SUMMER INTERNSHIP PROGRAM

INTERIM REPORT

Calculation of IRR and

deciding on capital structure

Submitted to: Submitted by:

Prof. B.K Chadha Nitish Gupta
09BS0001485

Mobile No: 9899790100 E-mail id: nitish1486@gmail.com

ABSTRACT
 To see the effect of leveraging(operational leveraging & financial
leveraging) on the IRR of the project

 To understand, evaluate and prepare the financials of project X.

 To compute the NPV (Net Present Value), IRR (Internal rate of

return) based on different type of leveraging.

 Based on that, to prepare a financial proposal in order to

generate finance for project X .
The report involves:

 The concept of cash flows and discount rate

 The concept of time value of money.

INTRODUCTION

PURPOSE: To see the effect of operational & financial leveraging

on the projected IRR of project X and prepare a financial proposal in
order to generate finance of project X.

DESCRIPTION OF PROJECT:
 Overview of the Real Estate Sector
 Overview of important regulation related to the real estate
 SWOT analysis for the Company
 Licenses and approvals required
 Project Highlights
 Basic assumption used for compilation of projected financials
 Summarized financials
 Calculation of the various financial indicators
The project requires preparation of a financial model and building
cash flows of proceeds and expenditure of a project X and then
calculating the IRR for the project from the net cash flows. The
model will be made on assumptions of sale proceeds and
expenditures and then to see the effect of leveraging on IRR.

The Project allotted to me is the preparation of projected financials

of project X of M/s Ansal Properties and Infrastructure Ltd. (APIL or
Ansal API or the Company) and calculation of various financial
indicators and its analysis.

Project X includes a GHS (group housing scheme), development of a

shopping complex, and a community centre. The total area of
project is 30 acres. Out of the total FSI of 2.61 msft (excl. Loading
factor) , 2.58 msft area is to be developed under GHS and 4320 sft
under shopping complex and 8640 sft under community club.

The expenditure includes the land acquisition cost, sanction cost,

licensing cost, development charges, EDC (external development
charges), IDC (internal development charges), interest payment
charges, closing costs, advertising etc.

The revenues include the pre-sales collections and quarterly

collections as per booking. The project seeks to see the effect of
leveraging on the project IRR.
METHODOLOGY:
6 METHODOLOGY OF THE STUDY
Collection of Data: - We propose to conduct primary as well as
secondary research.

 Primary research will be done mainly by interviewing the

employees of the Company, referring other project reports, and
annual report.
 Secondary research will be done by collecting information
from various journals, books, magazines, newspaper and the
internet.

Analysis of data: - The data thus collected from all the above
sources will be analyzed to convert it to actionable piece of
information,

Detailed methodology:-

An excel sheet is being developed containing the cash flow

statement and economics of the project based on the assumptions
given in the assumption sheet. This excel sheet is a summarized
form of the financials. Another excel sheet has been made in
continuation which has more realistic assumptions and accordingly
the cash flows, profit and loss account and the balance sheet has
been worked out. This is being done by conducting primary
research. Research is being done by interviewing my project guide
and some colleagues of his in the finance department.

Risk analysis is a major part of the project analysis. This is being

done by doing primary as well as secondary research. A part of the
information is being obtained by asking my project guide. Rest of
the information is being obtained by going through various articles
on the internet, by referring to books and from the balance sheet
and the placement booklet. Addressing the risk is a back up plan
put in place by the Company. This information is being obtained
solely by consulting the project guide. This data is credible enough.
Mostly infrastructure and construction projects are marred with
time delays. A range of reasons are responsible for the same. All
this information has been obtained by primary research.

