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Housing Development & Infrastructure
Property
Trading below book but triggers absent. With the stock down 46% over the past
3M, HDIL is trading at 0.6X current book value with FY2012E RoE of 13% and
manageable D/E of 0.35X. HDIL’s equity raising from FY2007 to date is Rs98/share i.e.
72% of current market cap. However, delays in MIAL rehabilitation and aggressive
project investments at this stage of the cycle have emerged as incremental concerns.
We retain our ADD rating with a target price of Rs180/share (0.8x BV) at 18% WACC
and lower value of MIAL project.
In-line 3QFY11
HDIL reported revenues of Rs4.6 bn (+11% yoy, +22% qoq, 12% above expectations), EBITDA of
Rs2.7 bn (+41% yoy, +12% qoq, 1% above expectations) and recurring PAT of Rs2.6 bn (+58%
yoy, +20% qoq, 14% above expectations). EBITDA margin declined 520 bps qoq to 58.5%
primarily due to an increase in construction costs. TDR pricing and volumes have remained steady -
HDIL sold 1.25 mn sq. ft of TDR in 3QFY11 at an average price of Rs3,100/sq. ft vs. 1.1 mn sq. ft
in 2QFY11 and 1.5 mn sq. ft in 3QFY10.
Delays in MIAL project and timing of project addition negatively impact investment thesis
The MIAL project is facing issues regarding eligibility of slum dwellers and is awaiting a solution
that suits all parties. We are now assuming only Phase I and Phase II of the project as part of our
NAV and also include only 5 mn sq. ft of free-sale area (10 mn sq. ft earlier) and delaying the freesale
date to FY2015. If the eligibility criteria are relaxed over the next one-two quarters and the
existing slum dwellers are rehabilitated, we would expect this to be a significant positive trigger.
HDIL has invested Rs 8.5 bn in three new projects – (1) Rs4 bn for a 69% stake in Lashkaria
Constructions for an SRS project in Malad (W) with potential development of 25 mn sq. ft, (2)
Rs2.5 bn for land acquisition for affordable housing and (3) Rs2 bn for MHADA redevelopment at
SPV Nagar (Versova). Addition to the land bank is usually assumed to be an NAV-enhancing step,
however, we find this addition worrying as (1) HDIL already has 27 mn sq. ft of forthcoming
residential projects (current projects under execution are for a total of 12.2 mn sq. ft), (2) holding
69% equity stake will not lead to any value unlocking over the next few years, and (3) we do not
appreciate the urgency in utilizing cash to buy land in an uncertain regulatory, price and raw
material inflation scenario.
Reduce target price to Rs180/share; retain ADD
We reduce our March-2012 NAV based target price to Rs180/share (Rs310 earlier) as we (1)
increase WACC to 18% (highest end of our band) given the higher risk in SRS projects, (2) reduce
value from MIAL project to Rs12.6 bn (versus Rs63 bn earlier) by assuming only Phase I and II will
be completed and sale of the free sale commercial property will be delayed, (3) increase net debt
estimates (based on cash outflow for land acquisition) and (4) increase interest cost by 200 bps.
In-line 3QFY11 with revenues above estimates but PBT in-line
HDIL reported PBT of Rs2.7 bn (+40% yoy, +10% qoq), which is 1% lower than our
estimate of Rs2.8 bn. The effective tax rate declined to 6% vs 14% in 2QFY11 and 17% in
3QFY10 since (1) the company had projected for tax on yearly basis and was not expecting
FSI sale at Popular Car Bazaar which will fall under MAT taxation and (2) a majority of
income came through TDR sales which also falls under MAT.
The company registered FSI sales of Rs500 mn from Popular Car Bazaar in 3QFY11. TDR
sales of 1.25 mn sq. ft and average TDR price of Rs3,100 were in line with estimates.
EBITDA margin declined 520 bps due to higher construction costs but remained in the
acceptable band at 58.5%.
MIAL project faces rehabilitation delays
The MIAL project is facing issues regarding the eligibility of slum dwellers for rehabilitation in
units constructed by HDIL. This will require government intervention and a solution that suits
multiple parties (developer, slum dweller, government, judiciary, municipal bodies). Given
that this will be a complicated process and recent developer statements that approvals for
projects have slowed down in Mumbai, we would expect this issue to not be resolved in a
hurry. We, therefore, are now assuming only Phase I and Phase II of the project as part of
our NAV and also include only 5 mn sq. ft of free-sale area (10 mn sq. ft earlier) and
delaying the free-sale date to FY2015. If the eligibility criteria are relaxed over the next onetwo
quarters and the existing slum dwellers are rehabilitated, we would expect this to be a
significant positive trigger.
