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HDIL
Looking beyond MIAL; maintain Buy
Though MIAL redevelopment has been steady, shifting of
families has been delayed, raising risk for the 65 acres and
phases 2&3. Of the funds raised from QIP, and land & FSI sales,
we believe HDIL invested ~`9bn in three projects to further derisk
MIAL. We rollover our NAV to Mar 12e, lowering it to `255;
we trim our price target to `228, at 10% discount to NAV. Buy.
MIAL project. Shifting of families in phase 1 is likely to lag due
to issues at the government level (undecided cut-off dates of
tenants) and resistance to shifting by some sections. This raises
risk on the 65acre airport land and development of phases 2&3.
Utilizing cash, de-risking business. The +`15bn cash built up
on the balance sheet was used to acquire projects, investing `9bn
in three projects. This would add another 47-50m sqft land bank
(of which, 29m sqft would be in Mumbai City). As projects are
large, we await further clarity before assigning value to them.
Change estimates. Our NAV is impacted by removal of 65 acres
of free-sale land in MIAL, part of phase 2, and phase 3 from
valuation due to lack of land visibility and adding a discount to
some under-construction slum-rehab projects in Mumbai. For
now, the new acquisitions are taken at cost.
Valuation and risks. Our Mar ’12e NAV is `274 and target price
is `247, which is at 10% discount to NAV. At CMP, the stock
trades at 0.7x Mar ’12e PBV. Key risk: slowdown in execution.
MIAL: Shifting worries
Shifting of families in phase 1 is likely to lag due to issues at the
government level (undecided cut-off dates of tenants etc) and
resistance to shifting of families by some sections. This raises risk
on the 65acre airport land and development of phases 2&3. Hence,
we remove the aforementioned projects from our valuation.
MIAL project
Phase 1: Shifting of families
Shifting of families in phase 1 of the MIAL project has been delayed by
over a year. Initially to be completed before Feb ’10, shifting of families
has been since delayed to Apr ’11 for want of water connections by local
government agencies, legitimacy of families staying on MIAL land and
conflict among government agencies regarding this, and resistance of
certain societies to shift.
We understand that shifting of the families is the responsibility of the
MMRDA (a Government body). On the part of HDIL, it has handed over
more than 9,000 units at its Kurla site (phase 1) to shift the tenants. Units
under construction for phase 1 and part of phase 2 are 33,000. The delay is
mainly owing to undecided cut-off dates of tenants and resistance to
shifting by some sections.
TDR generation; right on 65 acres of land
TDR generation of up to 98% depends on construction milestones; 2%
depends on defect liability, up to six months after shifting of families to
rehab buildings. Hence, generation of TDR is largely independent of the
shifting of families.
Although the official ‘government rule’ has yet to come, we believe that
the state government clearance in Dec ’10 to amend FSI in suburban
Mumbai from 1 to 1.33 would have little impact on TDR pricing. The cost
of additional FSI (0.33x) would depend on how the government charges it
with respect to the ongoing ready reckoner rates in each micro-market. We
re-iterate that TDR prices depend on construction activity in Mumbai
In FY12, TDR sales would also depend on the amount of construction
required for MIAL phase 2 and land conveyed to the SRA for subsequent
locations. On the company selling the Andheri (E) land parcel recently, we
await more clarity on phase 2 projects. We estimate that HDIL, postconstruction-
commencement at Mahul, may also start rehab construction
in the eastern suburbs, provided it gets some clarity regarding shifting of
families in MIAL project.
The 65 acres to be allotted to HDIL, on which it plans to develop 10m
sqft of commercial space, depends on families shifting from encroached
airport land. Given the delay/uncertainty in shifting, we exclude the 10m
sqft development potential from our NAV.
Utilizing cash, de-risking business
The +`15bn cash built up on the balance sheet has been used to
acquire different projects, spending `9bn. This would add another
47-50m sqft to projects (of which, 29m sqft in Mumbai City). As the
projects are large, we await further clarity before assigning further
value to the projects.
A comfortable balance sheet today
FSI / land sales
Over and above its recurring TDR and FSI sales (in Vasai and Virar),
HDIL also sold 1m sqft of FSI in suburban Mumbai (the Siddharth Nagar
project) and a land parcel in Andheri East (Popular Car Bazaar) for `14bn
combined. This money would be realized in the next 2-4 quarters,
provided certain redevelopment commitments and approval processes are
fulfilled.
With this, although the company has altered its original stance of selling
FSI/land, realization from such high sales would keep it comfortable vs.