DETAILED PROJECT DESCRIPTION:

ABOUT REAL ESTATE

The term ‘real estate’ is defined as land, including the air above it
and the ground below it, and any buildings or structures on it. It is
also referred commercial offices, trading spaces such as theatres,
hotels and restaurants, retail outlets, industrial buildings such as
factories and government buildings. Real estate involves the
purchase, sale, and development of land, residential and non-
residential buildings. The main players in the real estate market are
the landlords, developers, builders, real estate agents, tenants,
buyers etc. The activities of the real estate sector encompass
the housing and construction sectors also. Developments in the real
estate sector are being influenced by the developments in
the retail, hospitality and entertainment (e.g., hotels, resorts,
cinema theatres) industries, economic services (e.g., hospitals,
schools) and information technology (IT)-enabled services (like call
centers) etc. and vice versa. As real estate construction and values
have expanded in India — underpinned by healthy economic growth
from 2001 to 2007 and coupled with a series of IPO’s by property
firms — so in recent years has India's property sector changed
substantially.
Though there is a correction in the prices of the real estate products
and the change in the flavour of expectation by the user group
trends of growth and modernization are set to continue, with some
market participants forecasting that real estate development in
India will grow to US$90 billion by 2015. In addition, global capital
has become more interested in Indian property and is seeking
transparent and liquid ways to invest. Furthermore, with a more
global property market, the level of competition in the Indian
property business is rising, while the need for property firms
to strengthen their operational infrastructures, personnel and
finances to better compete is also becoming more acute.
India's GDP growth rate has averaged 8% over the last three years,
up from an average of around 6% during the 1990s, and highlights
India's emergence as a land of opportunities. The sustained
economic growth has, in turn, stimulated demand for property to
help meet the needs of business, such as modern offices,
warehouses, hotels and retail shopping centers. It has also boosted
housing demand as a wealthier populace seeks upgraded
accommodation. Moreover, shrinking household size and improved
access to housing finance have boosted the demand for residential
property. Tax incentives have also been granted to interest and
principal paid on home loans, which has made owner-occupied
property more attractive. Indian cities are customarily divided into
three groups: Tier I, comprising of major urban centers like Delhi,
Mumbai and Bangalore; Tier II, including such cities as Hyderabad,
Kolkata and Pune, and Tier III, consisting of cities such as
Ahmedabad, Ghaziabad, Indore, Jaipur, Lucknow and Nagpur. Over
the last few years, modern real estate development — and some
investor interest — have spread beyond Tier 1 cities to Tier II and
Tier III cities. However, although the longevity of this development is
not certain, it does indicate that the Indian property business is
more competitive and thinking more broadly.
.

ABOUT THE FINANCIAL MODEL

The project aims at building a MS-Excel financial model and

compute project IRR based on assumptions of sales and
expenditures and developments. The assumptions have been taken
keeping in mind the market situation and the company brand name
,past record and performance.

The aim is to incorporate operational leveraging and financial

leveraging in the model and see the effect on IRR. The project also
seeks to see the effect of introducing a equity partner in the capital
structure on project IRR. The purpose is to reduce initial cash
outflow in order to reduce initial equity injection requirement.
OPERATIONAL LEVERAGING:

Proponing proceeds and deferring expenses and development cost is

considered to be operational leveraging. Ex: Giving Down payment
option can significantly improve the net cash flow in a quarter and
deferring expenses like paying land cost in phases and delaying
development and paying sales closing cost in phases etc.

FINANCIAL LEVERAGING:

Introduction of debt in the capital structure provides tax shielding

and debt is the cheapest source of finance so when the market
situation is bright the companies generally use this source for
project finance.
 Purchased Land Cost

Particulars
Plot Size 30.00 Acres
145,200 Sq. yrd
Book Value / Original Price (Basic Cost) mn/ acre 20.00

Land Cost (Basic Cost) INR (mn) 600.00

Add: Additional Costs

Lease Rentals (NA) 0.00

Stamp Duty & Misc. 48.00 INR (mn)

Total Land Cost (Excluding Interest) 648.00 INR (mn)

Total FSI sft (mn) 2.61

Impact Assessment Fee 0 per Sq. Fts. 0.00
Cost of FSI purchased (Rs. mn) 0 per Sq. Fts. 0.00 INR
Land Cost (including FSI cost) INR (Mn) 648.00 INR (Mn)