New project additions raise concerns rather than add to our NAV
HDIL has invested Rs 8.5 bn in three new projects –
Rs4 bn for a 69% stake in Lashkaria Constructions for an SRS project in Malad (W) with
potential development of 25 mn sq. ft,
Rs 2.5 bn for land acquisition for affordable housing and
Rs2 bn for MHADA redevelopment at SPV Nagar (Versova).
Addition to the land bank is typically a NAV enhancing step, however, we find this addition
worrying as (1) HDIL already has 27 mn sq. ft of forthcoming residential projects (current
projects under execution are for a total of 12.2 mn sq. ft), (2) holding 69% equity stake will
not lead to any value unlocking over the next few years, and (3) we do not appreciate the
urgency in utilizing cash to buy land in an uncertain price and raw material inflation scenario.
Reduce target price to Rs180/share
We reduce our March-2012 NAV based target price to Rs180/share (Rs310 earlier) as
We increase WACC to 18% (highest end of our band) given the higher risk in SRS
projects which are over 30% of our estimated NAV,
We reduce value from MIAL project to Rs12.6 bn (versus Rs63 bn earlier) by assuming
only Phase I and II will be completed and sale of the free sale commercial property will be
delayed,
We increase net debt estimates (largely factoring in cash outflow for land acquisition) to
Rs29.7 bn versus Rs17.8 bn
We increase interest cost by 200 bps. HDIL mentioned current interest cost is 13.5% and
we are now assuming 14.5% for FY2012E.
Business Update
HDIL launched Paradise City in Plaghar in Dec 2010 and as on 31 Dec 2010, the company
has managed to sell ~95% of phase 1 and ~50% of phase 2 of the project. Overall, HDIL
has managed to sell 73% of its ongoing residential portfolio of 12.2 mn sq. ft at a blended
average rate of Rs4,500/sq ft
Ambitious plans to launch 27 mn sq. ft of residential projects
Compared to 2QFY11, HDIL has (1) sold the FSI in its Popular Car Bazaar project, (2)
launched Palgar Townsip (Paradise City Phase 1 and 2) and (3) is planning to launch
additional projects at Kharadi and MMR (Novignon Property).
Debt goes up marginally
Debt went up marginally by Rs90 mn and the D/E ratio as on 31 Dec 2010 is at 0.4 vs. 0.5 in
2QFY11/3QFY10. The company paid off ~2bn of its debt in Jan 2011 and is targeting to pay
off Rs1 bn - Rs1.5 bn by March 2011. Over the next year, HDIL is aiming to reduce its debt
by 10%-15%. The company’s current cost of debt stands at 13.5%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Housing Development & Infrastructure
Property
Trading below book but triggers absent. With the stock down 46% over the past
3M, HDIL is trading at 0.6X current book value with FY2012E RoE of 13% and
manageable D/E of 0.35X. HDIL’s equity raising from FY2007 to date is Rs98/share i.e.
72% of current market cap. However, delays in MIAL rehabilitation and aggressive
project investments at this stage of the cycle have emerged as incremental concerns.
We retain our ADD rating with a target price of Rs180/share (0.8x BV) at 18% WACC
and lower value of MIAL project.
In-line 3QFY11
HDIL reported revenues of Rs4.6 bn (+11% yoy, +22% qoq, 12% above expectations), EBITDA of
Rs2.7 bn (+41% yoy, +12% qoq, 1% above expectations) and recurring PAT of Rs2.6 bn (+58%
yoy, +20% qoq, 14% above expectations). EBITDA margin declined 520 bps qoq to 58.5%
primarily due to an increase in construction costs. TDR pricing and volumes have remained steady -
HDIL sold 1.25 mn sq. ft of TDR in 3QFY11 at an average price of Rs3,100/sq. ft vs. 1.1 mn sq. ft
in 2QFY11 and 1.5 mn sq. ft in 3QFY10.
Delays in MIAL project and timing of project addition negatively impact investment thesis
The MIAL project is facing issues regarding eligibility of slum dwellers and is awaiting a solution
that suits all parties. We are now assuming only Phase I and Phase II of the project as part of our
NAV and also include only 5 mn sq. ft of free-sale area (10 mn sq. ft earlier) and delaying the freesale
date to FY2015. If the eligibility criteria are relaxed over the next one-two quarters and the
existing slum dwellers are rehabilitated, we would expect this to be a significant positive trigger.
HDIL has invested Rs 8.5 bn in three new projects – (1) Rs4 bn for a 69% stake in Lashkaria
Constructions for an SRS project in Malad (W) with potential development of 25 mn sq. ft, (2)
Rs2.5 bn for land acquisition for affordable housing and (3) Rs2 bn for MHADA redevelopment at
SPV Nagar (Versova). Addition to the land bank is usually assumed to be an NAV-enhancing step,
however, we find this addition worrying as (1) HDIL already has 27 mn sq. ft of forthcoming
residential projects (current projects under execution are for a total of 12.2 mn sq. ft), (2) holding
69% equity stake will not lead to any value unlocking over the next few years, and (3) we do not
appreciate the urgency in utilizing cash to buy land in an uncertain regulatory, price and raw
material inflation scenario.
