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Housing Development and Infrastructure
Redevelopment woes; cut to Neutral
Downgrade to Neutral on lack of triggers, cut PO to Rs175
We downgrade HDIL to Neutral and sharply lower our PO to Rs175 from Rs340,
implying 8% potential upside. We have not assigned any value to the airport
rehab project (Rs174/sh earlier) in our current estimate. We believe most of the
downside from the delay in airport rehabilitation and the expected slowdown in
Mumbai residential is already priced in. But upside likely capped as airport project
approvals are unlikely in the next 12 months and cash flows would be unexciting
given substantial investments in redevelopment / commercial projects in FY12.
Airport rehab to face significant delays
The indefinite delay in the airport project will severely impact cash flows and
earnings near term. The project’s future is dependent primarily on government’s
change in eligibility norm in the slum rehab policy which we think could well take
over 9-12 months. Moreover, HDIL has already invested the surplus funds in other
projects, and therefore would need to raise more equity/debt whenever approvals
come through, a scenario which looks difficult for the next 12 months.
Unexciting cash flows in FY12 to cap upside
We expect HDIL’s cash flow to be unexciting in FY12 due to drop in TDR sales,
and investment in construction of commercial assets and in recently acquired
redevelopment projects. However, the company is unlikely to face challenges on
debt servicing since debt repayments start from FY13 while FSI sale for Rs13bn
in 4QFY11 will take care of funding requirement for FY12.
Affordable housing and FSI sale protect downside
HDIL’s increased focus on affordable housing and residential development will
help reduce its dependence on volatile TDR/FSI and sustain earnings and
cashflow over the next two years even in the absence of TDR sales. The sale of
FSI for Rs13bn in 4Q will provide further comfort on liquidity in near term.
Downgrade to Neutral; PO of Rs175
We downgrade HDIL to Neutral rating and cut our PO to Rs175 from Rs340,
offering 12% potential upside. Our PO is based on 15% discount to our NAV of
Rs.206. The sharply lower NAV primarily factors in no value for the airport rehab
project (earlier accounted for Rs174/sh or 38% of NAV) due to uncertainty on the
subsequent phases and higher discount to longer dated land bank in outskirts of
Mumbai. We believe most of the downside from the delay in this project and the
expected slowdown in Mumbai residential market is already in the stock post a
sharp 40% correction in the last six months. But the upside is likely capped as
airport project approvals are unlikely in the next 9-12 months and cash flows
would be unexciting given substantial capital investments in FY12.
Table 1: Expected positives and negatives triggers over next 12 months
Key positives Key negatives
Sale of FSI for Rs13bn in 4QFY11
Delay in approvals for Airport rehab project for next 12
months
Strong sales volume in affordable housing projects in
FY12 Unexciting cash flows in FY12 to disappoint the street
No debt repayments over FY12, thus comfortable on
liquidity Sales volume in Mumbai projects to remain muted
Diversified cash flow stream as compared to 2008-09
Source: BofA Merrill Lynch Global Research
NAV valuation - conservative approach
We have now valued only the projects where the regulatory risks are minimal and
have provided higher discount to land banks expected to be monetized beyond 5-
6 years, like the Vasai / Virar land bank or Kochi/Hyderabad. We have not
assigned any value to the airport rehab project due to lack of clarity on the timing
of the approval for the subsequent phases. Our PO of Rs175 is based on 15%
discount to NAV of Rs206. We expect the stock to trade at 15% discount given its
strong position in redevelopment/ rehab projects in Mumbai, high margin and
comfortable liquidity. While the redevelopment projects are prone to delays, we
believe our NAV factors in most of the risk.
Launched projects account for Rs119/sh or 41% of the NAV for HDIL while the
long dated land bank in Vasai/Virar and Hyderabad/Kochi account for Rs63/sh or
22% of the NAV. The remaining 35% is from projects which HDIL has acquired in
the last six months or is expected to be launched over the next 2-3 years.
The NAV is highly sensitive to drop in residential prices as every 1% drop in
residential price assumption leads to a 2% drop in NAV. But we have already
factored in a 15-20% drop in prices for HDIL’s projects in Mumbai.