Payment Plan
One Time Payment INR (Mn) 240.00
10% (inclg. EMD) within 1 month INR (Mn) 0.00 10-Sep-06 -240.00
Additional 20% within 2 months INR (Mn) 0.00 10-Nov-06
Lease Rentals (NA) INR (Mn) 0.00
Stamp Duty & Misc. INR (Mn) 48.00
0.00
Total amount till Sale Deed (A) INR (Mn) 288.00

Balance to be paid INR (Mn) 360.00

in Installment

Installment Plan
Date of Payment Total Payment Principal Interest @ Total Outstanding Principal
INR (Mn) INR (Mn) 14% INR(Mn)
70.2 45.0 25.2 315.0
67.1 45.0 22.1 270.0
63.9 45.0 18.9 225.0
60.8 45.0 15.8 180.0
57.6 45.0 12.6 135.0
54.5 45.0 9.5 90.0
51.3 45.0 6.3 45.0
48.2 45.0 3.2 0.0
purchase of fsi
total 473.40 360.0 113.4

This sheet gives the land cost details . This shows that a total of
30 acres land is to be developed under this project . The cost of
acquisition is 2crores per acre .The total land cost including the 8%
stamp duty is 648 mn, out of which 40% i.e (240+48) mn is paid
initially and rest land cost is paid in installments , the loan
amortization schedule of which has been prepared.
2) PROJECT LAYOUT

Stage -2

Area Demarcated for separate developments

FAR FAR Expected Ground Coverage Allowed Ground Coverage Expected Basement (Max) Loading
Group Housing 99.39% Of Gross Area 200.00% 200.00% 30.00% 15.00% 2 LVL 8.00%
LSC 0.20% Of Gross Area 150.00% 150.00% 30.00% 30.00% 0 LVL 8.00%
EWS 0.00% Of Gross Area 200.00% 200.00% 30.00% 30.00% 0 LVL 0.00%
Milk Booth 0.00% Of Gross Area 200.00% 200.00% 100.00% 100.00% 0 LVL 0.00%
Commnity Club 0.41% Of Gross Area 150.00% 150.00% 40.00% 40.00% 0 LVL 8.00%
Nursery School 0.00% Of Gross Area 200.00% 200.00% 40.00% 40.00% 0 LVL 0.00%

The above chart shows that out of 30 acres land to be developed

99.39% is to be developed under GHS and .2% and .41% area
under local shopping complex and community club respectively.
The floor area ratio ie the total area that can be covered is 200%,
150%, 150% for the GHS , LSC and community club respectively.

The loading factor is the area that is to be developed for providing

services like fire exit, stair cases and lifts etc which is 8% of the
total area.

3) EXPENSES ASSUMPTIONS

Now lets see the expenditure pattern of different expenses that

would be incurred in different years as the project goes on . This
figures has been taken from assumptions sheet by linking cells .
Expenditure Pattern % Amount
st
1 Year 42.17% INR 74,242,749
nd
2 Year 25.13% INR 44,242,749
rd
3 Year 25.13% INR 44,242,749 Marketing
th
4 Year 7.57% INR 13,319,012

Expenditure Pattern % Amount

st
1 Year 1.91% INR 5,055,190
nd
2 Year
rd
28.30% INR 74,742,725 Sales closing cost
3 Year 55.86% INR 147,507,179
th
4 Year 13.92% INR 36,765,794

Expenditure Pattern % Amount

st
1 Year
nd
47.62% INR 83,711,815 Administration O/H
2 Year 25.04% INR 44,011,815
rd
3 Year 22.19% INR 39,011,815
th
4 Year 5.14% INR 9,041,815

Expenditure Pattern % Amount

st
1 Year 28.80% INR 13,087,500
nd
2 Year 30.25% INR 13,747,518
rd
3 Year 39.14% INR 17,789,843 Architecture fees
th
4 Year 1.81% INR 823,005

