HDIL: Sharp correction ahead; downgrade to Underperform 􀂄 BofA Merrill Lynch,

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H ousing Development and Infrastructure
Sharp correction ahead;
downgrade to Underperform
􀂄 Expect sharp correction in Mumbai residential
We downgrade HDIL to Underperform with a PO of Rs85 (cut from Rs156) with
10% potential downside, based on a 25% discount to our NAV. The cut in our
NAV estimate factors in our bearish view on the Mumbai residential market and
delay in project launches due to lack of approvals. We believe a 15-25%
correction in Mumbai residential prices will likely drive down the stock over the
next 3-6 months, even though it is trading close to the trough P/B multiple. Also
we see further delay in the completion of the FSI sale which was expected to help
deleverage its balance sheet.
Restart of airport rehab project key for turnaround
The stock is highly dependent on an approval of the Mumbai airport rehabilitation
project. We don’t expect the approval over next 6-9months as the government
continues to be slow on critical projects particularly the ones favoring developers.
Also the upcoming local municipal elections will further delay the process. The
scrapping of this project could severely impair its net worth and therefore the
stock is trading at 0.4x P/B multiple.
Debt levels high, FSI sale key to deleveraging
Debt has risen to the FY09 high even after HDIL raised around US$800mn in
equity, as it invested heavily in new redevelopment projects and airport rehab,
most of which have failed to take off. The conclusion of FSI sale remains critical
for its deleveraging plans which may get delayed due to liquidity constrains at the
developer level due to poor sales volume in Mumbai.
Upside risk
The stock may move up sharply if the airport rehab project is approved or
volumes return with just 5-10% correction in property prices in Mumbai.

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