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HDIL (HDIL IN)
We expect robust Q3 FY11 earnings growth of 37% y-o-y
HDIL’s ability and willingness to launch projects at competitive
rates makes it less vulnerable to cash flow volatility
Reiterate OW(V) rating but lower TP to INR205 (INR357 earlier) to
factor in downcycle valuations
3Q FY11 outlook
We expect HDIL to report a modest 12.5%
growth in revenues during 3Q FY11, driven
primarily by healthy transfer of development
rights (TDR) volumes of 1m sq ft at INR3,100psf,
along with floor space index (FSI) sales of
INR1.5bn. Recent media reports suggest the
company has sold INR8bn worth of FSI. We have
not factored this upside in our 3Q FY11 earnings.
EBITDA margins (including project interest) are
likely to remain high, at 62.3%, a sharp jump
from 3Q FY10’s 49.5%. The sharp EBITDA
margin expansion should help HDIL post c37% yo-y growth during the quarter. In our view,
investors will focus on the management update on
the Mumbai airport slum rehabilitation project
and debtor days (which stood at 111 days in 2Q
FY11, the highest since HDIL became public).
Investment summary
HDIL prices products competitively. HDIL’s
primary business model of slum
rehabilitation/redevelopment allows the company to
keep land cost low. This allows it to launch products
at a competitive price and generate demand. HDIL’s
willingness (the majority of recent launches have
been at 10-15% discount to market rates) to do so
makes it even more efficient as Mumbai developers
continue to keep product prices high, thereby
curtailing volumes. HDIL’s recent launch of a midincome housing project in the Vasai-Virar region has
received a strong response, with the company selling
c30% of the volumes (1.2m sq ft) in the first 3 days
of launch.
Reduced dependence on TDR sales has
improved business model. We attribute the
majority of HDIL’s share price underperformance
during the last cyclical downturn to its overdependence on TDR sales. However, the strategy
to increase its focus on a build and sell model has
helped reduce dependence on TDR sales
significantly. We expect the share of TDR sales in
the revenue mix to fall from c60% in FY11 to
c30% in FY12, before increasing to 39% in FY13.
A good proxy to play Mumbai’s property
market. Housing Development and Infrastructure
Ltd (HDIL) is India’s third-largest real estate
developer, measured by market capitalisation. We
like the locations of HDIL’s land bank (195m sq
ft), given the strong focus on the city of Mumbai
(36%, including TDR and FSI sales) and the
Mumbai Metropolitan Region (43%).
HDIL is a direct play on Mumbai, one of India’s
most resilient property markets, and one of the
few developers that have met their project
timelines during the recent business downcycle,
highlighting HDIL’s strong execution ability.
Mumbai contributes c90% to HDIL’s NAV, more
than any other large listed real estate company
operating in India’s two most important cities,
Mumbai and Delhi.
Key earnings forecast changes
We have reduced our TDR sales estimate for
FY12 to 4.5m sq ft from 5m sq ft along with other
minor revenue mix changes. Consequently, we
have lowered our revenue estimate by 7.5% in
FY12 and by c1.5% in FY13. The fall in EBITDA
margin by 10-60bps during FY12 and FY13 is
primarily due to the revenue mix changes. In line
with this, our earnings estimates have dropped by
c10% in FY12 and 3% in FY13 (figure D2).
Valuation
We value HDIL on a net asset value (NAV)
approach using the discounted cash flows of its real
estate projects (Cost of Equity 15.5%, risk free rate
7.5%, market risk premium 5.5% and WACC
13.6%). Apart from the recent equity dilution, we
have also factored in a potential further equity
dilution from 26m warrants planned to be issued to
major shareholders at INR274 per share.
Our target price of INR205 is pegged at a 55%
discount to its NAV (from 20%) and terminal
value of INR33. Our high target NAV discount of
55% factors in: 1) looming concern about an FSI
hike, which could lower demand and pricing for
TDR in the Mumbai suburbs to 1.33x from 1x, 2)
a weak MMR property market outlook. Our target
NAV discount of 55% is a reflection of HDIL’s
market positioning and higher risk-reward ratio in
the slum rehabilitation/redevelopment business.
Under our research model, the Neutral rating band
is 10ppt above and below the hurdle rate of 10.5%
for volatile India equities, or 0.5-20.5% above the
current share price. Our target price implies a
potential return of 30.5% (including prospective
dividend yield), which is above the Neutral band.
Thus we retain our Overweight (V) rating.
Risks
The key risks to our valuation are:
Slum rehabilitation projects have a longer
gestation period and are prone to delays. Any
longer-than-anticipated delay would
negatively impact our revenue forecasts.
Lower than estimated TDR volumes and
prices would be a key downside risk.
