HDIL – 2QFY2011 Result Update - Angel Broking

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HDIL – 2QFY2011 Result Update

Angel Broking maintains a Buy on HDIL with a Target Price of Rs302.

HDIL’s 2QFY2011 results were marginally above our expectations on account

of steady TDR volumes and sale of high-margin FSI in Vasai and Virar.

Further, the company entered into MoU for sale of FSI worth `650cr, which

would be booked over the next three quarters. In its earnings call, HDIL

highlighted that the TDR prices and volumes would sustain at current levels,

since the government has still to issue an official notification regarding

increase of FSI. It also outlined its aggressive strategy for new residential

launches entailing ~27mn sq ft, which would improve its cash flow going

forward. Further, its recent QIP issue is expected to expedite execution of

phase II of the airport project. Hence, we maintain a Buy on the stock.

Sale of high-margin FSI, TDR drives profitability: Revenues increased 5.4%

yoy (down 17.4% qoq) to `373cr (v/s our estimate of `434cr) on account of

TDR sale of 1mn sq ft from the MIAL project and average realisation of

`3,000/sq ft (`2,950/sq ft in 1QFY2011). HDIL also sold 1mn sq ft of FSI in

Vasai/Virar for a total consideration of `70cr. EBITDA margin came in at

63.7%, up by 436bp qoq and 1,285bp yoy owing to the lower costs

associated with the FSI sale. Consequently, operating profit stood at `237cr,

up 11.3% qoq and 32.0% yoy. Tax rate for 2QFY2011 stood at 14.3%

(20.8%). Hence, PAT grew 43.9% yoy (declined 8.8% qoq) to `214cr.

Outlook and Valuation: Smooth execution of the ongoing `200bn MIAL

project, sustainable TDR prices and successful new launches provide strong

visibility for HDIL. At the CMP of `242, the stock is trading at a 40% discount

to our one year forward NAV of `402. We maintain Buy on the stock with a

Target Price of `302 (25% discount to our NAV).

Investment Arguments

High-margin slum redevelopment projects

Slum redevelopment (SRA) does not involve upfront investment in land compared

to the conventional real estate projects. The cost per sq ft in slum redevelopment

projects is around `3,000/sq ft v/s `5,000–6,000/sq ft (including land cost) on

freehold land due to the high property prices in Mumbai. Slum redevelopment also

has high entry barriers, as it requires expertise and experience to deal with

government agencies and slum dwellers regularly till completion of the project. In

Mumbai, more than 54% of the population lives in slum clusters situated in certain

pockets of the city. A slum population of 7.5mn translates into 1.5mn families, with

an average household size of five. This translates into SRA potential of 644mn sq ft

and revenue potential of `2,000bn for the redevelopers.

HDIL, the market leader in slum rehabilitation, is well poised to cash in on the

immense opportunity in the SRS segment. The company has executed close to

10mn sq ft of SRS projects in the last 15 years and is more competitive than other

developers in the fray. Thus, HDIL stands a good chance to win large SRA projects,

such as Dharavi - where the rehab families could be of similar size as MIAL.

Execution of airport project on track

First phase of HDIL's MIAL project to rehabilitate 28,000 families is on track and

likely to get completed by September 2010, generating around 10mn sq ft of TDR.

The company will also get 2mn sq ft of FSI for commercial development in the

airport vicinity once the 28,000 families get rehabilitated. We expect HDIL to sell

5–6mn sq ft of TDR annually over the next five years on strong ongoing execution

of the MIAL project, which will generate further 37mn sq ft of TDR over the next

5–6 years. The MIAL project contributes around 30% to our one-year forward NAV.

Rewarding new launches

In 2QFY2011, HDIL launched the first phase of Whispering Towers, Mulund. The

company sold more than 40% at an average price of `8000/sq ft. HDIL has

strategically deleveraged its business model by launching various projects through

the conventional route since March 2009, thereby reducing its overdependence on

the TDR market. The company has been able to pre-sell 75% of its residential

projects (7mn sq. ft.) launched since FY2009, thereby providing `5,000cr of

revenue visibility over FY2010–12E. HDIL has even managed to pre-lease 20% of

its commercial launches at its Andheri (Metropolis) project for `140/sq. ft. The

company's recent launches have been successful on account of being launched at

a 10–20% discount rate to the prevailing market prices. Management has

indicated that it would adopt the same strategy for its forthcoming launches as

well. In FY2011/12, HDIL plans to launch new projects of 26mn sq. ft., largely in

Mumbai (including Siddharth Nagar, Goregaon, Ekta Nagar, Kandivali and Pant

Nagar, Ghatkopar, Kochi, Palghar).

Outlook and Valuation

HDIL is the largest listed slum rehabilitation developer in the most resilient market

of Mumbai, which contributes a substantial 71% to our GNAV. Smooth execution

of the ongoing `200bn MIAL project, sustainable TDR prices and successful new

launches via the conventional method provide strong visibility for HDIL. We

maintain our TDR price assumption of `2,500/sq ft for the company’s MIAL

project. Further, HDIL seeks to deleverage its balance sheet on the back of the

expected high revenue inflow from the MIAL project, successful new launches and

the recent QIP issue. At the CMP of `242, the stock is trading at a 40% discount

to our one year forward NAV of `402. We maintain Buy on the stock with a

Target Price of `302 (25% discount to our NAV).