HDIL

The renewed fortunes of the Transferable Development Rights (TDR) market, coupled with HDIL's steady progress in its slum rehabilitation and residential projects add impetus to the company's earnings prospects.



Concerns over a subdued TDR market, high leverage and, more recently, some of the old promoters opting out of the ‘promoter group' resulted in the company's stock declining by over 30 per cent on a year-to-date basis.

As most of these concerns have subsided, investors with a two-three-year time horizon can consider investing in the stock of HDIL. At the current market price of Rs 242, the stock trades at 8.5 times its per share earnings for FY-12 on a diluted equity base.

TDR boost

Transferable Developments Rights — the right to develop/sell land granted to real-estate companies that undertake slum rehabilitation or redevelopment projects — have been the key source of revenue for HDIL.

These TDRs have traditionally enjoyed a robust market, given the higher Floor Space Index (FSI) granted. While the slowdown in 2008-09 resulted in TDR prices in Mumbai plunging to as low as Rs 850 per sq. ft. in February 2009, the prices bounced back to an average of Rs 2,500 per sq ft. in FY-10. However, concerns arose after the Maharashtra Government decided to increase the FSI in the Mumbai suburbs from 1 to 1.33, the additional FSI being available for a premium.

This increase was expected to depress the TDR market, as developers could gain additional FSI by paying a small premium, instead of high prices for TDR.

A recent Mumbai High Court decision reversed the government's notification to increase FSI. Developers who sought to buy land with additional FSI may therefore once again be scouting for TDRs The ruling could, therefore, turn out to be beneficial for TDR sellers, HDIL being the largest among such players.

This ruling therefore, increases the prospects of HDIL's TDR sales. HDIL's TDR volumes have remained robust, what with the company on an average selling 1.5 million sq.ft of TDRs per quarter over the last few quarters, at Rs 2,700-2,900 per sq ft. With this ruling, prices too could see some upside given higher demand.

Residential sales

While the TDR market has been the key contributor to revenues, HDIL has ramped up on other traditional segments such as residential and commercial projects to hedge itself against any possible dip in development right sales.

Its current residential projects have a saleable area of 4.7 million sq. ft. and revenue potential of Rs 2,600 crore. HDIL launched the projects at a marginal discount to the local market price to accelerate sales.

Selling prices though, moves up gradually as the Mumbai real estate market picked up. For instance, in its Metropolis project in Andheri (W), the company flagged off the project with a launch rate of Rs 7,650 per sq ft in March 2009. Current selling price stands at Rs 11,500 per sq. ft. Besides, most of the projects are over 75 per cent sold. Clearly, the company has timed its projects and pricing strategies well. HDIL has also made steady progress in its biggest project — Mumbai airport rehabilitation programme — although issues such as water storage have marginally delayed resettlement.

The company would also require Rs 600-700 crore towards buying some land parcels for the Mumbai airport project. This may marginally increaserise its debt which stood at Rs 4,000 crore as of March 2010.

De-leverage

HDIL has over the year managed to de-leverage its balance-sheet. From a debt equity ratio of close to one a year ago, the company brought it down to 0.4 in March 2010, thanks to a series of equity infusion through institutional placements and warrant conversion by promoters.

Despite warrant conversions, the promoter stake in HDIL has come down as a result of ‘de-promoterisation', wherein some of the old-time promoters have moved out of the management and have been classified as ‘public shareholders'. We do not view this as a major concern as the ‘active' promoters continue to hold control.

Even as HDIL has been improving its revenues the company is yet to climb back to its sales and profit levels of FY-09.

For FY-10, sales at Rs 1,500 crore was 13 per cent lower than the previous year, while profits declined by 27 per cent to Rs 567 crore. Evidently, the ascend has been slow and tedious.

Operating profit margins have already climbed back to the pre-slowdown levels of over 50 per cent, thanks to TDR sales.

However, we expect non-TDR sales, which are likely to bunch-up over the next couple of years (revenue booked only on project completion), to significantly ramp up revenues.

via BL