Expenditure Pattern % Amount

st
1 Year 1.91% INR 5,055,190
nd
2 Year 28.30% INR 74,742,725
rd
3 Year 55.86% INR 147,507,179
th
4 Year 13.92% INR 36,765,794
Developers fees

The next thing was to develop the cash payment schedule of the
sales . The cash payment schedule is how the collections of the sold
area will come.
4) Development particulars
COST OF DEVELOPMENT / CONSTRUCTION

PARTICULARS AREA Cost Per Acre Cost Per SF TOTAL

Sanction Cost 30 Acres INR - 0 INR

Construction of Group Housing 2,805,408 sft INR 1,100.00 3,085,948,800 INR
Construction of basement 1,266,945 sft INR 600.00 760,167,224 INR
Infrastructure Development Expenses 1,306,800 sft INR - 0 INR
Construction of EWS Group Housing 0 sft INR - 0 INR
Construction of LSC 4,320 sft INR 1,500.00 6,480,000 INR
Construction of Community Club 8,640 sft INR 3,000.00 25,920,000 INR
Total Cost of Construction and Sanction

TOTAL 4,085,313 SF INR 949.38 3,878,516,024 INR

The prices for the development of different areas are mentioned and
the total development charges have been calculated.

The model is still being developed and the rest details will be given
after completion of whole project.

SWOT ANALYSIS

Strength of the Company

 Extensive land reserves acquired at competitive cost.
 Successful and pioneering track record.
 Project execution at strategic locations.
 An established brand image.
 An extensive sales and marketing network.
 Strong relationships with contractors and suppliers.
 A strongly bound and well trained workforce.
 The Company has diversified its function by entering into hotels
and hospitality, healthcare sector, power sector and education
sector.
Weaknesses of the Company:-
 The Company is concentrating only on North India. This way
they are missing out on other profitable opportunities available in
other parts of India.
Opportunities:-
 The real estate market is poised to grow to $50 billion by 2010.
 A shortage of 12 million housing units in the urban areas.
 The retail market for mortgages is currently valued at slightly
over $5 billion.
 The mortgage market is expected to grow at 25% over the next
five years, so as to be at par with Asian peers.
 The recently announced Urban Infrastructure Renewal Mission is
expected to give a boost to the sector, wherein $11.5 billion has
been earmarked over the next five years for 60 cities.
 Total project value dedicated to low and middle income housing
in the next 7 years is estimated at $40 billion.
 Investment opportunities exist in almost every segment of the
business be it housing, office space, commercial space and hotels
& hospitality.

Threats:-
 Sanctioning process through the authorities is slow and time
consuming.
 Archaic tenancy laws.
 The ever rising competition can adversely affect results.
 The projects in real estate business involve purchasing small
parcels of land in a large area. Inability to do so may lead to the
failure of the whole project.
 The projects are vulnerable to the PIL’s (Public Interest
Litigations) field by the public from time to time and may stall the
work indefinitely.
 The Company undertakes projects jointly with third parties,
which involve certain risks.
 The growth of the Company requires huge capital which may not
be available easily.
 This sector is governed by Government rules and regulations
which may change from time to time.
Risk factors associated with the project and the Company as a
whole:-
One of the most important factors in analyzing assets is
determining the degree of risk they involve. Risk is often defined in
term of loss or injury, or the degree of uncertainty of the outcome.
Assets may be associated with different types of risk.
I) Economic risk: -
􀂾 Price fluctuation: - Assets will react to various economic
changes. During inflationary periods, costs increase and
consequently , purchasing power declines. The opposite occurs
during depressions or severe recessions because prices decline.
Thus, the value of assets can increase or decline during economic
cycles. For example, with inflation the value of real estate increases.
On the other hand, in a depression, real estate prices decline. Real
estate prices have the greatest impact on the margins of the
developers because land constitutes the major portion of the cost
incurred on property. Project developers are exposed to the volatility
in prices during the process of completion of the project.
Remedy: - Price fluctuations cannot be controlled. So no remedy
can be provided for this and there is no way this risk can be
covered.
Demand Risk: - It indicates the ability to sell properties based on
the location, brand, track record, quality and timeless of
completion. Most real estate developers try to overcome this
problem by undertaking market surveys in order to assess the
demand for their properties. In addition, demand is also strongly
influenced by policy decisions relating to housing incentives.
Remedy: - This risk can be controlled to an extent by careful
analysis of the market surveys. But the very credibility of market
survey is doubtful. So this risk can be hedged only to some extent.