Key changes from earlier NAV estimate
We highlight the key changes to our NAV estimate below-
Airport rehab project not included in the valuation while earlier it accounted
for Rs174/sh or 38% of our NAV
Lower valuation for Virar/Vasai and Hyderabad/Kochi projects– We have
lowered our valuation for longer dated projects/ land bank like Virar/ Vasai
projects and Hyderabad/Kochi projects since we expect the monetization to
remain very slow in these region and cash flows expected only post FY15-
16. We have reduced the value by 35% by increasing the discount by 20-
30% for these assets.
We have increased the valuation of the residential assets by 10% given the
acquisition of the new projects in 3Q and launch of the affordable housing
project.
Higher debt estimate given the recent investment in the new projects.
Why not a Underperform
Delay in the airport project priced in
The sharp correction in the stock since November 2010 already discounts the
delay and uncertainty over the airport rehab project. We have removed the
project from our NAV valuation and therefore we do not expect any negative
news flow on the project to impact HDIL’s valuation.
Liquidity is comfortable
HDIL remains comfortable on liquidity as its debt repayments start beyond FY12.
Unlike in FY09, majority of the firm’s debt is longer term as HDIL, over the last 12-
18 months, has refinanced most of its shorter-term debt to longer-term
debentures/ debt with maturity of 3-5 years. The company will have sufficient
funds from the recent FSI sale (around Rs11bn expected in the next 2-3 months)
to prepay debt which is maturing in FY12. The balance sheet is in much better
shape compared to FY09 as HDIL has raised substantial capital over the last two
years, though debt at absolute levels remains high. HDIL is also targeting 20%
reduction in debt over the next few quarters but it will be dependent on whether it
invests in new redevelopment projects (Sion, Andheri).
Diversified cash flow stream – Moving away from TDR model
Over the last two years, HDIL has changed its model from being entirely
dependent on highly volatile TDR/FSI sale to a more stable development and sale
model. The sale of TDR and FSI are highly dependent on the liquidity with
developers and thus tends to dry up as interest rates increase sharply and
residential sales volume drop. But HDIL has slowly diversified its cash flow by
launching 12mn sq ft (9mn sq ft pre sold) of residential projects with sale value of
Rs55bn in the last two years. It is looking to further launch 18mn sq ft over the
next 12-18 months to boost its development business.
Therefore, cash flows from these projects and upcoming launches will help the
firm fund the construction of projects, service its debt obligations and sustain
earnings unlike in 2009 when it was entirely dependent on TDR/FSI sales for
cash flows and earnings.
Trading at cheap P/E and P/B
HDIL is currently trading at 6x FY12E earnings and 0.6x FY12E book value,
which compares well with other real estate developers which are trading at 13x
FY12E earnings and 1.1x FY12E book value. During the last cycle, HDIL went as
low as 0.35x forward book value but we believe it is much better placed this time
around, given it has
No liquidity issues
Better earnings profile
Why not a Buy
Unexciting cash flows in FY12
We expect HDIL to continue to disappoint on cash flows in FY12 given large
investments in commercial and redevelopment projects and lower TDR sales. We
have cut our free cash flow estimate for FY12 and FY13 to Rs1.5bn and Rs5bn
from Rs8bn and Rs18bn, respectively. In the absence of TDR sales, residential
sales will be the key driver. But the construction expenses on the redevelopment
and commercial projects are likely to eat up most of the surplus from the
residential sales. There is a downside risk to our estimate for FY12 given that
HDIL is looking to add more redevelopment projects in suburban Mumbai, such
as with the projects in Sion and Andheri. Table 2 lists all the estimated cash
inflow and outflows for HDIL for FY12 and FY13.
Lack of TDR sales to impact cash inflow
TDRs have been a major source of cash inflow for HDIL in the last two years. We
expect the sale of TDR to fall from 3.8mn sq ft in FY11 to 2mn sq ft in FY12 due
to delay in approval for the airport project. This in turn would lead to sharply lower
cash flows at Rs6bn in FY12 as against Rs11.5bn in FY11 from TDR sales.
Investment in commercial assets a drag
HDIL continues to invest in creating office/hotel/commercial assets which require
substantial investment during the construction phase. This, we believe, will be a
drag on its cash flows. Also some of the investments– like hotel projects in
Mumbai, IT SEZ in Kochi – are not very lucrative. Kochi is still struggling to
establish itself as an IT destination and we don’t expect rentals to be higher than
Rs30-34/sq ft/month, while hotels are not a very high return / cash flow business.
