Divisors@multiples.

com

Multiples: Valuing ILF Real Estate Private Ltd

Inherent Strengths of the business model:
Benefits of the Deal structure:

For a project valued at `900 million, the cost of the land bank is `750 million.
This makes the project particularly attractive as this high collateral value
reduces the default risks, thereby reducing cost of capital.

The IRR of the project based accounting for the dividend payments and equity
buy backs is 21%. The realization multiple of the project is 2.95 for the Private
Equity Investor. Both multiples look strong given the context of the project.

Idiosyncratic Benefits:

Project location is unique and there is no contiguous plot of land in close

proximity of the city. Competition gets limited to a few players and thus the
planned 7% increase in selling price can be sustained.

High promoter equity (37.5%) adds credibility to the sustenance of the project,
in terms of the commitment of the promoter to the project.

Risks Involved
Internal accruals & its implications

20 20 20 20 20 20 20 20
10 11 12 13 14 15 16 17
72 31 35 62 93 24 15 21
Total Outflow 5 9 2 3 2 30 79 61
Inflows from 11 46 93 18 26 23 18
sales of units 42 3 0 8 35 39 93 49

Construction activities are almost entirely funded by cash inflows from advance
sales. Sales over the 7 years are sensitive to market conditions and will influence
the working capital management. Current valuation assumes a 400% y-o-y
increase in sales for 2012, whereas the y-o-y increase is only 40-60% in other
years.

External Risks

Regulatory risks in terms of building plan approvals, layout approvals, and NOC
can delay construction in the tightly knit construction plan. Additionally there
could be selling pressures created by delays in the upcoming amenities in the
surrounding ecosystem.

Reasonability of Assumptions in the existing Valuation

Construction Cost assumptions: The project assumes construction costs to rise at an
effective annual rate of 9.2% (5% increase in the construction material costs and 4%
in cost-overruns), which is quite reasonable if not cautious.
 Divisors@multiples.com

Given the size of the project, 40 lakh sq.ft, at least 2.5% of the Super-Built-Up
area should be developed into commercial space to generate an additional
revenue stream. Considering a selling price of INR 3000/sq.ft . For the
commercial space, we can expect additional revenues of about INR 50 million.

 Working Capital management is a potential issue given the assumptions about

the absorption rates. Might need lead to short-term borrowings at a higher cost
of capital to fulfill obligations. A better model would probably be to stagger the
construction over a 4-year period, with 25% completion target every year. This
would reduce the dependence on cash flow from sales.

Sensitivity Analysis: Cash Available to Equity Holders

(Change from base case as per the model)

Selling Price
(20.0%) (10.0%) 0.0% 10.0% 20.0%
CostConstruction

(20.0%) 3,198.5 3,815.2 4,431.9 5,048.6 5,665.3

(10.0%) 2,973.3 3,590.0 4,206.7 4,823.4 5,440.0
0.0% 2,748.0 3,364.7 3,981.4 4,598.1 5,214.8
10.0% 2,522.8 3,139.5 3,756.2 4,372.8 4,989.5
20.0% 2,297.5 2,914.2 3,530.9 4,147.6 4,764.3

Other Considerations

Price Checks Vicinity Development Opportunity Costs Developer Reputation

Verify the authenticity of
the land price, by looking at
data for the last registered
land deal in the vicinity of
the project from the
Registrar. The selling price
should be evaluated with
those of comparable
existing projects nearby.
Due considerations should This deal should be The developer’s credibility
be given to the existing compared with the other is imperative and the fund
residential projects and deal proposals the Fund has should perform extensive
future developments received in the last month background checks
(including commercial, to understand the regarding the reputation of
residential and opportunity cost of this the developer from the
infrastructure activities) deal. perspective of its customers
within a 5 km radius. and partners.

Recommendations
The assumptions taken by the developer seem fair in most instances, if not
conservative. The developer’s commitment is clearly highlighted by its investment in
the project at an early stage. Some further investigation needs to be undertaken to
understand the premium value and prospects of the location as claimed by the
developer. Although it would have been preferable to invest in this project once the
work had started, as that would help circumvent some of the risks, the project seems
profitable at this stage and presents a strong proposition for investments.