the risk in return involved in investing in such companies considering various ratios such as Debt equity ratio A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets. Thus the risk involved in investing in both DLF and Unitech is fairly low because cost of procuring equity is comparatively cheaper and convenient to both the companies than the cost of procuring debt. Which means that investors would perceive lower risk as the companies are leveraging its sources of funds more towards equity than to debt. Interest Coverage ratio A ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) of one period by the company's interest expenses of the same period. Thus both DLF and Unitech are earning enough to make timely payments for the debts, but Unitech is comparatively in a better off position. Return On Equity The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. Return on Assets An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment". In such a capital intensive industry one can expect low returns to equity or assets because of the high capital investment and less competition. But DLF and Unitech have maintained high returns to these variables, but it would be safer to invest in DLF since its returns have been steadily increasing while Unitech s have been steadily decreasing.

Dividend Payout Ratio The payout ratio provides an idea of how well earnings support the dividend payments. More mature companies tend to have a higher payout ratio. If the

investors are seeking dividend to the investment then investing in DLF would be a standout option as it is consistently high currently being 26.74, while Unitech s DPR is languishing at 5.96

Debt Equity Ratio

A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.

Note: Sometimes only interest-bearing, long-term debt is used instead of total liabilities in the calculation. Also known as the Personal Debt/Equity Ratio, this ratio can be applied to personal financial statements as well as corporate ones.

Interest Coverage Ratio

Return on Assets
A measure of financial performance calculated as:

Fixed assets are tangible property used in production, such as real estate and machinery. Net working capital is calculated by taking the company s current assets minus its current liabilities. The higher the return, the better the profit performance for the company. Individually, no single calculation tells the whole story of a company s performance, and Return On Net Assets is just one of many ratios that can be used to evaluate a company s financial health.

Return on Equity

STRATEGIC POINT OF VIEW

Strategy is generally made either for long term or for short term. Similarly for both short term and long term we make strategy for finance or for operations. Thus there are four sub objectives while making strategy for any company: Short term operations Short term financials Long term operations Long term financials

Following ratios are analysed to provide strategic point of view for any company: y y y y y y y y y Fixed Assets Turn Over Ratio Inventory Turn Over Ratio Recievable Turn Over Ratio Cash From Operations Debt Equity Ratio Debt Equity Networth Interest Coverage Ratio Short term solvency ratio Interest Coverage Ratio

Apart from the above ratios, amount taken from the creditors is also checked to find out the amount that the company owes to them. From the ratio analysis it has been observed that DLF has lower fixed asset ratio as compared to Unitech which is a plus point for long term operations. DLF receivable turnover ratio is higher than that of Unitech & hence it has manageable receivables. Also creditors are comparatively lower which means that DLF is better off in short term operations than Unitech. Ratio analysis for Unitech tells us that it has higher fixed asset ratio than DLF which is a negative point for long term operations & hence it need to invest more in fixed assets to stabilise long term operations.

Receivable turnover ratio for Unitech is lower than DLF & its creditors are high which means it needs to lower its loans & needs to collect the amount given out as loans to improve situation in short term operations.

REFERENCES
1. www.moneycontrol.com 2. www.economictimes.com

3. www.dlf.com 4. www.unitech.com