We expect HDIL to invest Rs3.5bn annually on the announced projects over the
next three years.
HDIL is regarded as a redevelopment play and we believe there are better ways
to play the commercial story – DLF/ Oberoi. Thus, investment by HDIL in
commercial assets is not a positive for the stock in the medium term.
Redevelopment projects - capital intensive
HDIL is developing two redevelopment projects and recently added two more
large projects. Earlier HDIL was predominantly into slum rehabilitation. We
believe initial investment and expenses for the slum rehab project is lower than
that for the redevelopment project. First, the developer has to pay to the current
owners upfront fees, secondly the redeveloped units are much larger in size as
compared to the slum rehab units and thirdly the competition is higher in
redevelopment projects as compared to slum rehab projects.
The recent projects acquired by HDIL are expected to be capital intensive over
the next 12-18 months, particularly the SVP Nagar – Andheri and Malad project.
HDIL has already invested Rs6bn for acquiring the rights for redevelopment of
these projects. We expect it to further invest Rs3-4bn over the next two years to
create the redevelopment units before it could commercially sell its share of FSI/
or launch project for free sale.
Airport project key to turnaround
The airport project is the key for the fortune of HDIL and the indefinite delay will
impact cash flows and earnings severely in the near term. The project had
accounted for Rs175/sh of NAV and we believe the uncertainty is likely to be a
drag on the stock performance. The future of the project is now dependent
primarily on the government’s change in slum rehab policy, which we think could
well take over 9-12 months. We are removing the project from our valuation since
there is no visibility on the approval of the subsequent phases and relocation of
slum dwellers.
Approval dependent on change in eligibility norms
The subsequent phases and the relocation are now primarily dependent on the
eligibility norm of the slum dwellers for the rehab unit. Currently only those slum
dwellers who are residing in the slum since year 2000 are eligible for rehab units.
But as per media reports only 60-65% of the families in the airport rehab may
have been residing since 2000. Therefore, in order make the project a success,
the government would need to relax the eligibility norm. This, we believe, is a
major issue and the government in unlikely to decide in a hurry since it could also
impact other slum rehab projects – like Dharavi rehab and the ones which are
being undertaken by other developers.
Good news unlikely for next 9-12 months
The project has faced significant delays in the last 12-18 months. Even if the
government decides on the policy, it will take a further 3-6 months for completing
the survey to determine the eligible slum dwellers. Looking at the current political
environment, it is unlikely that the government will take any decision which may
appear to hugely benefit any particular developer.
Ascribing no value to the project
In light of the above, we are now not ascribing any value to the project and would
wait for the government’s decision on the matter. HDIL will receive another 3mn
sq ft of TDRs from the current phase over the next 12-15months, while we
estimate it has to spend over Rs5bn for the construction of the 33,000 units. The
sale of TDR from the project accounted for Rs14bn and Rs10bn of revenue in
FY10 and 9MFY11, respectively. We now estimate this to fall to Rs6bn in FY12
and Rs2.4bn in FY13.
Affordable boost to sales volume in FY12
We have built in sales volume of 8.9mn and 10.8mn for FY12 and FY13,
respectively, for HDIL, lower by 25% from our earlier estimate, primarily to factor
in lower TDR sales for the next two years in the absence of approval for
subsequent phases of the airport project. Further, we have increased the
proportion of affordable housing in overall residential sales. Therefore we, expect
the pre-sale value to remain flat in FY12 and grow by 15% in FY13. We think the
strong volume from affordable housing will not be sufficient to drive the stock
higher from current levels.
But volume in Mumbai projects more important
HDIL plans to launch 12mn sq ft of affordable housing project and 6mn sq ft of
Mumbai residential projects in the next 12-18 months. We believe the
performance of the stock is dependent on the higher-margin Mumbai projects. In
the last two years, the company has sold around 2-2.5mn sq ft annually in
Mumbai, and we expect FY12 to be no different even though it plans to launch
6mn sq ft of projects over the next 12-18 months. Most of the Mumbai projects
are redevelopment projects and hence prone to delays (Kandivili project was
expected to be launched in 1HFY11, but still not launched). Secondly, the
currently launched phases already have inventory, and so the subsequent
launches will be delayed.
