HDIL -All set to deliver a solid FY12 ::Macquarie Research,

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HDIL
All set to deliver a solid FY12
Event
 HDIL reported strong 1Q FY12 results. Importantly, it looks like HDIL will be
able to deliver solid sales and cash flows for FY12. This differentiates it from all
Mumbai-based developers. We believe stock price weakness should be seen
as an opportunity by long-term investors. HDIL seems to be the best stock to
accumulate if one expects a bounce on receding concerns about the rate cycle
in India.
Impact
 Positive surprise in 1Q FY12 results. Reported sales stood at Rs5.1bn vs
our expectation of Rs2.0bn. This produced the outperformance at the bottom
line (Rs1.9bn vs our estimate of Rs778m). This was driven by revenue
recognition of Rs3.3bn of land sales in Andheri, Mumbai.
 HDIL remains well positioned from a cash flow perspective for FY12: The
primary concern in the Mumbai market has been the delays in getting
approvals. This has led to delays in launches and hence cash inflows across
developers in this market. HDIL is the exception due to three factors:
 Pending payments and unsold inventory from strong residential
launches in the last 24 months (Kurla, Andheri, etc).
 TDR sales: TDR sales volumes seem set to exceed 2m sqft in FY12.
TDR prices are down by over 25% from the peak to around Rs2,500/ sqft,
but are still 4% above our forecast.
 Land sales: Pending payment from sale of land in FY11 (notably
Goregaon). Expectation of land sales (FSI) outside Mumbai city limits
(Vasai/ Virar) where the regulatory environment is more benign and prices
are strong.
 Free cash and debt position comfortable: The core FY12 free cash yield
stands at a robust 10%. If sales of FSI are included, the free cash yield for
FY12 might rise to 24%. While debt servicing remains comfortable,
management expects debt to fall by a further 15-20% from current levels by
end-FY12.
Earnings and target price revision
 Our FY12/13E earnings have changed by a marginal +0.2% and -2.9%,
respectively.
Price catalyst
 12-month price target: Rs230.00 based on a Sum of Parts methodology.
 Catalyst: Progress on the new projects, price/volume trends, sale of land/ FSI.
Action and recommendation
 HDIL’s stock has been very weak due to macro concerns and the lack of
clarity on progress in the airport slum rehab project. The stock is now pricingin a zero valuation for the airport project. Despite building in very conservative
forecasts from the ongoing ventures and three new projects, the stock is still
trading at a very attractive 62% discount to NAV. As discussed above, the
visibility of cashflows is very high. This differentiates it from most industry
peers. HDIL seems best positioned if one expects a bounce in the markets.