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UBS Investment Research
HDIL
F avourable risk-reward
Concerns likely priced in
With HDIL’s significant underperformance to the Sensex and the sector at 39% and 13%
over the past three months, respectively, we believe the key concerns are largely priced in.
These are: 1) delays in the airport slum rehabilitation project, 2) slowing Transferable
Development Rights’ (TDR) volumes and limited upside to TDR prices from policy risks;
and 3) aggressive land acquisitions using capital raised. Valuations at a 56% discount to
our NAV estimate of Rs335 offer a favorable risk-reward, in our view.
Near-term operational triggers
1) Strong pre-sales at new residential launches (c4msf) in the Mumbai suburbs at
attractive pricing given its execution track record; 2) continued focus on Floor Space
Index (FSI) sales (it targets Rs10bn cash flow for FY11) in Mumbai and suburbs; 3)
IFRS adoption in FY12 of the percentage completion method (versus current project
completion) for revenue recognition to boost earnings; and 4) improved visibility on
progress and land acquisitions for Phase III of the airport rehab project.
Key strengths and risks
We believe HDIL’s expertise in slum rehabilitation, focus on Mumbai’s strong demand
and a relatively well-capitalised balance sheet (0.3x D/E in FY11E) are key strengths in
the current environment. That said, likely risks are: 1) FSI policy risks affecting TDR
demand/prices (20% of our NAV); and 2) increased capex for new projects.
Valuation: lower price target from Rs236.00 to Rs218.00
With valuations at a 56% discount to our base-case NAV of Rs335, a 37% discount to
our bear-case NAV of Rs233 and 0.4x P/BV in FY11E, we forecast good return
potential. Recent land investments of Rs13bn (Rs32/share in our NAV) could offer
additional upside (not factored in to our NAV estimate). We maintain our Buy rating
but lower our price target to Rs218, based on a 35% discount to our revised NAV that
factors in a higher WACC of 16%.
Housing Development & Infrastructure
Housing Development and Infrastructure Limited (HDIL) is one of the largest
slum redevelopers in Mumbai. HDIL's business includes real estate development
and slum rehabilitation and development, which includes clearing slum land and
re-housing slum dwellers. HDIL has a portfolio of 196msf of developable land,
of which 61msf relates to the Slum Rehabilitation Authority (SRA) and 170msf
is in Mumbai. It has a strong track record in slum rehabilitation projects and was
awarded the Mumbai International Airport Slum Rehabilitation contract in
October 2007, one of the largest slum clearances to date in India.
Statement of Risk
We believe key risks for real estate companies include a prolonged higher
interest rate environment (one+year), higher mortgage rates impacting consumer
affordability, slower annual GDP growth of <7% impacting demand for
residential and commercial properties, changes in foreign direct investment
regulations impacting capital availability for the sector, changes in regulatory
policies impacting commercial viability of development, and inflation impacting
consumer affordability.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
HDIL
F avourable risk-reward
Concerns likely priced in
With HDIL’s significant underperformance to the Sensex and the sector at 39% and 13%
over the past three months, respectively, we believe the key concerns are largely priced in.
These are: 1) delays in the airport slum rehabilitation project, 2) slowing Transferable
Development Rights’ (TDR) volumes and limited upside to TDR prices from policy risks;
and 3) aggressive land acquisitions using capital raised. Valuations at a 56% discount to
our NAV estimate of Rs335 offer a favorable risk-reward, in our view.
Near-term operational triggers
1) Strong pre-sales at new residential launches (c4msf) in the Mumbai suburbs at
attractive pricing given its execution track record; 2) continued focus on Floor Space
Index (FSI) sales (it targets Rs10bn cash flow for FY11) in Mumbai and suburbs; 3)
IFRS adoption in FY12 of the percentage completion method (versus current project
completion) for revenue recognition to boost earnings; and 4) improved visibility on
progress and land acquisitions for Phase III of the airport rehab project.
Key strengths and risks
We believe HDIL’s expertise in slum rehabilitation, focus on Mumbai’s strong demand
and a relatively well-capitalised balance sheet (0.3x D/E in FY11E) are key strengths in
the current environment. That said, likely risks are: 1) FSI policy risks affecting TDR
demand/prices (20% of our NAV); and 2) increased capex for new projects.
Valuation: lower price target from Rs236.00 to Rs218.00
With valuations at a 56% discount to our base-case NAV of Rs335, a 37% discount to
our bear-case NAV of Rs233 and 0.4x P/BV in FY11E, we forecast good return
potential. Recent land investments of Rs13bn (Rs32/share in our NAV) could offer
additional upside (not factored in to our NAV estimate). We maintain our Buy rating
but lower our price target to Rs218, based on a 35% discount to our revised NAV that
factors in a higher WACC of 16%.
Housing Development & Infrastructure
Housing Development and Infrastructure Limited (HDIL) is one of the largest
slum redevelopers in Mumbai. HDIL's business includes real estate development
and slum rehabilitation and development, which includes clearing slum land and
re-housing slum dwellers. HDIL has a portfolio of 196msf of developable land,
of which 61msf relates to the Slum Rehabilitation Authority (SRA) and 170msf
is in Mumbai. It has a strong track record in slum rehabilitation projects and was
awarded the Mumbai International Airport Slum Rehabilitation contract in
October 2007, one of the largest slum clearances to date in India.
Statement of Risk
We believe key risks for real estate companies include a prolonged higher
interest rate environment (one+year), higher mortgage rates impacting consumer
affordability, slower annual GDP growth of <7% impacting demand for
residential and commercial properties, changes in foreign direct investment
regulations impacting capital availability for the sector, changes in regulatory
policies impacting commercial viability of development, and inflation impacting
consumer affordability.
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