The company's recent affordable housing project in the outskirts of Mumbai
received very good response, having sold over 3.75mn sq ft in 3Q. Riding on this
success, it is looking to launch similar projects over the next 12 months. We
expect the demand to remain strong in these projects as HDIL had priced these
attractively at around Rs2,000/sq ft.
Pricing correction factored in
We don’t see any downside risk to our pricing assumptions since our estimates
are already 15-20% lower than the current prevailing prices and only 15-20%
higher than the bottom prices we saw in 2009.
Financials - Cut estimates to factor delays
We have cut our earnings estimate for FY12 and FY13 by 40-45% on the back of
30-35% reduction in our revenue estimate to factor in
Sharply lower TDR sales - We are now factoring TDR sales of Rs6bn in
FY12, against our earlier estimate of Rs15.6bn, and Rs2.5bn in FY13,
against our earlier estimate of Rs15.6bn.
Lower sales estimate for Mumbai projects – We have cut our pre-sales
estimate for Mumbai projects from FY11-12 and built in higher sales from
affordable housing projects.
Lower EBIDTA margin – We have lowered our EBIDTA margin estimate for
FY12/13 from 55% to 48% due to lack of TDR sales and higher contribution
from affordable housing projects.
Proposing change in accounting
HDIL currently follows project completion accounting unlike other developers who
follow percentage completion. It is currently evaluating options to move to
percentage completion from FY12. This, we believe, would also imply
restatement of financials for earlier years and could lead to sharp increase in
FY11 earnings. The change in accounting will also lead to change in our earnings
estimates but is not likely to impact cash flows or valuation.
FSI sale to cushion some impact
HDIL had signed MOUs with a couple of developers to sell FSI in two of its projects
in the last six months for around Rs13bn. It expects to complete the transaction as
well as recognize the revenues in 4Q. But we expect one of the transactions to spill
over to FY12. The FSI sale should help HDIL report 4% growth in FY12. But we
don’t expect more such deals as with falling volume and tighter liquidity, developers
would be cautious on committing funds to new land purchases.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Housing Development and Infrastructure
Redevelopment woes; cut to Neutral
Downgrade to Neutral on lack of triggers, cut PO to Rs175
We downgrade HDIL to Neutral and sharply lower our PO to Rs175 from Rs340,
implying 8% potential upside. We have not assigned any value to the airport
rehab project (Rs174/sh earlier) in our current estimate. We believe most of the
downside from the delay in airport rehabilitation and the expected slowdown in
Mumbai residential is already priced in. But upside likely capped as airport project
approvals are unlikely in the next 12 months and cash flows would be unexciting
given substantial investments in redevelopment / commercial projects in FY12.
Airport rehab to face significant delays
The indefinite delay in the airport project will severely impact cash flows and
earnings near term. The project’s future is dependent primarily on government’s
change in eligibility norm in the slum rehab policy which we think could well take
over 9-12 months. Moreover, HDIL has already invested the surplus funds in other
projects, and therefore would need to raise more equity/debt whenever approvals
come through, a scenario which looks difficult for the next 12 months.
Unexciting cash flows in FY12 to cap upside
We expect HDIL’s cash flow to be unexciting in FY12 due to drop in TDR sales,
and investment in construction of commercial assets and in recently acquired
redevelopment projects. However, the company is unlikely to face challenges on
debt servicing since debt repayments start from FY13 while FSI sale for Rs13bn
in 4QFY11 will take care of funding requirement for FY12.
Affordable housing and FSI sale protect downside
HDIL’s increased focus on affordable housing and residential development will
help reduce its dependence on volatile TDR/FSI and sustain earnings and
cashflow over the next two years even in the absence of TDR sales. The sale of
FSI for Rs13bn in 4Q will provide further comfort on liquidity in near term.
Downgrade to Neutral; PO of Rs175
We downgrade HDIL to Neutral rating and cut our PO to Rs175 from Rs340,
offering 12% potential upside. Our PO is based on 15% discount to our NAV of
Rs.206. The sharply lower NAV primarily factors in no value for the airport rehab
project (earlier accounted for Rs174/sh or 38% of NAV) due to uncertainty on the
subsequent phases and higher discount to longer dated land bank in outskirts of
Mumbai. We believe most of the downside from the delay in this project and the
expected slowdown in Mumbai residential market is already in the stock post a
sharp 40% correction in the last six months. But the upside is likely capped as
airport project approvals are unlikely in the next 9-12 months and cash flows
would be unexciting given substantial capital investments in FY12.