Delay in the airport slum rehabilitation
project execution would be a key negative.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
HDIL (HDIL IN)
We expect robust Q3 FY11 earnings growth of 37% y-o-y
HDIL’s ability and willingness to launch projects at competitive
rates makes it less vulnerable to cash flow volatility
Reiterate OW(V) rating but lower TP to INR205 (INR357 earlier) to
factor in downcycle valuations
3Q FY11 outlook
We expect HDIL to report a modest 12.5%
growth in revenues during 3Q FY11, driven
primarily by healthy transfer of development
rights (TDR) volumes of 1m sq ft at INR3,100psf,
along with floor space index (FSI) sales of
INR1.5bn. Recent media reports suggest the
company has sold INR8bn worth of FSI. We have
not factored this upside in our 3Q FY11 earnings.
EBITDA margins (including project interest) are
likely to remain high, at 62.3%, a sharp jump
from 3Q FY10’s 49.5%. The sharp EBITDA
margin expansion should help HDIL post c37% yo-y growth during the quarter. In our view,
investors will focus on the management update on
the Mumbai airport slum rehabilitation project
and debtor days (which stood at 111 days in 2Q
FY11, the highest since HDIL became public).
Investment summary
HDIL prices products competitively. HDIL’s
primary business model of slum
rehabilitation/redevelopment allows the company to
keep land cost low. This allows it to launch products
at a competitive price and generate demand. HDIL’s
willingness (the majority of recent launches have
been at 10-15% discount to market rates) to do so
makes it even more efficient as Mumbai developers
continue to keep product prices high, thereby
curtailing volumes. HDIL’s recent launch of a midincome housing project in the Vasai-Virar region has
received a strong response, with the company selling
c30% of the volumes (1.2m sq ft) in the first 3 days
of launch.
Reduced dependence on TDR sales has
improved business model. We attribute the
majority of HDIL’s share price underperformance
during the last cyclical downturn to its overdependence on TDR sales. However, the strategy
to increase its focus on a build and sell model has
helped reduce dependence on TDR sales
significantly. We expect the share of TDR sales in
the revenue mix to fall from c60% in FY11 to
c30% in FY12, before increasing to 39% in FY13.
A good proxy to play Mumbai’s property
market. Housing Development and Infrastructure
Ltd (HDIL) is India’s third-largest real estate
developer, measured by market capitalisation. We
like the locations of HDIL’s land bank (195m sq
ft), given the strong focus on the city of Mumbai
(36%, including TDR and FSI sales) and the
Mumbai Metropolitan Region (43%).
HDIL is a direct play on Mumbai, one of India’s
most resilient property markets, and one of the
few developers that have met their project
timelines during the recent business downcycle,
highlighting HDIL’s strong execution ability.
Mumbai contributes c90% to HDIL’s NAV, more
than any other large listed real estate company
operating in India’s two most important cities,
Mumbai and Delhi.
Key earnings forecast changes
We have reduced our TDR sales estimate for
FY12 to 4.5m sq ft from 5m sq ft along with other
minor revenue mix changes. Consequently, we
have lowered our revenue estimate by 7.5% in
FY12 and by c1.5% in FY13. The fall in EBITDA
margin by 10-60bps during FY12 and FY13 is
primarily due to the revenue mix changes. In line
with this, our earnings estimates have dropped by
c10% in FY12 and 3% in FY13 (figure D2).
Valuation
We value HDIL on a net asset value (NAV)
approach using the discounted cash flows of its real
estate projects (Cost of Equity 15.5%, risk free rate
7.5%, market risk premium 5.5% and WACC
13.6%). Apart from the recent equity dilution, we
have also factored in a potential further equity
dilution from 26m warrants planned to be issued to
major shareholders at INR274 per share.
Our target price of INR205 is pegged at a 55%
discount to its NAV (from 20%) and terminal
value of INR33. Our high target NAV discount of
55% factors in: 1) looming concern about an FSI
hike, which could lower demand and pricing for
TDR in the Mumbai suburbs to 1.33x from 1x, 2)
a weak MMR property market outlook. Our target
NAV discount of 55% is a reflection of HDIL’s
market positioning and higher risk-reward ratio in
the slum rehabilitation/redevelopment business.
Under our research model, the Neutral rating band
is 10ppt above and below the hurdle rate of 10.5%
for volatile India equities, or 0.5-20.5% above the
current share price. Our target price implies a
potential return of 30.5% (including prospective
dividend yield), which is above the Neutral band.
Thus we retain our Overweight (V) rating.
Risks
The key risks to our valuation are:
Slum rehabilitation projects have a longer
gestation period and are prone to delays. Any
longer-than-anticipated delay would
negatively impact our revenue forecasts.
Lower than estimated TDR volumes and
prices would be a key downside risk.
Delay in the airport slum rehabilitation
project execution would be a key negative.
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