HDIL: HOLD. HDIL: Holding up well

The last year was a challenging one for the real estate sector across the country with no perceptible improvement in home prices and sales volumes; profits of the BSE Realty index companies dropped 8 per cent.

But a few such as Mumbai-based property developer Housing Development and Infrastructure Limited (HDIL) have bucked this downtrend.

The company’s profits increased 23 per cent last year. It reduced debt by 10 per cent during the year, thanks to good cash collection. In the March quarter, the company’s residential sales doubled year-on-year. In May 2013, HDIL’s contract with the Mumbai International Airport Limited to rehabilitate slum dwellers was terminated. The company could not get transferable development rights (TDR) in return for the apartments it had constructed as the government did not take possession.

But recently, HDIL handed over 1,700 completed apartments and 10,000 more houses are expected to follow in 2015-16. This is expected to aid HDIL’s revenue from TDR sale.

These positives boosted the stock. It nearly doubled from the start of the year to a high of ₹136 in mid-April. The price has since corrected, but still the stock trades at 17 times its 2014-15 earnings. This is higher than the five-year average price-to-earnings ratio of 11 times.

It is also at a premium to peers such as Mahindra Lifespace Developers, which is trading at under 15 times 2014-15 earnings.

Given current valuations, the stock seems to factor in the positives; so upside in the near term may be limited. Despite healthy project completion expected this year, continuing weakness in the Mumbai realty market could drag sales growth. That said, shareholders can remain invested in the HDIL stock as the company’s fundamentals are improving and long-term earnings potential looks good.

HDIL’s revenue from existing projects improved last year — overall revenue increased over 13 per cent in 2014-15 to ₹1,083 crores. The company follows a project completion method of accounting and recognises revenue only on project handover.

There are four projects worth ₹2,500 crore likely to be completed in the next four-five quarters. Currently, 23 projects totalling 43 million sq ft area are under construction, primarily in the residential segment in Mumbai. The company is also developing 5 million sq ft of commercial space.

In the residential segment, sales growth picked up pace and the company indicated that new sales in May was ₹150 crore.

This follows a 100 per cent growth in sales to ₹400 crore during the March quarter. Still, many of its projects that are nearing completion have sizeable unsold inventory of over 50 per cent. This is a concern in a slow market.

HDIL will also earn revenue from TDR sale, as the apartments developed as part of slum rehabilitation for the airport are handed over. In April, HDIL sold 150,000 sq ft of TDR with an average realisation of ₹4,500 per sq ft. It expects that the hand-over of 10,000 apartments will give a TDR of 2.5 million sq ft in the first phase. Revenue from this high margin segment could help the stock re-rate.

But the process may be long-drawn given the legal and other policy issues. The company has obtained approvals and plans to launch Planet HDIL, an affordable housing project spread across 550 acres in Virar near Mumbai in 2016.

This large development should help the long-term revenue growth. Besides, the company has land and TDR which can support 245 million sq ft construction primarily in the Mumbai metropolitan area. This will support new launches when the market situation improves.

HDIL’s consolidated net debt has declined by 19 per cent from the peak level over the last six quarters thanks to good cash collection. In 2014-15, debt reduced by 10 per cent year-on-year to ₹2,942 crores.

The debt-to-equity ratio is at a comfortable 0.3 times. The company hopes to reduce debt further to ₹2,500 crore by March 2016 through cash from operations and sale of land outside Mumbai.

Paying off debt has reduced its interest outgo — from over ₹700 crore in 2013-14 to ₹550 crore in 2014-15.

This has helped a 23 per cent growth in profit to ₹218 crore in 2014-15, compared with a 13 per cent growth in revenue. Margins are likely to improve as interest costs reduce and share of TDR income increases.

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