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HDIL’s 3QFY11 results were above our expectations on account of higher TDR
volumes. The net debt to equity increased from 0.32x to 0.4x on account of
increased investments in new projects (~50mn sq ft) whereas debtor days have
reduced from 100 to 84 as on 3QFY11. The company continues its aggressive
strategy for its new residential launches, which would improve its cash flow and
reduce dependence on TDR going forward. The uncertainty (eligibility of slum
dwellers) in the progress of MIAL project still prevails, but management is hopeful
of things getting sorted out over next two quarters. We maintain a Buy on HDIL.
Sale of high-margin FSI, TDR drives profitability: For 3QFY11, revenues increased
11.4% yoy and 22.2% qoq to `455cr (v/s our estimate of `420cr) on account of
TDR sale of 1.25mn sq ft from the MIAL project and average realisation of
`3,100/sq ft (`3,000/sq ft in 2QFY11). Further it received ~`65cr from sale of
FSI in Vasai and Virar. EBITDA margin came in at 58.5%, up by 1,236bp yoy
(down 512bp qoq on account of rising sand cost) owing to the lower costs
associated with the FSI sale. Consequently, operating profit stood at `267cr, up
12.4% qoq and 41.2% yoy. Tax rate for 3QFY11 stood at 6.0% (16.6%). During
the quarter, HDIL booked expense of `4.5cr on account of damage done by fire
at one of its towers. Hence, PAT grew 54.8% yoy and17.8 qoq to `252cr.
Outlook and Valuation: We believe that HDIL stock could outperform on the back
of increased land sales and successful new launches, which would improve its
balance sheet liquidity and reduce dependence on TDR. At `138, HDIL is trading
at 60% discount to our 1-year forward NAV of `347 and 0.5x FY2012E P/BV. We
maintain Buy on HDIL, with a Target Price of `243 (30% discount to our NAV).
FSI sales and new land acquisitions augurs well for HDIL
Recently, HDIL was involved in couple of land deals wherein it sold FSI of 2mn sq ft
to other developers in the Western suburbs of Mumbai, which is expected to fetch
around `1,400cr. Management has indicated that the Popular Bazaar deal
entailing Rs750cr is likely to be booked as revenues in 4QFY2011 post certain
redevelopment commitments and approval processes getting fulfilled. Further, the
company is utilising the recent QIP proceeds in new projects which is likely to add
another ~50mn sq ft, which will add further value to our NAV. However, more
clarity on all the approvals is awaited.
Investment Arguments
High-margin slum redevelopment projects
Slum redevelopment (SRA) does not involve upfront investment in land compared
to the conventional real estate projects. The cost per sq ft in slum redevelopment
projects is ~`3,000/sq ft v/s `5,000–6,000/sq ft (including land cost) on freehold
land due to the high property prices in Mumbai. Slum redevelopment also has
high entry barriers, as it requires expertise and experience to deal with government
agencies and slum dwellers regularly till completion of the project. In Mumbai,
more than 54% of the population lives in slum clusters situated in certain pockets
of the city. A slum population of 7.5mn translates into 1.5mn families, with an
average household size of five. This translates into SRA potential of 644mn sq ft
and revenue potential of `2,000bn for the redevelopers.
HDIL, the market leader in slum rehabilitation, is well poised to cash in on the
immense opportunity in the SRS segment. The company has executed close to
10mn sq ft of SRS projects in the last 15 years and is more competitive than other
developers in the fray. Thus, HDIL stands a good chance to win large SRA projects,
such as Dharavi - where the rehab families could be of similar size as MIAL.
Look beyond MIAL
HDIL have already generated 11mn sq ft from the project so far despite the more
than one year delay in shifting the families in Phase 1. Further, the Maharashtra
government is likely to hike FSI from 1.0x to 1.33x in the suburbs, which will affect
the TDR prices. Hence, we have factored in lower TDR price of `2,400/sf. (i.e. 20%
discount to current levels of `3,000/sf) for arriving at our target price, and do not
expect negative impact incrementally. We have assumed 4.5msf of TDR sale (i.e.
30% drop in TDR sales from FY2010) in FY2011 and FY2012 to factor in the hike
in FSI. It should be noted here that a 10% decline in TDR prices would adversely
impact our NAV by a mere 3% and target price by 2.3%. Given the
delay/uncertainty in shifting of families, we have excluded10mn sq ft (potential 65
acres), which HDIL is expected to get at the airport vicinity as it rehabilitates
85,000 families. Overall, we expect the share of TDR sales in the revenue mix to
fall from 60% in FY2011 to 30% in FY2012.
