Stock Review: Housing Development Infrastructure Limited (HDIL)

 

The stock performance of Housing Development Infrastructure Limited (HDIL) is yet to reflect the company's good financial numbers for the December 2010 quarter. It has underperformed the 29-stock ET Realty Index in the past three months. Unlike most other realty firms, which derive revenues from project launches and commercial rentals, HDIL, which has a large exposure in slum rehabilitation projects, earns nearly half of its revenue by selling transfer of development rights (TDR).

TDR is a portion of land that can be sold by a company undertaking redevelopment projects.

To de-risk its business model, HDIL has increased its exposure in residential housing by launching various projects since March 2009. It has also sold two separate parcels of land for about . 1,400 crore, half of which will be booked as revenue during the March 2010 quarter.

For the nine months ended December 2010, HDIL's sales grew 20% to . 1,278 crore over the year-ago period. This was due to a healthy sales volume, with average realisation of . 3,000-3,500/square feet by selling TDR.

The company has also paid back some outstanding loans in the recent past through money raised by selling fresh shares to institutional investors last year. This brought down interest cost and helped it grow net profit by 67% to . 703 crore. On the flip side, its debt level has increased again in the second half of the calendar year 2010. HDIL had a debt-equity ratio of 0.45 as of December 31, 2010, with outstanding loans of . 4,142 crore, 23% higher than a year ago.

Growth in earnings in the coming quarters largely depends upon HDIL's ability to maintain high sales volume, given the expectation of lower realisations. This could be challenging since the recent hike in interest rate may impact volume growth. But the new launches in the residential segment should provide an upside to the topline. The company's future growth hinges to a large extent on the success of its strategy to diversify into residential projects. At the last market price of . 154, the stock is trading 6.7 times its trailing 12-month profit, which makes it cheaper compared with the industry average P/E of 22 for medium and large realty firms.