Mumbai peers.
Adding to 2QFY11 cash
The aforementioned sales would add to the 2QFY11 cash balance, already
high owing to the QIP (`11.5bn) and warrant premium (`1.78bn). This
would have set HDIL as one of the better-placed listed large developers in
connection with its balance sheet, with net D/E of 0.2x in Mar ’11e.
Focusing on suburban residential projects
From Mar ’09 to Dec ’10e, HDIL launched and sold stock in Mumbai
suburbs worth `57bn. Its focus has been on suburban locations (as against
the major focus of listed peers, of South-Central Mumbai) at a discount to
its competitors. Its recent launch of entry-level housing in Palghar (the
Mumbai Metropolitan Region) saw sales of ~`7bn (over 6,000 units).
According to its 2QFY11 presentation, HDIL plans to launch 27m sqft of
residential projects in the next 2-3 quarters. Residential projects, usually
requiring negative working capital, would add to its cash book.
New mega projects acquired
HDIL has recently acquired three projects (one slum rehab, one
redevelopment and one virgin land). Investment in the acquisition is `9bn
as of date.
In the Malvani project at Malad, HDIL acquired a 67% stake in
Lashkariya Construction. The project is to be developed over 70-80
acres, rehabilitating ~25,000 families. We understand the project has
already received “3K” approval from the state government and HDIL
has paid a 25% premium to the SRA. It has estimated sellable area of
25-28m sqft.
HDIL has also acquired redevelopment rights to SVP Nagar in
Andheri (W) for 98 buildings and ~3,200 and 3,500 families.
Management expects this to generate ~4m sqft of saleable area.
The third land parcel acquired is ~400 acres at Boisar, a distant suburb
in the MMR on the western side. We believe HDIL would launch an
affordable/entry-level housing project here on the lines of the Palghar
project launched in 3QFY11. We estimate this project to have a
potential sellable area of 18-20m sqft. Management intends to launch
it in the next six months.
With these three acquisitions, the company has maintained its focus on
slum rehabilitation and the Mumbai suburban mass market.
Although the aforementioned projects add between 47m and 50m sqft of
sellable area, we await further clarity on launch plans and status of the SRS
and redevelopment projects. Both are huge and could take 7-9 years.
Change in estimates
Our NAV is impacted by removal of 65 acres of free-sale land in
MIAL, part of phase 2, and phase 3 from valuation due to lack of
land visibility and adding a discount to some under-construction
slum-rehab projects in Mumbai. For now, the new acquisitions are
taken at cost
Valuation
We have removed the 10m sqft development (from the 65 acres of MIAL
land) from our development schedule, owing to delays or uncertainties in
shifting pf families. The impact on our NAV would be 18%
We remove MIAL phase 3 development schedule value on account of
ongoing land acquisition (land payment) and clarity regarding phase 2
rehab construction. The impact on our NAV would be 13%
We have assumed development schedules for slum rehab schemes/
redevelopment schemes. To take into account uncertainties in certain
projects, e.g., Bandra (E) SRS 1, we introduce a discount of 15%.
For planned (announced) launches in 2QFY11, we assume a development
schedule other than JDAs, and JDAs where deposit has been paid.
For its land bank in Vasai, Virar, and other cities, we assign a certain
premium to book value of acquisition (as taken before).
For our valuation, we have taken cost of equity as 19%, cost of debt as
13% and WACC of 15%.
Risks
Although we have taken into account delays in our MIAL assumptions, a
change in government policy could affect the project and, hence, value.
A slowdown in construction in Mumbai could affect the TDR market (9%
contribution)
Slowdown in sales
Financials
HDIL follows the project-completion method of accounting. It is
shifting to the percentage-completion method 1QFY12 onwards. We
await further clarity on the threshold limit, and on percent of work
on projects completed, in order to effect changes in our reporting
format.
FY11 – Revenue recognized. In addition to TDR and FSI sales, we have
estimated that HDIL would recognize revenue from the sale of FSI (of 1m
sqft) in Siddharth Nagar, Goregaon (W) and from the sale of the Andheri
(E) land parcel in FY11.
Inventory. Given the company’s accounting policy, all costs on projects
not delivered would show in inventories. Besides, we believe HDIL has
paid for other projects/land to be acquired and in acquisition/sanitization
phases; e.g., BKC Developers, Novinon Land parcels’ acquisition,
redevelopment project in Vikhroli etc., still to be announced for sale.
