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INITIAL PUBLIC OFFERING -

PROCESS & VALUATION METHOD

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INITIAL PUBLIC OFFERING

Raise Capital

Under Pricing / Over Pricing

Privately Held Companies

Significance to the Company

Significance to the Investor

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Risk Involved

Unpredictable

No past record of the Company

Business Risk

Financial Risk

Market Risk

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Analyzing An IPO Investment

Business Operations

Financial Operations

Marketing Operations

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IPO Valuation (DCF)

DCF analysis says that a company is worth all

of the cash that it could make available to

investors in the future. It is described as"discounted" cash flow because cash in the

future is worth less than cash today.

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DCFContinued

Company Competitive Position Excess Return/Forecast Period

Slow-growing company; operates inhighly competitive, low margin

industry .

1 year

Solid company; operates withadvantage such as strong marketing

channels, recognizable brand name, orregulatory advantage .

5 years

Outstanding growth company;

operates with very high barriers toentry, dominant market position orprospects .

10 years

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DCFContinued

Growth Rate:

HDIL is expected to grow at to have CAGR of 42

%( source: Emkay Research). We take fixedgrowth rate of 42% for DCF valuation for coming 5years.

Reinvestment Rate:

Equity Reinvestment Rate = Growth Rate / ROE = 42/76 = 55.26 %

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DCF Valuation

Forecasting Free Cash Flows:

EBIT (1-tax) [EBIT (1-tax) X Reinvestment

Rate] EBIT (1-tax) nth year = EBIT (1-tax) n-1 year X (1

+ growth rate)

Current Year 2008 2009 2010 2011 2012

ExpectedGrowth Rate - 42% 42% 42% 42% 42%

EBIT(1-tax) 6181 8777 12463 17698 25131 35686

Equity

Reinvestment

Rate - 55.26% 55.26% 55.26% 55.26% 55.26%

FCFE - 22185 30394 41639 57046 78153

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WACC

Cost of Equity (Re): CAPM = Cost of Equity = RF + Beta (Rm-Rf)

Cost of Debt (Rd):

Rd (1 - corporate tax rate).

Cost of Equity + Cost of DebtE/V 0.66 Rf 7.44

Corporate tax 30% Beta 1.1

D/V 0.34 Rm 13.5

Cost of Debt Cost of Equity

D/V x (1 - corporate tax rate) E/V x [Rf + Beta (Rm-Rf)]

0.34 [1-0.30] 0.66 [7.44 + 1.1 x 6]

WACC = Cost of Debt + Cost of Equity = 9.5%

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DCFContinued

2008 2009 2010 2011 2012

Free Cash Flow 3927 5576 7918 11243 15965

Discount rate 1.095 (1.095) (1.095) (1.095)4 (1.095)5

Present value 3586 4650 6030 7820 10141

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Terminal Value

We have assumed perpetuity growth rate for

HDIL as 6%

Net income of 2012 (1+ perpetuity growthrate)

= 35686 (1+0.06)

= Rs. 37827 mn

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Reinvestment rate after 2012

(Terminal Point): Reinvestment rate = PerpetuityGrowth

rate / Return on Equity

Return on equity will drop to the stable periodcost of capital of 9.5%.

Reinvestment rate (terminal point) = 6/9.5 =

63%

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Free cash flow = EBIT (1-

tax) [EBIT (1-tax) xReinvestment Rate]

Free cash flow 2013 = 37827 [37827 x 52%] =

Rs. 13936 mn.

GordonGrowth Model

Free cash flow of the year after the

terminal year /(Discount Rate PerpetuityGrowth Rate)

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Terminal Value

Terminal Value = 13936 100 /(9.5 6 ) =

Rs 146099 mn

Present value of = 146099 / (1.095)6 Terminal year

= Rs. 84754 mn

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Calculating Total Enterprise

Value: Total Enterprise = Sum of Present value for 5

years + Present value OfTerminal Year +

Cash Debt= 32228 + 84754 + 1949 - 3756 =Rs. 115175 mn

Fair value = Rs 115175 mn

Number of outstanding shares = 214 mn

Fair value of the HDIL per share = Rs 538

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NSE Data

Date Prev Close Open High Low Close Total Trd Qty Turnoverin Lacs

24-Jul-07 500 538.6 575.95 535 559.35 28590806 160030.8

25-Jul-07 559.35 549.4 587.4 545.3 580.1 8552244 48465.14

26-Jul-07 580.1 585.6 634.3 585.6 621.4 9125757 55976.88

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