The stock price of Housing Development and Infrastructure Limited (HDIL), a Mumbai-based property developer, has fallen over 70 per cent this year to Rs 34. Reasons for the fall include news of a promoter selling shares to raise cash and termination of a contract.
After this sharp decline, the stock may seem a good bargain. Retail investors, who have invested less than Rs 1 lakh, have in fact doubled their holdings in the last two quarters to 18 per cent.
However, we recommend that investors sell the stock. The company’s prospects seem to be at risk due to loss of key revenue drivers and its high debt levels. Also, even after the fall, the stock’s valuation (price-to-one-year forward earnings of around 16 times) is higher than better placed peers.
FEWER CASH COWS
HDIL’s primary source of income was from the sale of transferable development rights (TDR). This accounted for 43 per cent of its income last June. Earlier this year, Mumbai International Airport Limited (MIAL) terminated its contract (signed in October 2007) with the company to rehabilitate slum dwellers.
This has curtailed around 30 to 40 million sq ft of TDR the company would have received.
A one-time write-off of Rs 442 crore was recorded in the March quarter. MIAL has also claimed damage of Rs 262 crore from HDIL for delay in execution.
HDIL also sells land and has around Rs 600 crore of receivables outstanding for its Floor Space Index (FSI) sales. However, the slowdown in the Mumbai market has lowered demand and payments are being affected due to delays in getting approvals.
Besides these two revenue sources, the company has a pipeline of mainly residential projects with some commercial and slum re-development scheme (SRS) projects. It plans to launch five million sq ft in the first phase of its new township development in Virar, near Mumbai, later this year.
The unit price of around Rs 30 lakh (Rs 4,000 to Rs 4,500 per sq ft for 600 to 800 sq ft units) is likely to have buyer interest.
However, the company will not be able to record sales in the near future due to its revenue accounting method (completed contract), where sale is only recorded on project completion, not in phases.
Lack of TDR income, project concentration in a single geography and concerns about the sluggish Mumbai property market could impede HDIL’s revenue growth.
DEBT TROUBLES
HDIL has a consolidated debt of around Rs 7,000 crore as of June end. Debt reduction over the last year has only been to the tune of Rs 210 crore. The company plans to pare debt by the same amount this year.
While the total debt-to-equity ratio of 0.66 does not appear too high, the company’s interest cover ratio at 1.12 times is precarious.
That is, operating profit just about covers its interest cost. Slipping revenue and profits have resulted in the interest cover deteriorating from 1.75 times last June.
Promoters, who hold 36 per cent in the company, have pledged over 96 per cent of their holding to raise funds. In January this year, a promoter sold 1 per cent of his holding to pay for land purchased in 2010. Concerns over the company’s financial situation caused the stock to crash 40 per cent.
The credit rating for HDIL’s non-convertible debenture (NCD) was lowered to D (default) in March this year by Credit Analysis and Research (CARE), due to payment delays.
The company’s rate of borrowing is around 14 per cent and two-thirds of the company’s debt is due within five years. Any increase in the cost of short-term borrowing may add additional interest burden.
HDIL saw improvement in cash collection in the recent quarter, with Rs 347 crore collected and it expects positive cash flow in the coming quarters from its residential projects.
However, the company’s high debt, limited ability to pay interest and shrinking options to raise additional funding, add to its risks.
HIGH VALUATION
HDIL’s consolidated revenue in FY13 halved to around Rs 1,000 crore. With Rs 440 crore write-off in the March quarter for the MIAL contract termination, profit fell to Rs 73 crore, from Rs 810 crore in FY12. For the recent June quarter, HDIL reported sales of Rs 138 crore, 30 per cent lower than a year ago.
Profits have fallen in the last three quarters and, in the current quarter, these were down 85 per cent to Rs 16 crore. Net margin slipped from 50 per cent last year to 10 per cent, due to decrease in high margin (60 per cent) FSI and TDR sale revenues.
Based on projects to be completed and outstanding receivables, FY14 revenues are estimated to be around Rs 570 crore and net margin at around 15 per cent. The stock now trades at 16 times its estimated FY14 earnings.
This is much higher than peers, such as Oberoi Realty and Indiabulls Realty, which are trading at 11 to 13 times. HDIL commanded a premium valuation in the past due to its high profit margin.
However, the company’s current pipeline of residential projects does not justify a high premium.
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