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HDIL
Reuters: HDIL.BO
Play on high-potential Mumbai
redevelopment
Redevelopment: significant upside potential and political risk
Mumbai's topography has resulted in redevelopment offering significant benefits,
entry barriers, attractive margins and high RoIs (+40%). The low price of land
offers HDIL the flexibility to launch attractively priced projects. Robust execution
resulted in the completion of Phase I of MIAL rehab. After a significant delay, the
commencement of government processes should enable HDIL to begin the next
phases. Due to a delay in approvals, we cut our FY12-13 estimates by up to 32%
and our target price to INR 225. With c.35% upside potential, we maintain Buy.
Though complex, redevelopment offers good margins and RoIs…
Redevelopment remains key to Mumbai real estate due to legal restrictions
(ULCRA, CRZ, etc.) and scarcity of land. The requirement of an increasing number
of government approvals, coupled with significant approval delays, leads to
significant entry barriers. Along with low upfront investments for the purchase of
land and high property prices, margins are attractive and RoIs high (+40%).
…and hence, offers significant advantages to HDIL
HDIL, the largest redeveloper (c.20msf; +30,000 families in the past decade),
enjoys the flexibility to launch attractively priced residential projects. Despite the
near-timely completion of MIAL rehab Phase I, government inaction in identifying
eligible slum-dwellers forced HDIL to slow its later phases. HDIL indicates that
this process has just commenced. Government approval for an additional 0.33 FSI
to developers through fee payment may lead to lower demand and pricing for
TDRs.
Estimates cut by up to 32%; target price down to INR 225; maintaining Buy
With significant macro headwinds (tightening liquidity, high inflation, etc.), we cut
FY12-13 revenues, EBITDA and PAT estimates by up to 32% and our DCF-based
target price to INR 225. With c.35% upside potential, we maintain Buy. Risks
include: (a) overdependence on Mumbai and redevelopment, (b) political risks, (c)
aggressive FSI or slum number assumptions, (d) decline in TDR prices and
volumes and (e) execution risks.
Investment thesis
Outlook
HDIL has capitalised on its low-cost land bank generated through redevelopment in Mumbai
by having the flexibility to launch projects at affordable prices. HDIL is a direct and indirect
play on the Mumbai property market, with Mumbai and rehab accounting for c.80% and
c.69% of its GAV, respectively. Land acquisition for the creation of rehab structures for the
expansion of the Mumbai airport (MIAL) resulted in HDIL's high gearing of 94% as of 30 June
2009. Equity dilution (through two QIPs in July 2009 and September 2010) and the
recommencement of demand driven by operational cash flows helped reduce gearing to
c.43% as of 31 March 2011. While robust execution by HDIL resulted in the completion of
Phase I of MIAL rehab, significant government delays in identifying eligible slum-dwellers
forced HDIL to slow its later phases. According to HDIL, the government has just
commenced this process. The recent government approval for an additional 0.33 FSI to
developers though fee payment has resulted in a drop in TDR prices from INR 3,100/sf to
INR2,500/sf. HDIL expects these prices to stabilize and a TDR monetization of
c.0.9msf/quarter for FY12 vs. c.1.5/quarter previously. Due to the company’s current
conservative accounting policy, we project a CAGR in revenues, EBIDTA and PAT of 40%,
15% and 28%, respectively, during the next three years. With c.36% underperformance vs.
the Sensex over the past 12 months, the risk/reward scenario appears favourable; therefore,
we rate the stock Buy.
Valuation
We value the MIAL rehab project and regular business with a DCF-based NAV methodology.
We value the MIAL rehab project at INR 46/share (a 30% discount to the DCF-based NAV),
which is based on: a) flat prices and costs, b) a TDR price of INR 2,250/sf, c) a 17.5%
discount rate, d) project completion in eight years, e) a cap rate of 12% and f) an effective tax
rate of 20.4%. We value the regular business at INR 179/share (a 30% discount to the DCFbased
GAV), similar to our assumptions (tax rate of 30%). Thus, our target price is INR
225/share.
