HDIL reported revenues of Rs2.9bn (-17% q-o-q; -48% y-o-y) driven primarily by sale of TDR (93% of total revenues). Improvement in TDR rates led to better margins QoQ (EBITDA margin at 39% in 1Q FY10 up from 27% in 4Q FY09).
The company raised $350 million in the recent QIP, which has mitigated cash flow concerns and reduced net debt equity from 0.9 to 0.4.
Further, rescheduling of debt (1st principal repayment due on Oct. 10) will reduce near term pressure on cash flow. However, the QIP offering and warrants issued to promoters (26mn at Rs240/share) will imply dilution of equity.
We are also concerned of the enabling resolution to raise an additional US$450mn, implying further dilution of equity.
Our interaction with management highlights that property prices are expected to remain rangebound in the next one year after having declined by 20-40%.
While volumes have improved relative to Dec-Jan 10 (volumes were negligible), it is still approximately 70% below Apr-Jul ‘09.
We maintain our view of a U shaped recovery in prices due to anecdotal evidence of oversupply since most of the developers are focusing on affordable housing; and demand driven by government employees, which are price sensitive.
Our target price upgrade to Rs268 is primarily driven by an increase in TDR rate from Rs950/sq ft to Rs1,600/sq ft and shift of base year from FY10 to FY11.
The stock is currently trading at our target price of Rs268 and therefore we upgrade our recommendation to NEUTRAL. At our target price the stock will trade at 22x FY10 EPS and 11x FY11 EPS.