The stock price of Mumbai-based real estate developer HDIL has been on an uptrend in the last few months. Price has more than doubled from ₹45 in early March to ₹108 currently. There are two factors driving this rally, reduction in the company’s debt and improving prospects of the Mumbai real estate market. But has HDIL the company really turned the corner? Here is a reality check on the company.
HDIL’s stock price zoomed by 50 per cent on the back of a series of block deals in March and April this year. Kotak Securities bought 0.5 per cent stake, Nomura Singapore 1 per cent and Credit Suisse 0.5 per cent stake in the company in this period. Shareholding by foreign institutional investors has also increased from around 28 per cent in June 2013 to an estimated 38 per cent currently, with promoter holdings steady at 36 per cent.
So, what is driving buyer interest? According to Hariprakash Pandey, Vice-President - Finance and Investor Relations, HDIL, reduction in debt has played a major part in making the sentiment positive. “We generated enough cash flow in a difficult macro environment and repaid around ₹600 crore of debt last year. This is a 15 per cent reduction," he says. “The overall revival in sentiment is also helping.”
HDIL plans to repay ₹600-800 crore, or nearly 20 per cent of its debt this year. The company’s cash receipts, that is aiding debt repayment, is also improving. In the March 2014* quarter, net cash flow from operations was nearly ₹490 crore, which enabled paying off ₹408 crore of debt during the quarter. The company’s net debt as of March 2014 was ₹3,511 crore, against ₹4,004 crore in March 2013.
Mumbai market revival
Pandey notes that there are signs of revival in the Mumbai property market. One, there are more enquiries and interest in the commercial segment, after a three year lull. Next, land transactions are happening, which indicates developer optimism. Last, better macro economics and stock market performance will aid consumption in the Mumbai market, he notes.
He says this is a positive for the company as its TDR (related to the land gained through slum rehabilitation) sales, which commands margins of over 60 per cent, will likely increase. Pandey expects operating margins to improve by 5-10 percentage points, as the revenue mix tilts to 60 per cent property sales and 40 per cent TDR.
The company handed over possession of around 1,000 apartments, covering 1.5 million sq ft in 2013-14. The same is expected this year along with 2,000 flats covering over 2.5 million sq ft in its township development in Virar East near Mumbai. As the company recognises revenue only on project completion, as opposed to the normal practise of percentage of completion, hand-over is positive for revenue numbers.
Issues remain
We continue to be cautious about the stock for three reasons.
First, the company’s debt is still high and around 96 per cent of the promoter holdings (or around 35 per cent of outstanding shares), are still pledged.
Second, while there may be signs of revival in the Mumbai market, how well the TDR sale will increase for the company is yet to be seen.
Last, the company’s share price has already zoomed, in anticipation of growth. The stock trades at a price to FY14 earnings multiple of 25 times. This is higher than other Mumbai-based realtors, but HDIL has always commanded a premium due to its high margins from TDR sales in the past. While margins have improved in FY14, compared to FY13, it is still at around 20 per cent levels and not yet at the 40 per cent levels seen in the past.