HDIL: Signs of revival in volume

HDIL: Signs of revival in volume
The Hindu Business Line, May 27, 2009, Page 10

Deep discounts help sales.

Vidya Bala

BL Research Bureau HDIL’s results for the quarter ended March 2009 belies the sharp re-rating enjoyed by the stock from Rs 140 to Rs 280 between January and now.

A 64 per cent decline in sales and 91 per cent decline in net profits in the fourth quarter of FY-09, compared to March 2008, does not come as a surprise, given the real estate slowdown and more specifically the decline in price of transferable developments rights (TDRs) compared with a year ago.

Debt restructuring, a pick up in sales volumes and plans to seek funds through qualified institutional placement – the new mantras (suggestive of a revival) that have buttressed the recent rally in realty stocks – are a feature of HDIL’s results as well.

Relief from high raw material costs did not provide much support to HDIL’s operating profit margins as a result of a steep drop in turnover. OPMs declined to 27 per cent, a 3 percentage point slide even with respect to the December quarter. Net profit margins too suffered what with interest costs rising manifold.

Improving sequentially

A comparison of the recent quarter numbers with that of the December quarter, however, offers a hint of revival. Sales was up by 14 per cent on a sequential basis though operating and net profits declined, suggesting that volumes could be reviving but perhaps only due to steep price discounts offered.

In the March quarter, the company launched residential projects in Kurla and Andheri at discounts of 20-30 per cent on the prevailing market prices. However, the recent units sold would not reflect in its revenues in the near future.

HDIL’s Mumbai airport slum rehabilitation project is also running on schedule. This could be crucial to its growth as slum rehabilitation continues to be HDIL’s primary business.

A more positive aspect of sales could be TDRs. The management has stated that it has seen a revival in TDR volumes even as prices appear to be at the same levels as the December quarter.

TDRs are allocated parcels of land received from the Government in return for Slum Rehabilitation Schemes (SRS) undertaken. These also typically carry higher Floor Space Index of up to 3 times, thereby improving volumes for the builder.

Of the ongoing projects of 64 million sq.ft, 80 per cent of the developable area fall under SRS/TDRs. TDRs can be used for development or can be sold by the company. Hence, a revival in TDR volumes may be crucial to quickly improve the company’s cash flow position.

HDIL suffered negative operating cash flows at the end of March quarter.

QIP
HDIL’s current debt stands at over Rs 4,000 crore. The qualified institutional placement of about Rs 2,800 crore, which was recently approved, can help reduce debt by 50 per cent. However, this placement combined with preferential allotment planned to be issued to promoters could result in capital expanding by a good 40-45 per cent if issues are priced at current market prices. Slow revival in revenues and expanded capital could mean earnings dilution in the near term.