Investment in this is likely to be over `15bn. Although such projects are
likely to add more value, further clarity is required.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HDIL
Looking beyond MIAL; maintain Buy
Though MIAL redevelopment has been steady, shifting of
families has been delayed, raising risk for the 65 acres and
phases 2&3. Of the funds raised from QIP, and land & FSI sales,
we believe HDIL invested ~`9bn in three projects to further derisk
MIAL. We rollover our NAV to Mar 12e, lowering it to `255;
we trim our price target to `228, at 10% discount to NAV. Buy.
MIAL project. Shifting of families in phase 1 is likely to lag due
to issues at the government level (undecided cut-off dates of
tenants) and resistance to shifting by some sections. This raises
risk on the 65acre airport land and development of phases 2&3.
Utilizing cash, de-risking business. The +`15bn cash built up
on the balance sheet was used to acquire projects, investing `9bn
in three projects. This would add another 47-50m sqft land bank
(of which, 29m sqft would be in Mumbai City). As projects are
large, we await further clarity before assigning value to them.
Change estimates. Our NAV is impacted by removal of 65 acres
of free-sale land in MIAL, part of phase 2, and phase 3 from
valuation due to lack of land visibility and adding a discount to
some under-construction slum-rehab projects in Mumbai. For
now, the new acquisitions are taken at cost.
Valuation and risks. Our Mar ’12e NAV is `274 and target price
is `247, which is at 10% discount to NAV. At CMP, the stock
trades at 0.7x Mar ’12e PBV. Key risk: slowdown in execution.
MIAL: Shifting worries
Shifting of families in phase 1 is likely to lag due to issues at the
government level (undecided cut-off dates of tenants etc) and
resistance to shifting of families by some sections. This raises risk
on the 65acre airport land and development of phases 2&3. Hence,
we remove the aforementioned projects from our valuation.
MIAL project
Phase 1: Shifting of families
Shifting of families in phase 1 of the MIAL project has been delayed by
over a year. Initially to be completed before Feb ’10, shifting of families
has been since delayed to Apr ’11 for want of water connections by local
government agencies, legitimacy of families staying on MIAL land and
conflict among government agencies regarding this, and resistance of
certain societies to shift.
We understand that shifting of the families is the responsibility of the
MMRDA (a Government body). On the part of HDIL, it has handed over
more than 9,000 units at its Kurla site (phase 1) to shift the tenants. Units
under construction for phase 1 and part of phase 2 are 33,000. The delay is
mainly owing to undecided cut-off dates of tenants and resistance to
shifting by some sections.
TDR generation; right on 65 acres of land
TDR generation of up to 98% depends on construction milestones; 2%
depends on defect liability, up to six months after shifting of families to
rehab buildings. Hence, generation of TDR is largely independent of the
shifting of families.
Although the official ‘government rule’ has yet to come, we believe that
the state government clearance in Dec ’10 to amend FSI in suburban
Mumbai from 1 to 1.33 would have little impact on TDR pricing. The cost
of additional FSI (0.33x) would depend on how the government charges it
with respect to the ongoing ready reckoner rates in each micro-market. We
re-iterate that TDR prices depend on construction activity in Mumbai
In FY12, TDR sales would also depend on the amount of construction
required for MIAL phase 2 and land conveyed to the SRA for subsequent
locations. On the company selling the Andheri (E) land parcel recently, we
await more clarity on phase 2 projects. We estimate that HDIL, postconstruction-
commencement at Mahul, may also start rehab construction
in the eastern suburbs, provided it gets some clarity regarding shifting of
families in MIAL project.
The 65 acres to be allotted to HDIL, on which it plans to develop 10m
sqft of commercial space, depends on families shifting from encroached
airport land. Given the delay/uncertainty in shifting, we exclude the 10m
sqft development potential from our NAV.
Utilizing cash, de-risking business
The +`15bn cash built up on the balance sheet has been used to
acquire different projects, spending `9bn. This would add another
47-50m sqft to projects (of which, 29m sqft in Mumbai City). As the
projects are large, we await further clarity before assigning further
value to the projects.
A comfortable balance sheet today
FSI / land sales
Over and above its recurring TDR and FSI sales (in Vasai and Virar),
HDIL also sold 1m sqft of FSI in suburban Mumbai (the Siddharth Nagar
project) and a land parcel in Andheri East (Popular Car Bazaar) for `14bn
combined. This money would be realized in the next 2-4 quarters,
provided certain redevelopment commitments and approval processes are
fulfilled.
With this, although the company has altered its original stance of selling
FSI/land, realization from such high sales would keep it comfortable vs.
