Housing Development Infrastructure (HDIL)

Housing Development Infrastructure (HDIL), the erstwhile Dheeraj Group, was incorporated in 1996. Its expertise is in developing slum rehabilitation projects. The company follows a build and sell model for all residential, commercial and retail properties and operates in segments such as Special Economic Zones, hospitality, oil and gas, entertainment and media.

Its total land reserves (including Transfer of Development Rights, or TDR) add up to 196 million sq ft (msf) of saleable area to be developed through 17 ongoing projects covering 64 msf and 18 planned projects accounting for 133 msf. About 81% of the reserves are in the Mumbai Metropolitan Region, giving it a competitive advantage because this is prime real estate for which demand is unlikely to decline.

CURRENT PROJECTS & GROWTH

The focus would be on timely execution of ongoing projects in Mumbai. Under Phase I of the Mumbai Airport slum rehabilitation project, a total of some 11 msf is under construction. Out of the 2.5 msf of development rights sold in FY09, 40% was in the March quarter, an indication of a revival in the sector. The company is expected to generate 5-6 msf of TDR from the airport rehabilitation project by 2010. Assuming an average (of the peak and the lowest rate) rate of Rs 2000 per sq ft, this would add Rs 1,200 crore to the topline by ‘10.

HDIL launched three new residential projects adding up to 2 msf of saleable area in prime locations in Mumbai. Three-fourths the area of these projects have been pre-sold and this would add about Rs 1,200 crore to the topline. Advances from customers in these projects were Rs 75 crore during the March ‘09 quarter. Since one of the projects was launched at the end of March and one in April, future customer advances are likely to increase. This would ease the liquidity problem for the company.

HDIL recently tied up with the Mumbai Metropolitan Region Development Authority (MMRDA) to develop a mass rental housing scheme on 525 acres in the northern Virar suburb. Part of the developed land will be handed over to MMRDA under the housing scheme while the rest will be available for sale by the company. Not only will this project add large volumes to HDIL’s topline but also ensure a continuous stream of cash for the company. The estimated revenue from this project is expected to be Rs 20,000 crore

FUNDING

HDIL plans to raise fresh equity capital worth Rs 2,800 crore through Qualified Institutional Placement (QIP) and warrants to its promoters. The money will be used mainly to liquidate debt, which is about Rs 4,150 crore. This will help reduce interest costs and the overall leverage of the company but earnings per share for investors will also get diluted. With significant streamlining of its debt situation and sufficient cash to complete its projects, HDIL seems poised to grow. Though investment in the realty sector is still considered risky, on a long-term basis, HDIL’s business model seems to be well placed.

FINANCIALS AND VALUATIONS

HDIL’s results have not been insulated from the slowdown in the industry. Net sales fell by more than 50% in the March ‘09 quarter. The company sold TDR worth Rs 140 crore; Rs 70 crore came from plotted development in Vasai and the rest from floor space index sales at its Bandra and the Malad (W) projects. Due to lower income for every sq ft it sold, operating profit fell by over 80% from Rs 810 crore in the March ‘08 quarter. This also impacted the overall interest coverage ratio for the company. In the December ‘08 quarter, when earnings before interest and tax (EBIT) were sufficient to cover two and a half years’ worth interest costs, EBIT during March’09 is just enough to cover interest costs for a year and a half.

The annual results did not present a different picture, with both sales and operating profit declining. Annual net profit margins, at 48%, reported a 1100-basis point fall. At the current price to book value (P/BV) of 1.65, it is better placed than Akruti’s (the only other comparable developer with significant presence in slum rehabilitation projects) P/BV of 3.53. With a price to earnings (P/E) ratio of 9.5x, there seems to be little downside for investors having a long-term view of this stock.

However, HDIL’s cash flow position has been deteriorating because of rising receivables and unsold inventory. Nonetheless, improved sales would help improve this situation.

RISKS

The real estate business is driven by adequate demand for residential property and lease space. If economic conditions deteriorate further, demand for new projects would get affected. This would have a negative impact on cash flows and the revenue stream of the company, thus affecting its shareholders.