Rewarding new launches
HDIL's recent launch of a mid –income housing project in Palghar has received
strong response with the company selling 30% of the volumes in the first 3 days of
launch. In 2QFY2011, HDIL launched the Whispering Towers - Phase I, Mulund
and sold >40% at an avg. price of `8,000/sf. We believe the company's recent
launches have been successful on account of being launched at 10-20% discount
to the prevailing market prices. The company has been able to pre-sell 75% of its
residential projects (13msf) launched since FY2009, thereby providing `4,300cr of
revenue visibility over FY2010-12E. During FY2011-12, HDIL plans to launch new
projects of 26mn sq. ft., largely in Mumbai (including Siddharth Nagar,
Goregaon, Ekta Nagar, Kandivali and Pant Nagar, Ghatkopar, Kochi, Palghar).
Outlook and Valuation
The HDIL stock underperformed in the last cyclical downturn primarily due to its
overdependence on TDR sales. While we remain negative on the Mumbai region,
we believe that HDIL could outperform on the back of increased land sales and
successful new launches, which would improve its balance sheet liquidity (net D/E
ratio of 0.32x as of 2QFY2011) and reduce dependence on TDR sales. We have
assigned 30% discount to our one-year forward NAV, assumed TDR price of
`2,400/sq ft and excluded 10mn sq ft of the MIAL project to factor in the delays in
execution, hike in FSI and weak MMR property market outlook. At `137, HDIL is
trading at 60% discount to our 1-year forward NAV of `347 and 0.5x FY2012E
P/BV. We maintain a Buy on the stock, with a Target Price of `243 (30% discount
to our NAV).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HDIL – 3QFY2011 Result Update
Angel Broking maintains a Buy on HDIL with a Target Price of Rs. 243.
HDIL’s 3QFY11 results were above our expectations on account of higher TDR
volumes. The net debt to equity increased from 0.32x to 0.4x on account of
increased investments in new projects (~50mn sq ft) whereas debtor days have
reduced from 100 to 84 as on 3QFY11. The company continues its aggressive
strategy for its new residential launches, which would improve its cash flow and
reduce dependence on TDR going forward. The uncertainty (eligibility of slum
dwellers) in the progress of MIAL project still prevails, but management is hopeful
of things getting sorted out over next two quarters. We maintain a Buy on HDIL.
Sale of high-margin FSI, TDR drives profitability: For 3QFY11, revenues increased
11.4% yoy and 22.2% qoq to `455cr (v/s our estimate of `420cr) on account of
TDR sale of 1.25mn sq ft from the MIAL project and average realisation of
`3,100/sq ft (`3,000/sq ft in 2QFY11). Further it received ~`65cr from sale of
FSI in Vasai and Virar. EBITDA margin came in at 58.5%, up by 1,236bp yoy
(down 512bp qoq on account of rising sand cost) owing to the lower costs
associated with the FSI sale. Consequently, operating profit stood at `267cr, up
12.4% qoq and 41.2% yoy. Tax rate for 3QFY11 stood at 6.0% (16.6%). During
the quarter, HDIL booked expense of `4.5cr on account of damage done by fire
at one of its towers. Hence, PAT grew 54.8% yoy and17.8 qoq to `252cr.
Outlook and Valuation: We believe that HDIL stock could outperform on the back
of increased land sales and successful new launches, which would improve its
balance sheet liquidity and reduce dependence on TDR. At `138, HDIL is trading
at 60% discount to our 1-year forward NAV of `347 and 0.5x FY2012E P/BV. We
maintain Buy on HDIL, with a Target Price of `243 (30% discount to our NAV).
Aggressive new launches in FY2011-12E
HDIL has strategically de-leveraged its business model by launching various
projects through the conventional route since March 2009, thereby reducing its
overdependence on the TDR market. To-date, it has registered cumulative sales
bookings of ~`4,300cr on the 14msf launched. Some of the company's recent
projects have met with success on account of being launched at 10-20% discount
to the prevailing market prices. Management would be adopting the same strategy
for its forthcoming launches as well. Over the next one year, HDIL proposes to
launch new projects (Siddharth Nagar-Goregaon, Ekta Nagar-Kandivali, Pant
Nagar- Ghatkopar, Kochi, Palghar-phase III) constituting another 27mn sq ft.