Risks
Downside risks include: (a) overdependence on Mumbai and on redevelopment projects as
they account for c.80% and c.69% of the company’s GAV, respectively; (b) political risks,
especially in relation to the company’s redevelopment projects; (c) aggressive volume
assumptions (in terms of FSI or number of slums); (d) a decline in TDR prices and volumes;
(e) inability to ramp up execution with delays in projects; and (f) weak corporate governance.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HDIL
Reuters: HDIL.BO
Play on high-potential Mumbai
redevelopment
Redevelopment: significant upside potential and political risk
Mumbai's topography has resulted in redevelopment offering significant benefits,
entry barriers, attractive margins and high RoIs (+40%). The low price of land
offers HDIL the flexibility to launch attractively priced projects. Robust execution
resulted in the completion of Phase I of MIAL rehab. After a significant delay, the
commencement of government processes should enable HDIL to begin the next
phases. Due to a delay in approvals, we cut our FY12-13 estimates by up to 32%
and our target price to INR 225. With c.35% upside potential, we maintain Buy.
Though complex, redevelopment offers good margins and RoIs…
Redevelopment remains key to Mumbai real estate due to legal restrictions
(ULCRA, CRZ, etc.) and scarcity of land. The requirement of an increasing number
of government approvals, coupled with significant approval delays, leads to
significant entry barriers. Along with low upfront investments for the purchase of
land and high property prices, margins are attractive and RoIs high (+40%).
…and hence, offers significant advantages to HDIL
HDIL, the largest redeveloper (c.20msf; +30,000 families in the past decade),
enjoys the flexibility to launch attractively priced residential projects. Despite the
near-timely completion of MIAL rehab Phase I, government inaction in identifying
eligible slum-dwellers forced HDIL to slow its later phases. HDIL indicates that
this process has just commenced. Government approval for an additional 0.33 FSI
to developers through fee payment may lead to lower demand and pricing for
TDRs.
Estimates cut by up to 32%; target price down to INR 225; maintaining Buy
With significant macro headwinds (tightening liquidity, high inflation, etc.), we cut
FY12-13 revenues, EBITDA and PAT estimates by up to 32% and our DCF-based
target price to INR 225. With c.35% upside potential, we maintain Buy. Risks
include: (a) overdependence on Mumbai and redevelopment, (b) political risks, (c)
aggressive FSI or slum number assumptions, (d) decline in TDR prices and
volumes and (e) execution risks.
Investment thesis
Outlook
HDIL has capitalised on its low-cost land bank generated through redevelopment in Mumbai
by having the flexibility to launch projects at affordable prices. HDIL is a direct and indirect
play on the Mumbai property market, with Mumbai and rehab accounting for c.80% and
c.69% of its GAV, respectively. Land acquisition for the creation of rehab structures for the
expansion of the Mumbai airport (MIAL) resulted in HDIL's high gearing of 94% as of 30 June
2009. Equity dilution (through two QIPs in July 2009 and September 2010) and the
recommencement of demand driven by operational cash flows helped reduce gearing to
c.43% as of 31 March 2011. While robust execution by HDIL resulted in the completion of
Phase I of MIAL rehab, significant government delays in identifying eligible slum-dwellers
forced HDIL to slow its later phases. According to HDIL, the government has just
commenced this process. The recent government approval for an additional 0.33 FSI to
developers though fee payment has resulted in a drop in TDR prices from INR 3,100/sf to
INR2,500/sf. HDIL expects these prices to stabilize and a TDR monetization of
c.0.9msf/quarter for FY12 vs. c.1.5/quarter previously. Due to the company’s current
conservative accounting policy, we project a CAGR in revenues, EBIDTA and PAT of 40%,
15% and 28%, respectively, during the next three years. With c.36% underperformance vs.
the Sensex over the past 12 months, the risk/reward scenario appears favourable; therefore,
we rate the stock Buy.
Valuation
We value the MIAL rehab project and regular business with a DCF-based NAV methodology.
We value the MIAL rehab project at INR 46/share (a 30% discount to the DCF-based NAV),
which is based on: a) flat prices and costs, b) a TDR price of INR 2,250/sf, c) a 17.5%
discount rate, d) project completion in eight years, e) a cap rate of 12% and f) an effective tax
rate of 20.4%. We value the regular business at INR 179/share (a 30% discount to the DCFbased
GAV), similar to our assumptions (tax rate of 30%). Thus, our target price is INR
225/share.
Risks
Downside risks include: (a) overdependence on Mumbai and on redevelopment projects as
they account for c.80% and c.69% of the company’s GAV, respectively; (b) political risks,
especially in relation to the company’s redevelopment projects; (c) aggressive volume
assumptions (in terms of FSI or number of slums); (d) a decline in TDR prices and volumes;
(e) inability to ramp up execution with delays in projects; and (f) weak corporate governance.
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