Table 1: Expected positives and negatives triggers over next 12 months
Key positives Key negatives
Sale of FSI for Rs13bn in 4QFY11
Delay in approvals for Airport rehab project for next 12
months
Strong sales volume in affordable housing projects in
FY12 Unexciting cash flows in FY12 to disappoint the street
No debt repayments over FY12, thus comfortable on
liquidity Sales volume in Mumbai projects to remain muted
Diversified cash flow stream as compared to 2008-09
Source: BofA Merrill Lynch Global Research
NAV valuation - conservative approach
We have now valued only the projects where the regulatory risks are minimal and
have provided higher discount to land banks expected to be monetized beyond 5-
6 years, like the Vasai / Virar land bank or Kochi/Hyderabad. We have not
assigned any value to the airport rehab project due to lack of clarity on the timing
of the approval for the subsequent phases. Our PO of Rs175 is based on 15%
discount to NAV of Rs206. We expect the stock to trade at 15% discount given its
strong position in redevelopment/ rehab projects in Mumbai, high margin and
comfortable liquidity. While the redevelopment projects are prone to delays, we
believe our NAV factors in most of the risk.
Launched projects account for Rs119/sh or 41% of the NAV for HDIL while the
long dated land bank in Vasai/Virar and Hyderabad/Kochi account for Rs63/sh or
22% of the NAV. The remaining 35% is from projects which HDIL has acquired in
the last six months or is expected to be launched over the next 2-3 years.
The NAV is highly sensitive to drop in residential prices as every 1% drop in
residential price assumption leads to a 2% drop in NAV. But we have already
factored in a 15-20% drop in prices for HDIL’s projects in Mumbai.
Key changes from earlier NAV estimate
We highlight the key changes to our NAV estimate below-
Airport rehab project not included in the valuation while earlier it accounted
for Rs174/sh or 38% of our NAV
Lower valuation for Virar/Vasai and Hyderabad/Kochi projects– We have
lowered our valuation for longer dated projects/ land bank like Virar/ Vasai
projects and Hyderabad/Kochi projects since we expect the monetization to
remain very slow in these region and cash flows expected only post FY15-
16. We have reduced the value by 35% by increasing the discount by 20-
30% for these assets.
We have increased the valuation of the residential assets by 10% given the
acquisition of the new projects in 3Q and launch of the affordable housing
project.
Higher debt estimate given the recent investment in the new projects.
Why not a Underperform
Delay in the airport project priced in
The sharp correction in the stock since November 2010 already discounts the
delay and uncertainty over the airport rehab project. We have removed the
project from our NAV valuation and therefore we do not expect any negative
news flow on the project to impact HDIL’s valuation.
Liquidity is comfortable
HDIL remains comfortable on liquidity as its debt repayments start beyond FY12.
Unlike in FY09, majority of the firm’s debt is longer term as HDIL, over the last 12-
18 months, has refinanced most of its shorter-term debt to longer-term
debentures/ debt with maturity of 3-5 years. The company will have sufficient
funds from the recent FSI sale (around Rs11bn expected in the next 2-3 months)
to prepay debt which is maturing in FY12. The balance sheet is in much better
shape compared to FY09 as HDIL has raised substantial capital over the last two
years, though debt at absolute levels remains high. HDIL is also targeting 20%
reduction in debt over the next few quarters but it will be dependent on whether it
invests in new redevelopment projects (Sion, Andheri).
Diversified cash flow stream – Moving away from TDR model
Over the last two years, HDIL has changed its model from being entirely
dependent on highly volatile TDR/FSI sale to a more stable development and sale
model. The sale of TDR and FSI are highly dependent on the liquidity with
developers and thus tends to dry up as interest rates increase sharply and
residential sales volume drop. But HDIL has slowly diversified its cash flow by
launching 12mn sq ft (9mn sq ft pre sold) of residential projects with sale value of
Rs55bn in the last two years. It is looking to further launch 18mn sq ft over the
next 12-18 months to boost its development business.