Reduce target price to Rs180/share; retain ADD
We reduce our March-2012 NAV based target price to Rs180/share (Rs310 earlier) as we (1)
increase WACC to 18% (highest end of our band) given the higher risk in SRS projects, (2) reduce
value from MIAL project to Rs12.6 bn (versus Rs63 bn earlier) by assuming only Phase I and II will
be completed and sale of the free sale commercial property will be delayed, (3) increase net debt
estimates (based on cash outflow for land acquisition) and (4) increase interest cost by 200 bps.
In-line 3QFY11 with revenues above estimates but PBT in-line
HDIL reported PBT of Rs2.7 bn (+40% yoy, +10% qoq), which is 1% lower than our
estimate of Rs2.8 bn. The effective tax rate declined to 6% vs 14% in 2QFY11 and 17% in
3QFY10 since (1) the company had projected for tax on yearly basis and was not expecting
FSI sale at Popular Car Bazaar which will fall under MAT taxation and (2) a majority of
income came through TDR sales which also falls under MAT.
The company registered FSI sales of Rs500 mn from Popular Car Bazaar in 3QFY11. TDR
sales of 1.25 mn sq. ft and average TDR price of Rs3,100 were in line with estimates.
EBITDA margin declined 520 bps due to higher construction costs but remained in the
acceptable band at 58.5%.
MIAL project faces rehabilitation delays
The MIAL project is facing issues regarding the eligibility of slum dwellers for rehabilitation in
units constructed by HDIL. This will require government intervention and a solution that suits
multiple parties (developer, slum dweller, government, judiciary, municipal bodies). Given
that this will be a complicated process and recent developer statements that approvals for
projects have slowed down in Mumbai, we would expect this issue to not be resolved in a
hurry. We, therefore, are now assuming only Phase I and Phase II of the project as part of
our NAV and also include only 5 mn sq. ft of free-sale area (10 mn sq. ft earlier) and
delaying the free-sale date to FY2015. If the eligibility criteria are relaxed over the next onetwo
quarters and the existing slum dwellers are rehabilitated, we would expect this to be a
significant positive trigger.
New project additions raise concerns rather than add to our NAV
HDIL has invested Rs 8.5 bn in three new projects –
Rs4 bn for a 69% stake in Lashkaria Constructions for an SRS project in Malad (W) with
potential development of 25 mn sq. ft,
Rs 2.5 bn for land acquisition for affordable housing and
Rs2 bn for MHADA redevelopment at SPV Nagar (Versova).
Addition to the land bank is typically a NAV enhancing step, however, we find this addition
worrying as (1) HDIL already has 27 mn sq. ft of forthcoming residential projects (current
projects under execution are for a total of 12.2 mn sq. ft), (2) holding 69% equity stake will
not lead to any value unlocking over the next few years, and (3) we do not appreciate the
urgency in utilizing cash to buy land in an uncertain price and raw material inflation scenario.
Reduce target price to Rs180/share
We reduce our March-2012 NAV based target price to Rs180/share (Rs310 earlier) as
We increase WACC to 18% (highest end of our band) given the higher risk in SRS
projects which are over 30% of our estimated NAV,
We reduce value from MIAL project to Rs12.6 bn (versus Rs63 bn earlier) by assuming
only Phase I and II will be completed and sale of the free sale commercial property will be
delayed,
We increase net debt estimates (largely factoring in cash outflow for land acquisition) to
Rs29.7 bn versus Rs17.8 bn
We increase interest cost by 200 bps. HDIL mentioned current interest cost is 13.5% and
we are now assuming 14.5% for FY2012E.
Business Update
HDIL launched Paradise City in Plaghar in Dec 2010 and as on 31 Dec 2010, the company
has managed to sell ~95% of phase 1 and ~50% of phase 2 of the project. Overall, HDIL
has managed to sell 73% of its ongoing residential portfolio of 12.2 mn sq. ft at a blended
average rate of Rs4,500/sq ft
Ambitious plans to launch 27 mn sq. ft of residential projects
Compared to 2QFY11, HDIL has (1) sold the FSI in its Popular Car Bazaar project, (2)
launched Palgar Townsip (Paradise City Phase 1 and 2) and (3) is planning to launch
additional projects at Kharadi and MMR (Novignon Property).
Debt goes up marginally
Debt went up marginally by Rs90 mn and the D/E ratio as on 31 Dec 2010 is at 0.4 vs. 0.5 in
2QFY11/3QFY10. The company paid off ~2bn of its debt in Jan 2011 and is targeting to pay
off Rs1 bn - Rs1.5 bn by March 2011. Over the next year, HDIL is aiming to reduce its debt
by 10%-15%. The company’s current cost of debt stands at 13.5%.
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