HDIL --Value masked by near-term concerns:: Macquarie Research,

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HDIL
Value masked by near-term concerns
Event
 HDIL has the most-established track record of executing SRS projects in
Mumbai. The company is also expanding its presence in residential and
commercial development. HDIL has land reserves of ~240m sqf (including
Transferable Development Rights).

Impact
 The right strategy in Mumbai: The Mumbai residential market has
witnessed a surge in speculation, driving prices far beyond the 2007 peak.
Developers have held prices despite a sharp drop in affordability and, hence,
volumes. HDIL’s strategy takes advantage of this latent demand. It has
emerged as a ‘price warrior’ in every micro market launch. The company has
consistently been able to sell inventory within weeks of launch, as seen in
places such as Kurla, Mulund and Goregaon. This is because the pricing is at
a 10–15% discount to the market. Despite this, the land cost advantage
inherent in slum rehab helps keep margins at least 10% higher than the
industry average.
 Fortified balance sheet: HDIL’s gearing ratios have improved significantly in
the last six quarters (net debt to equity now stands at 0.3x). This was driven
by two secondary offerings (total US$600m), strength in the TDR (transferable
development rights) market and cash flow from residential launches. All major
payments for FY11 have been refinanced for three to five years. Funds for
buying land for subsequent phases of the airport project are now no longer a
concern.
 Volatility to settle down over medium term: The Mumbai airport slum
rehab project contributes around 50% of HDIL’s NAV (including TDRs).
Despite HDIL’s impressive performance in construction of rehab units,
regulatory issues have led to project delays. Even after building in a four-year
delay, we continue to believe that the project value is more than HDIL’s
current market cap. HDIL has also recently invested around Rs9bn in three
new projects in the Mumbai suburbs area. We believe these investments will
fuel future growth.
Action and recommendation
 HDIL currently trades at around a 65% NAV discount. With the resolution of
issues related to the airport slum project in the medium term and HDIL’s solid
performance in other projects, we expect this discount to narrow. Our target
price of Rs316 is therefore set at a 20% NAV discount.


HDIL Aide Memoire
Operational issues
1. What is your outlook on residential prices and volumes in the island city of Mumbai and in the suburbs of Mumbai?
2. Which product types (residential-mass/ luxury, commercial and retail) are likely to see the most action in the next 12
months and the next three to five years?
3. Please throw some light on your upcoming projects over the next two to three years.
4. What has been the response for the projects that have already launched already?
5. What do you think could be bottlenecks in achieving planned expansion in terms of material supply, capacity and capital?
Financial issues
1. Please share some thoughts on the capital requirement for your planned expansion. Do you have any fund raising plans?
2. Please throw some light on your targeted cash flow from operations in the next 12 months?
Regulatory issues
1. What would you think are the biggest risks facing the company? Do you think there are any regulatory/policy risks?
2. What are the regulatory and policy risks the sector and company are facing?