Cost of Development: - The costs in a housing project consist of

land, construction, and employee costs. As per the industry source,
the prices of steel and cement, which comprise a major portion of
the construction cost, are expected to rise in the coming 1-2 years.
This increase in cost, however, is expected to be outpaced by the
growth rate of individual disposable income and therefore is not
likely to depress the demand growth for housing units.
Remedy: - Cost escalation can be accounted for by increasing the
sale price of the assets but sale price cannot be raised above the
market rates. So if the cost escalation forces the developer to raise
sale price of the asset above the market price then have no choice
but to incur loss.
Interest rate: - The interest rates is regulated by the RBI and is
currently more or less comparable to rate existing 2006-07 after an
increase of about 400 basis points during calendar year 2008 over
the low achieved in 2006.
Remedy: - There is no way that interest rates can be tamed. In the
face of downturns the only thing that developers can do is to offer
easy finance if possible.
Tax incentives: - The existing tax incentives for housing loan are
also a major demand booster.
II) Political Risk: - Change in Government may lead to change in
policies of the states. This may lead to delay in sectioning of the
projects of adversely affect the growth plans of the company.
III) Project completion risk: - The completion of a construction
projects is the biggest risk faced by real estate companies. It could
be due to all the above mentioned reasons.
Remedy: - Sincere attempts need to be made on to shorten delays
occurring due to operational irregularities. Some other external
difficulties cannot be made up for.
IV) Supply of raw materials: - Increase in prices of vital raw
materials like steel and cement can adversely affect the profitability
by eating up the margins. In such a case the developers are left at
the mercy of the Government agency and wait for the prices to be
regulated. Maintaining an inventory of such items is not favourable
as that will affect the planned cash flows.
Remedy: - The Company mostly out sources its construction
activities so there is no direct bearing on the company but still they
may face the heat because contractors might ask for compensation
against losses made due to price rise.
V) Sector risk: - It refers to the risk in certain sectors because of
the role of government agencies. In case of real estate Government
agencies are involved at the sectioning step. They may resort to
unnecessary delays and cause trouble by asking for bribes.
Remedy: - There is no way for companies to hedge this risk. They
need to stand up and face the heat.
VI) Liquidity risk: - Liquidity is the ability to quickly sell an asset
at its current market price. Marketable securities are an example of
a liquid asset because they can easily be traded at the current
market price. Compare this situation to the sale of a nonliquid
asset such as real estate or an art collection. It may take several
months or more to find a buyer who will pay the current market
price. This type of asset could probably be sold quickly if the
current market price were greatly reduced.

LIMITATIONS:
 Company data is strictly confidential and many of the project
details cannot be incorporated in the report like the investors,
sponsors and banks lending debt cannot be disclosed.

 Real estate sector is a unregulated one and do not follow a

particular method of raising and deploying funds so
understanding real estate in detail in 3 month duration time
is not possible.

 The price assumed for the sale of the developed area keeps on
changing with the demand over the years so the initial
assumptions taken for the sale price may be completely
altered the next year.

 The assumptions of sales, development of the units depends

heavily on the market dynamics and government regulations
and licensing may effect the project development. The land
acquisition at the right time is a major area of concern for the
companies.
REFERENCES:
 Books: I.M Pandey and Financial management (Icfai
foundation) for conceptual clarification.

 Sites: www.ansalapi.com , www. rbi.gov.in

 College Mentor and company guide