Mumbai peers.
Adding to 2QFY11 cash
The aforementioned sales would add to the 2QFY11 cash balance, already
high owing to the QIP (`11.5bn) and warrant premium (`1.78bn). This
would have set HDIL as one of the better-placed listed large developers in
connection with its balance sheet, with net D/E of 0.2x in Mar ’11e.
Focusing on suburban residential projects
From Mar ’09 to Dec ’10e, HDIL launched and sold stock in Mumbai
suburbs worth `57bn. Its focus has been on suburban locations (as against
the major focus of listed peers, of South-Central Mumbai) at a discount to
its competitors. Its recent launch of entry-level housing in Palghar (the
Mumbai Metropolitan Region) saw sales of ~`7bn (over 6,000 units).
According to its 2QFY11 presentation, HDIL plans to launch 27m sqft of
residential projects in the next 2-3 quarters. Residential projects, usually
requiring negative working capital, would add to its cash book.
New mega projects acquired
HDIL has recently acquired three projects (one slum rehab, one
redevelopment and one virgin land). Investment in the acquisition is `9bn
as of date.
In the Malvani project at Malad, HDIL acquired a 67% stake in
Lashkariya Construction. The project is to be developed over 70-80
acres, rehabilitating ~25,000 families. We understand the project has
already received “3K” approval from the state government and HDIL
has paid a 25% premium to the SRA. It has estimated sellable area of
25-28m sqft.
HDIL has also acquired redevelopment rights to SVP Nagar in
Andheri (W) for 98 buildings and ~3,200 and 3,500 families.
Management expects this to generate ~4m sqft of saleable area.
The third land parcel acquired is ~400 acres at Boisar, a distant suburb
in the MMR on the western side. We believe HDIL would launch an
affordable/entry-level housing project here on the lines of the Palghar
project launched in 3QFY11. We estimate this project to have a
potential sellable area of 18-20m sqft. Management intends to launch
it in the next six months.
With these three acquisitions, the company has maintained its focus on
slum rehabilitation and the Mumbai suburban mass market.
Although the aforementioned projects add between 47m and 50m sqft of
sellable area, we await further clarity on launch plans and status of the SRS
and redevelopment projects. Both are huge and could take 7-9 years.
Change in estimates
Our NAV is impacted by removal of 65 acres of free-sale land in
MIAL, part of phase 2, and phase 3 from valuation due to lack of
land visibility and adding a discount to some under-construction
slum-rehab projects in Mumbai. For now, the new acquisitions are
taken at cost
Valuation
We have removed the 10m sqft development (from the 65 acres of MIAL
land) from our development schedule, owing to delays or uncertainties in
shifting pf families. The impact on our NAV would be 18%
We remove MIAL phase 3 development schedule value on account of
ongoing land acquisition (land payment) and clarity regarding phase 2
rehab construction. The impact on our NAV would be 13%
We have assumed development schedules for slum rehab schemes/
redevelopment schemes. To take into account uncertainties in certain
projects, e.g., Bandra (E) SRS 1, we introduce a discount of 15%.
For planned (announced) launches in 2QFY11, we assume a development
schedule other than JDAs, and JDAs where deposit has been paid.
For its land bank in Vasai, Virar, and other cities, we assign a certain
premium to book value of acquisition (as taken before).
For our valuation, we have taken cost of equity as 19%, cost of debt as
13% and WACC of 15%.
Risks
Although we have taken into account delays in our MIAL assumptions, a
change in government policy could affect the project and, hence, value.
A slowdown in construction in Mumbai could affect the TDR market (9%
contribution)
Slowdown in sales
Financials
HDIL follows the project-completion method of accounting. It is
shifting to the percentage-completion method 1QFY12 onwards. We
await further clarity on the threshold limit, and on percent of work
on projects completed, in order to effect changes in our reporting
format.
FY11 – Revenue recognized. In addition to TDR and FSI sales, we have
estimated that HDIL would recognize revenue from the sale of FSI (of 1m
sqft) in Siddharth Nagar, Goregaon (W) and from the sale of the Andheri
(E) land parcel in FY11.
Inventory. Given the company’s accounting policy, all costs on projects
not delivered would show in inventories. Besides, we believe HDIL has
paid for other projects/land to be acquired and in acquisition/sanitization
phases; e.g., BKC Developers, Novinon Land parcels’ acquisition,
redevelopment project in Vikhroli etc., still to be announced for sale.
Investment in this is likely to be over `15bn. Although such projects are
likely to add more value, further clarity is required.
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