Housing Development and Infrastructure (Capital Market Review)
CM RATING: 46/100
Strengths
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1. HDIL has land reserves of approximately 112.1 million square feet of saleable area to be developed through 32 ongoing or planned projects. The company has 21 ongoing projects under construction and development, aggregating to approximately 45.5 million square feet of saleable area, and has 11 planned projects aggregating approximately 66.6 million square feet of saleable area. Of the land reserves, about 73.4% is actually owned by the company; and 15.7% of it is to be acquired under memoranda of understanding (MoU) and agreements. But these MoUs do not have any revocation clauses. Another 10.9% of the land reserve is under joint venture with partners. The execution, however, rests with HDIL.
2. Has received in-principle approval from the Ministry of Commerce and Industry to develop, operate and maintain multi-services special economic zones (SEZs) in its name. However, given the uncertainty in SEZ regulations, HDIL has still not decided whether it would develop them on its own or in collaboration with others.
3. Land bank has been built historically at a weighted average cost of Rs 200 per square feet.
4. Advances from customers are Rs 512.1 crore end March 2007, representing amounts that have been received from customers but not booked by the company as sales. As and when the projects are completed, this amount will percolate to the top line. This represents 43% of the reported FY 2007 revenue. There was an inventory of Rs 1324.48 crore (approximately 98% constitutes work in progress) end March 2007.
5. Under Section 80-IB (10) of the Income-Tax Act, 1961, real-estate companies are eligible for 100% deduction of the profit derived from development and building of housing projects for middle-income small families approved before end March 2007 by a local authority. The company has approved tax-exemption projects with estimated sales value of Rs 5000 crore.
6. On account of the presence in the slum rehabilitation scheme, HDIL is partly hedged against fluctuation in land prices as the contraction cost does not vary significantly. Also, the company is not required to pay one-off land purchase costs at the beginning of each project.
Weaknesses
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1. Of the total land bank, 82% is in Mumbai Metropolitan Region, with a significant proportion in the Vasai-Virar region and in residential projects. The currently benchmark rates in Vasai-Virar region are in the range of only Rs 1000-1800 per square feet.
2. The Union government has recently decided to completely ban the real-estate players and township developers from accessing external commercial borrowings (ECBs) to fund projects. The Reserve Bank of India (RBI) also earlier raised risk weights on housing loan, followed by an interest-rate hike, to curb the demand for the real-estate sector. Thus, real-estate companies are likely to face difficulties in funding the projects (particularly for buying land) and their interest burden is likely to increase.
3. In the year ending March 2007, 69% of reported revenue was derived from selling of development rights/floor space index (FSI). Thus, one of the factors that would determine sustainability of revenue is likely to be the number of slum rehabilitation projects that will be bagged. Currently, the slum rehabilitation projects in the kitty will entitle it salable area of 64,26,222 square feet.
4. About 22% of the revenue was derived from sale of land. In future, sustainability of profit is likely to depend on movement in land prices.
5. As HDIL follows complete contract method of accounting, its earnings are likely to fluctuate significantly from year to year and quarterly results will be highly volatile. As other companies follow percentage completion method, comparisons will be difficult and may lead to wrong conclusions.
6. Over the past couple of years, there has been a significant increase in interest rate and real-estate prices. This has increased the equated monthly instalment (EMI) on housing loans. The increase in EMI as a proportion to disposable income of household has raised concern regarding affordability of properties. Real-estate prices are already showing signs of softening. A drop in prices could also result in customers adopting a wait-and-watch approach before booking new properties, and existing customers deferring payments or canceling bookings made earlier when prices were high. This would impact cash flows and could lead to a cash crunch, which could significantly impact the company’s ability to complete existing/start new projects.
Valuation
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Knight Frank had valued HDIL’s land reserves at Rs 21,095.10 crore on 15 December 2006 using the discounted cash flow (DCF) method. The per share value works out to Rs 984. Cushman & Wakefield has worked out the net present value (NPV) of the company’s projects at Rs 22039.40 crore on 22 January 2007. Per share value works out to Rs 1028. However, this valuation is about six months old and the real-estate market condition has changed after that.
Consolidated FY 2007 EPS on post-issue equity, assuming green shoe option is exercised, works out to Rs 25.3. At the offer price band of Rs 430 – Rs 500, the P/E range is 17-19.8, respectively. Comparable companies location-wise (focused on Mumbai) are: Akruti Nirman (mainly into slum rehabilitation) and Orbit Corporation (mainly into redeveloping projects) are trading at P/E of 31.5 and 16, respectively. However both these companies are much smaller compared with HDIL. Comparable listed player in terms of size, Parsvnath Developers (with development rights of approximately 151 million square feet), is currently trading at 22 times its FY 2007 earning.
Zerodha (Trading Account)
RHP