Therefore, cash flows from these projects and upcoming launches will help the
firm fund the construction of projects, service its debt obligations and sustain
earnings unlike in 2009 when it was entirely dependent on TDR/FSI sales for
cash flows and earnings.
Trading at cheap P/E and P/B
HDIL is currently trading at 6x FY12E earnings and 0.6x FY12E book value,
which compares well with other real estate developers which are trading at 13x
FY12E earnings and 1.1x FY12E book value. During the last cycle, HDIL went as
low as 0.35x forward book value but we believe it is much better placed this time
around, given it has
No liquidity issues
Better earnings profile
Why not a Buy
Unexciting cash flows in FY12
We expect HDIL to continue to disappoint on cash flows in FY12 given large
investments in commercial and redevelopment projects and lower TDR sales. We
have cut our free cash flow estimate for FY12 and FY13 to Rs1.5bn and Rs5bn
from Rs8bn and Rs18bn, respectively. In the absence of TDR sales, residential
sales will be the key driver. But the construction expenses on the redevelopment
and commercial projects are likely to eat up most of the surplus from the
residential sales. There is a downside risk to our estimate for FY12 given that
HDIL is looking to add more redevelopment projects in suburban Mumbai, such
as with the projects in Sion and Andheri. Table 2 lists all the estimated cash
inflow and outflows for HDIL for FY12 and FY13.
Lack of TDR sales to impact cash inflow
TDRs have been a major source of cash inflow for HDIL in the last two years. We
expect the sale of TDR to fall from 3.8mn sq ft in FY11 to 2mn sq ft in FY12 due
to delay in approval for the airport project. This in turn would lead to sharply lower
cash flows at Rs6bn in FY12 as against Rs11.5bn in FY11 from TDR sales.
Investment in commercial assets a drag
HDIL continues to invest in creating office/hotel/commercial assets which require
substantial investment during the construction phase. This, we believe, will be a
drag on its cash flows. Also some of the investments– like hotel projects in
Mumbai, IT SEZ in Kochi – are not very lucrative. Kochi is still struggling to
establish itself as an IT destination and we don’t expect rentals to be higher than
Rs30-34/sq ft/month, while hotels are not a very high return / cash flow business.
We expect HDIL to invest Rs3.5bn annually on the announced projects over the
next three years.
HDIL is regarded as a redevelopment play and we believe there are better ways
to play the commercial story – DLF/ Oberoi. Thus, investment by HDIL in
commercial assets is not a positive for the stock in the medium term.
Redevelopment projects - capital intensive
HDIL is developing two redevelopment projects and recently added two more
large projects. Earlier HDIL was predominantly into slum rehabilitation. We
believe initial investment and expenses for the slum rehab project is lower than
that for the redevelopment project. First, the developer has to pay to the current
owners upfront fees, secondly the redeveloped units are much larger in size as
compared to the slum rehab units and thirdly the competition is higher in
redevelopment projects as compared to slum rehab projects.
The recent projects acquired by HDIL are expected to be capital intensive over
the next 12-18 months, particularly the SVP Nagar – Andheri and Malad project.
HDIL has already invested Rs6bn for acquiring the rights for redevelopment of
these projects. We expect it to further invest Rs3-4bn over the next two years to
create the redevelopment units before it could commercially sell its share of FSI/
or launch project for free sale.
Airport project key to turnaround
The airport project is the key for the fortune of HDIL and the indefinite delay will
impact cash flows and earnings severely in the near term. The project had
accounted for Rs175/sh of NAV and we believe the uncertainty is likely to be a
drag on the stock performance. The future of the project is now dependent
primarily on the government’s change in slum rehab policy, which we think could
well take over 9-12 months. We are removing the project from our valuation since
there is no visibility on the approval of the subsequent phases and relocation of
slum dwellers.
Approval dependent on change in eligibility norms
The subsequent phases and the relocation are now primarily dependent on the
eligibility norm of the slum dwellers for the rehab unit. Currently only those slum
dwellers who are residing in the slum since year 2000 are eligible for rehab units.
