HDIL: Q2-FY11 Posts QoQ Decline in Earnings:: Citi

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Housing Development and Infrastructure
(HDIL.BO)
Alert: Q2-FY11 Posts QoQ Decline in Earnings

 Revenues decline QoQ — 2Q revenue of Rs3.7bn down 17% QoQ and PAT of
Rs2.1bn down 9% QoQ. On YoY basis, revenue grew 5% given low base effect
(Q2FY10 was one of their weakest quarters). EBITDA margins improved to
63.7% vs 59.3% in Q1 on account of reduction in construction costs.


 TDR contributes to ~80-90% of 2QFY11 revenue — TDR sales slowed to 1.0msf
(vs. 1.1msf in Q1Fy11 and 1.7msf in 2QFY10) albeit at higher prices of avg
Rs3000/sf (vs. Rs2300/sf in 2QFY10 and Rs 2,950/sf in Q1FY11). Management
sees TDR prices and volumes to remain strong, as the government notice on
additional 0.33 FSI hasn’t come in yet. They expect realizations to consolidate
at Rs 3200-3500 levels. Co. has sold ~12msf till date and holds 0.3msf in
inventory currently.


 While MIAL is going slow, aggressive launch pipeline is in place.
– MIAL rehab project is seeing relocation challenges as per press reports with
families refusing to move. Company states currently ~33,000 rehab units are
under construction (~12msf in area, of which 8.5msf is >75% complete) and
believe that relocation would begin to Kurla in < 1 month for 7,000 units which
are ready. Overall Ph-I handover to MMRDA to happen by Mar-11.
– Management is looking to launch 27msf (phased launches in larger projects like
Kochi and Palghar) in the next 6-months to take their residential portfolio to
35msf in 2-years time from the first launch.


 Details on land bank added + Other Conf Call Highlights —
– Novinon project to add 13msf of resi development to land bank. Co. has spent Rs
1.0b towards land costs (clearing labour dues etc). There are three parcels of
land within this - Tarapore, Baroda and Shahad. Co. is planning to only develop
the latter under its umbrella and exit/monetize the other two. In Shahad, they are
looking to build rental housing.
– In Q2, Co. applied for redevelopment of MotilalNagar under Swiss challenge to
MHADA, whereby if allotted, would add an expected saleable area of 15 msf. Co.
expects allotment to come within the next 6-7months. They have to in return
build 16,000 units in Virar and 1,500 units in Goregaon same plot for MMRDA.
Tenancy rights for this project to come at Rs. 7.5-10.0b.
– Rs 6.5b MOU signed for FSI sale in Goregaon project reflective of ~1 - 1.1msf.
Money has started flowing in and Co. is hoping to recognize large part of this FSI
sale in FY11 and is expected to have margins to the tune of 65-70%. After this
MOU, there is another 3.5msf to go.
– Agreement has been signed with Conrad for the Juhu Hotel. HDIL will own 45%
(balance lies with the promoters) of the project which will cost an estimated ~Rs
2.4b. Management stated that financial closure has happened for the same with
Yes Bank and the delivery deadline is 2014.
– 5-star business cum leisure hotel to come up at the Andheri Metropolis
development at an estimated cost of Rs 1.4-1.5bn. Signed an agreement with
Crown Plaza.
– Rs. 15.0 b from QIP lying in Fixed Deposits and Mutual Fundss. Co. has
identified the land for MIAL Ph-2 & 3 and is awaiting final approvals from
government.
– Net debt stood at Rs 26.2b and is not due for next one year. Cost of debt is 12%.
Customer advances were at Rs 2.2b in Q2 and overall at Rs 9.82b.



Housing Development and Infrastructure
Valuation
Our target price of Rs277 is based on a 25% discount to an estimated core March
2010E NAV of Rs370. We see HDIL positioned as a mid-scale developer with a
high risk-reward model and expect it to trade at a 25% discount to NAV, which is
the lower end of the average discount to NAV range of 25%-35% for tier-II
developers. We attribute a discount for the following reasons: 1) concentration risk
in Mumbai suburbs (92% of gross NAV); 2) a high risk-reward business model
given the emphasis on slum redevelopment; and 3) any execution delays in the
airport project. We believe an NAV-based valuation methodology is appropriate for
developers, as NAVs value landbank, along with development across asset
classes. Our NAV of Rs370 is based on the following assumptions: 1) Reduction in
debt levels to Rs33.5bn post QIP; 2) TDR prices at Rs2200/sf; 3) Development
volume of 201msf; 3) Average cost of capital of 13%; and 4) Tax rate of 26%,
factoring in tax benefits for the slum rehab and airport project.
Risks
We rate HDIL as Medium Risk since the near-term liquidity of the company has
improved post QIP and debt that was due in FY10 has been rolled over. Upside
risks to our investment thesis and target price are: 1) change in regulatory policy
favoring TDR prices, 2) more benefits/incentives offered by the government for
airport rehab projects, 3) significant FSI pre-sales easing liquidity crunch, and 4)
meaningful recovery in demand, particularly for office space in the Mumbai
market.