The Hindu Business Line : HDIL: Invest at cut-off

Established business in the Mumbai Metropolitan Region (MMR), land reserve in the prime areas of Mumbai and the relatively attractive offer price band are the key positives for the initial public offer of Housing Development and Infrastructure Ltd (HDIL). Operations in slum rehabilitation projects which involve uncertainties and track record of deriving a chunk of revenues through the sale of development rights or floor space that it receives through the slum rehabilitation schemes are risk factors to the IPO.

As the IPO is priced is at a discount to players of similar size, investors with a risk appetite can consider investing in HDIL with a two/three-year perspective. At the offer price band of Rs 430-500, the price-earnings multiple is 14-16 times its per-share earnings for FY-2007 on the existing equity base (and 16-19 times on the post-issue equity).

Fund utilisation

HDIL, a real-estate company of the Wadhawan group, builds residential, commercial and retail projects and also undertakes slum rehabilitation schemes in Mumbai. The company derives most of its business from the lucrative MMR market. The company plans to raise Rs 1,200-1,450 crore, the chunk of which is to be utilised on ongoing projects; less than 10 per cent of the funds will be used for the acquisition of land and development rights.

lucrative market

HDIL has a land reserve equivalent of 112 million sq ft of saleable area, 40 per cent of which is under construction or development.

Therefore, the company can start deriving revenue flow in the medium term from ongoing projects, even if there are delays in the take-off of planned projects.

Of the total land reserves, 83 per cent is in the lucrative MMR, the commercial capital where there is much demand, especially for commercial and retail space.

This locational advantage lends much visibility to the earnings potential for the company's completed projects. We are, therefore, confident about the absorption of the built projects in this region.

Another positive feature of the land reserve is that the company owns 70 per cent of the total developable area and the possession of land by way of sole development rights is negligible. This primarily means low probability of disputes or stalling of projects by court cases where the company only has development rights and not land ownership.

Business segments

Of the saleable area developed by the company so far, close to 50 per cent is derived from land improvement, wherein the company creates infrastructure on the land it holds and then sells the parcels. This business, which is otherwise not a very lucrative proposition, has yielded reasonable margins because of the high value land granted under the Slum Rehabilitation Scheme (SRS). But the fact remains that only 50 per cent of what the company has done so far can be termed as core real-estate development.

However, looking at the ongoing and planned projects, the company appears to be concentrating on the residential and retail segment and to this extent, its operations would be dominated by real-estate development.

This would be essential for the company to not only build and retain its brand image among competitors in the Mumbai region but also improve margins. For instance, the company's commercial and residential segment saw the highest growth compared to selling of land or development rights in 2007. As a result, the OPM surged from 31 per cent to 54 per cent between FY-06 and FY-07.

HDIL has so far followed the build-and-sell model even for its commercial and retail properties.

While this may not be in line with international practices, we feel that for companies such as HDIL, which also lock their working capital in developing SRS in Mumbai, there may be higher requirement of capital, and this is better met by building and selling, rather than leasing property.

However, this model has its disadvantages, as it would lead to bunching of revenues in some years. . This would also result in fluctuating operating costs and negative cash flows.

HDIL has, however, offset this to some extent by regular sale of transferable development rights that it earns thorough the slum rehab projects.

HDIL is into SRS projects, which are typically uncertainty prone as they involve evacuation of dwellers and providing them with alternative housing. HDIL however has a reasonable track record of re-settling 25,000 families under this scheme, thus inspiring some confidence.

Moreover, these projects have formed only 15 per cent of its construction activity so far. But we view this business as a tactical way to build low-cost housing and earn high-value land in return.

The IPO is open from June 28-July 03. Kotak Mahindra Capital and Enam Financial are the book running lead managers.

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