Housing Development and Infrastructure Limited (HDIL’s) 3QFY09 results provide the first signal that our sector thesis is beginning to play out.
We argued high leverage will force developers to sell assets to support cash flows in a down cycle, thus making DCF-based NAV valuations trend lower and redundant, and book-value of assets a key valuation metric.
In 3Q, 75% of total revenue was supported by sale of FSI (assets equivalent to land bank for a developer) in three slum-rehabilitation projects in Mumbai, totaling 0.5m sqft.
EBITDA margins declined to 34.6% from 58.8% in the last quarter and 59.7% a year ago. Debt-equity ratio continues to increase (currently 0.9x) for the company despite asset sales.
We note that leverage is high for HDIL especially given its back-end loaded business model. Near-term operational cash flows do not support debt repayment of approximately Rs16 billion due in FY10, which necessitates debt refinancing.
Significant pricing weakness in TDR raises concerns on financial viability of its key MIAL project. TDR prices have corrected approximately 80% over the previous year (to Rs900 from Rs4,400).
HDIL’s expensed cost for generating a TDR is approximately Rs850, although the actual cost incurred is much higher in our opinion.
Thus, at current pricing, the company is not making money in the project. Further, the MIAL project was to be supported by cash flows from the FSI sale in Kurla.
However, a weak demand for commercial projects has forced the company to launch lower margin residential projects instead, thus affecting cash flows significantly.
We anticipate further downside, as NAV will continue to trend lower due to forced asset sales. Delays in the company’s on-going projects introduce further downside risk to our FY10E and FY11E estimates.