FSI sales and new land acquisitions augurs well for HDIL
Recently, HDIL was involved in couple of land deals wherein it sold FSI of 2mn sq ft
to other developers in the Western suburbs of Mumbai, which is expected to fetch
around `1,400cr. Management has indicated that the Popular Bazaar deal
entailing Rs750cr is likely to be booked as revenues in 4QFY2011 post certain
redevelopment commitments and approval processes getting fulfilled. Further, the
company is utilising the recent QIP proceeds in new projects which is likely to add
another ~50mn sq ft, which will add further value to our NAV. However, more
clarity on all the approvals is awaited.
Investment Arguments
High-margin slum redevelopment projects
Slum redevelopment (SRA) does not involve upfront investment in land compared
to the conventional real estate projects. The cost per sq ft in slum redevelopment
projects is ~`3,000/sq ft v/s `5,000–6,000/sq ft (including land cost) on freehold
land due to the high property prices in Mumbai. Slum redevelopment also has
high entry barriers, as it requires expertise and experience to deal with government
agencies and slum dwellers regularly till completion of the project. In Mumbai,
more than 54% of the population lives in slum clusters situated in certain pockets
of the city. A slum population of 7.5mn translates into 1.5mn families, with an
average household size of five. This translates into SRA potential of 644mn sq ft
and revenue potential of `2,000bn for the redevelopers.
HDIL, the market leader in slum rehabilitation, is well poised to cash in on the
immense opportunity in the SRS segment. The company has executed close to
10mn sq ft of SRS projects in the last 15 years and is more competitive than other
developers in the fray. Thus, HDIL stands a good chance to win large SRA projects,
such as Dharavi - where the rehab families could be of similar size as MIAL.
Look beyond MIAL
HDIL have already generated 11mn sq ft from the project so far despite the more
than one year delay in shifting the families in Phase 1. Further, the Maharashtra
government is likely to hike FSI from 1.0x to 1.33x in the suburbs, which will affect
the TDR prices. Hence, we have factored in lower TDR price of `2,400/sf. (i.e. 20%
discount to current levels of `3,000/sf) for arriving at our target price, and do not
expect negative impact incrementally. We have assumed 4.5msf of TDR sale (i.e.
30% drop in TDR sales from FY2010) in FY2011 and FY2012 to factor in the hike
in FSI. It should be noted here that a 10% decline in TDR prices would adversely
impact our NAV by a mere 3% and target price by 2.3%. Given the
delay/uncertainty in shifting of families, we have excluded10mn sq ft (potential 65
acres), which HDIL is expected to get at the airport vicinity as it rehabilitates
85,000 families. Overall, we expect the share of TDR sales in the revenue mix to
fall from 60% in FY2011 to 30% in FY2012.
Rewarding new launches
HDIL's recent launch of a mid –income housing project in Palghar has received
strong response with the company selling 30% of the volumes in the first 3 days of
launch. In 2QFY2011, HDIL launched the Whispering Towers - Phase I, Mulund
and sold >40% at an avg. price of `8,000/sf. We believe the company's recent
launches have been successful on account of being launched at 10-20% discount
to the prevailing market prices. The company has been able to pre-sell 75% of its
residential projects (13msf) launched since FY2009, thereby providing `4,300cr of
revenue visibility over FY2010-12E. During FY2011-12, HDIL plans to launch new
projects of 26mn sq. ft., largely in Mumbai (including Siddharth Nagar,
Goregaon, Ekta Nagar, Kandivali and Pant Nagar, Ghatkopar, Kochi, Palghar).
Outlook and Valuation
The HDIL stock underperformed in the last cyclical downturn primarily due to its
overdependence on TDR sales. While we remain negative on the Mumbai region,
we believe that HDIL could outperform on the back of increased land sales and
successful new launches, which would improve its balance sheet liquidity (net D/E
ratio of 0.32x as of 2QFY2011) and reduce dependence on TDR sales. We have
assigned 30% discount to our one-year forward NAV, assumed TDR price of
`2,400/sq ft and excluded 10mn sq ft of the MIAL project to factor in the delays in
execution, hike in FSI and weak MMR property market outlook. At `137, HDIL is
trading at 60% discount to our 1-year forward NAV of `347 and 0.5x FY2012E
P/BV. We maintain a Buy on the stock, with a Target Price of `243 (30% discount
to our NAV).
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