Dlf: working capital analysis


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  • Dlf: working capital analysis

    1. 1. COMPANY’S PROFILE • DLF (DELHI LEASE AND FINANCE LTD) is India's biggest real estate developer based in New Delhi • Founded by Raghuvendra Singh in 1946 • They develops residential colonies, apartments , offices and malls etc. • Shivaji Park, Rajouri Garden , South extension, Krishna Nagar are some of their projects which they had completed in their initial phase • They 1957,DLF diversified their business into batteries and cables due to passage of Delhi Development Act.
    2. 2. Contd.. • After ban in Delhi they shifted their epicenter and started acquiring land in Gurgaon on relatively low cost and came up with DLF City in 1970 • Even after 2008 crisis DLF managed its working capital by adopting strategies to maintain its liquid position. • DLF earned Super brand ranking due to its commitment to quality ,timely delivery with agility and financial prudence
    3. 3. WHAT IS WORKING CAPITAL • Working capital refers to the funds invested in Current assets , sundry debtors, inventories , cash and bank balance • It is the fund required to support day to day operations such as purchase of raw materials , payments of wages and defraying other expenses for operations • Working capital = Current assets – Current liabilities • It measures how much in liquid assets a company has available to build its business.
    4. 4. Contd… • Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. • The management of working capital involves managing inventories, accounts receivable and payable and cash. • An increase in working capital indicates that the business has either increased current assets (that is received cash, or other current assets) or has decreased current liabilities,
    5. 5. FACTORS AFFECTING WORKING CAPITAL REQUIREMENT Nature of Business Size of business Production policy Operating efficiency Credit policy Dividend policy Growth and expansion Abnormal factor –strikes, lockout, inflation Etc
    7. 7. WORKING CAPITAL CYCLE • Cash flows in cycle into, around and out of business and hence should generate operating profitability & emphasize on cash surplus to carry out operations • Efficient management of working capital will generate cash, improve profits and reduce risk • Two elements that absorb cash Inventories (stocks and work in progress) and Receivables(debtors owing you money) • Main sources of cash are Payable (creditors) and Equity and loans
    8. 8. WORKING CAPITAL MANAGEMENT • Decisions relating to working capital and short term financing are referred to as working capital management. Short term financial management concerned with decisions regarding to CA and CL. • Management of Working capital refers to management of CA as well as CL. • If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit. • These involve managing the relationship between a firm's short-term assets and its short-term liabilities.
    9. 9. The fundamental principles of working capital management Reducing the capital employed Debtors Management (recievables) to increase cash flow Short term financing-loans utilization, cash conversion cycle Creditors management (payables) Cash management
    10. 10. “A firmmust have adequateworkingcapital neitherexcessivenor inadequate andexcessive fundsmay leadto no profitfor firm” ADVANTAGES Goodwill Creditability Creates environment of security, confidence Maintains solvency and liquidity DIASADVANTGES Unnecessary accumulation of inventory Indicates defective credit policy Inefficiency Excessive W.C meant idle funds which may decrease return on investment
    11. 11. DLF’s INVESTMENT IN WORKING CAPITAL • DLF, the leader of the real estate industry in terms of revenue, earnings, market capitalisation and developable areas. • Company made its Initial Public Offering(IPO) fixed the IPO price at INR 525 per share July 2007. • DLF’s business model is mix of both development & rental earnings with multi-business and multi-segment within each business. • Business verticals are organised and operated in independent manner .
    12. 12. Contd.. • It had grown tremendously in terms of its revenues and net income • The revenues of the company has grown at a CAGR of 174% from INR 19,602 million in 2006 to INR 146,839 million in 2008 • Net income has grown from INR 4,094 million in 2006 to INR 78,120 million in 2008
    13. 13. Total Super Metros Metros Tier-1 Tier-2 Segment Office 164 64 70 26 5 Retail 92 33 36 14 9 Super Luxury 4 4 0 0 0 Luxury 41 33 6 1 0 Mid income 432 113 231 73 16 Hotel 18 4 2 10 2 Grand Total 751 251 345 123 32
    14. 14. Effect of Economic Slowdown… •Revenue declined by 28.96%(2009) •Net Profit margin decrease to 42.848% •Cost of generating revenue was 31.42% of revenue in 2009 •High interest rates increased the finance cost from INR 3,099 to INR 5,584 Million
    15. 15. DLF STRAGIES TO MAINTAIN W.C CYCLE • Timely delivery of pre-sold or leased projects • Developed and delivered 7 million sq.ft of area to its customer • Exited from long gestation projects like Bidadi • Differed 27 million sq.ft for office and retail development • Shifted the hotel development plans for next 15-18 months • Surrendered 4 out of SEZ’S • Started focusing on mid-income housing to generate cash flow from its operations • Gross margin on the project stood at 20% - 25% • Overall cost reduction 15%-20% benefited the customers
    16. 16. Contd.. • They tied good amount of capital in raw materials, work in progress and technology • Centralization of cash credit system and for working capital requirements estimation of expenses is made and budget is prepared on the basis of cash inflows and outflow • Tracking of receivables and payables to track money received as advance , dispatch of finished good and money recoverable • They also planned to raise INR 5500cr by sale of non core assets
    17. 17. ANALYSIS AND IMPACT OF STRATEGIES • In 2009, Short term borrowings decreased by 32.31% and long term borrowings increased by 50% amounting to INR 147,629m • Gross working capital increased to INR 316,224 million • Company attained enough liquid assets to meet short term obligations as a result they also extended more credit period to its suppliers • Inventory processing period reached 357 days whereas its 1,134 for sector and 822 days for Ansal • Total receivables (Drs) amounted to INR 96,291 billion with a conversion period of 160 days • DLF attained best cash conversion cycles in Sector
    18. 18. Ratios Analysis at Glance CURRENT RATIO: Ability to pay debt CURRENT ASSEST/CURRENT LIABILITY QUICK RATIO: using near cash or quick assets to retire liabilities Should be greater then 1 shows liquidity of firm = (CA-INVENTORY)/CL MAR 06 MAR 07 MAR 08 MAR 09 1.58 1.46 1.39 1.30 MAR 06 MAR 07 MAR 08 MAR 09 1.22 1.17 1.11 1.02
    19. 19. WORKING CAPITAL RATIO PARTICULARS MAR 07 MAR 08 MAR 09 WORKING CAPITAL TURNOVER RATIO= COGS/NET WORKING CAPITAL 2.14 2.14 2.80 INVENTORY TO WORKING CAPITAL=Inventory/Working Capital 0.62 1.52 0.91 Ratio of Current Assets toFixed Ratio=CurrentAssets/ Fixed Assets 16.24 16.90 14.01
    20. 20. • Working capital turnover ratio is fluctuating due to the fluctuating cost of capital& amount of net current assets. For the first two financial years the ratio remained constant as the proportion of increment of cost of capital & w/c is same as the previous year’07. The overallratio does not indicate any steady growth of w/c. • Inventory to working capital ratio has increased in 2008-09 due to the increase in cost of inventories. • Ratio of current assets to fixed assets is gradually decreasing. It is because of the increase of fixed assets. It indicates the strong fixed assets in the company balance sheet.