But as per media reports only 60-65% of the families in the airport rehab may
have been residing since 2000. Therefore, in order make the project a success,
the government would need to relax the eligibility norm. This, we believe, is a
major issue and the government in unlikely to decide in a hurry since it could also
impact other slum rehab projects – like Dharavi rehab and the ones which are
being undertaken by other developers.
Good news unlikely for next 9-12 months
The project has faced significant delays in the last 12-18 months. Even if the
government decides on the policy, it will take a further 3-6 months for completing
the survey to determine the eligible slum dwellers. Looking at the current political
environment, it is unlikely that the government will take any decision which may
appear to hugely benefit any particular developer.
Ascribing no value to the project
In light of the above, we are now not ascribing any value to the project and would
wait for the government’s decision on the matter. HDIL will receive another 3mn
sq ft of TDRs from the current phase over the next 12-15months, while we
estimate it has to spend over Rs5bn for the construction of the 33,000 units. The
sale of TDR from the project accounted for Rs14bn and Rs10bn of revenue in
FY10 and 9MFY11, respectively. We now estimate this to fall to Rs6bn in FY12
and Rs2.4bn in FY13.
Affordable boost to sales volume in FY12
We have built in sales volume of 8.9mn and 10.8mn for FY12 and FY13,
respectively, for HDIL, lower by 25% from our earlier estimate, primarily to factor
in lower TDR sales for the next two years in the absence of approval for
subsequent phases of the airport project. Further, we have increased the
proportion of affordable housing in overall residential sales. Therefore we, expect
the pre-sale value to remain flat in FY12 and grow by 15% in FY13. We think the
strong volume from affordable housing will not be sufficient to drive the stock
higher from current levels.
But volume in Mumbai projects more important
HDIL plans to launch 12mn sq ft of affordable housing project and 6mn sq ft of
Mumbai residential projects in the next 12-18 months. We believe the
performance of the stock is dependent on the higher-margin Mumbai projects. In
the last two years, the company has sold around 2-2.5mn sq ft annually in
Mumbai, and we expect FY12 to be no different even though it plans to launch
6mn sq ft of projects over the next 12-18 months. Most of the Mumbai projects
are redevelopment projects and hence prone to delays (Kandivili project was
expected to be launched in 1HFY11, but still not launched). Secondly, the
currently launched phases already have inventory, and so the subsequent
launches will be delayed.
The company's recent affordable housing project in the outskirts of Mumbai
received very good response, having sold over 3.75mn sq ft in 3Q. Riding on this
success, it is looking to launch similar projects over the next 12 months. We
expect the demand to remain strong in these projects as HDIL had priced these
attractively at around Rs2,000/sq ft.
Pricing correction factored in
We don’t see any downside risk to our pricing assumptions since our estimates
are already 15-20% lower than the current prevailing prices and only 15-20%
higher than the bottom prices we saw in 2009.
Financials - Cut estimates to factor delays
We have cut our earnings estimate for FY12 and FY13 by 40-45% on the back of
30-35% reduction in our revenue estimate to factor in
Sharply lower TDR sales - We are now factoring TDR sales of Rs6bn in
FY12, against our earlier estimate of Rs15.6bn, and Rs2.5bn in FY13,
against our earlier estimate of Rs15.6bn.
Lower sales estimate for Mumbai projects – We have cut our pre-sales
estimate for Mumbai projects from FY11-12 and built in higher sales from
affordable housing projects.
Lower EBIDTA margin – We have lowered our EBIDTA margin estimate for
FY12/13 from 55% to 48% due to lack of TDR sales and higher contribution
from affordable housing projects.
Proposing change in accounting
HDIL currently follows project completion accounting unlike other developers who
follow percentage completion. It is currently evaluating options to move to
percentage completion from FY12. This, we believe, would also imply
restatement of financials for earlier years and could lead to sharp increase in
FY11 earnings. The change in accounting will also lead to change in our earnings
estimates but is not likely to impact cash flows or valuation.
FSI sale to cushion some impact
HDIL had signed MOUs with a couple of developers to sell FSI in two of its projects
in the last six months for around Rs13bn. It expects to complete the transaction as
well as recognize the revenues in 4Q. But we expect one of the transactions to spill
over to FY12. The FSI sale should help HDIL report 4% growth in FY12. But we
don’t expect more such deals as with falling volume and tighter liquidity, developers
would be cautious on committing funds to new land purchases.
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