Bangalore: A sudden share sale that has eroded the company’s stock value, a debt pile-up, a two-year delay in its most ambitious project, and a rating downgrade last week have put Housing Development and Infrastructure Ltd (HDIL) on uncertain ground.

Investors have been wary of the company since January on market rumours of a potential bankruptcy after vice-chairman and managing director Sarang Wadhawan on 21 January sold five million shares, or a 1% stake, to raise 57 crore.

The stock crashed for three consecutive days after the sale. The company’s explanation in a hurriedly arranged investor call on 24 January that the share sale was to urgently pay for a land parcel in central Mumbai didn’t pacify investors.

“We had to make the final transaction of the payment to close out the transaction," Hari Prakash Pandey, vice-president (finance and investor relations) at HDIL, said in the investor call.

India’s real estate sector has been hurt by the slump in economic growth, which is estimated at 5% this fiscal, the lowest in a decade, and high borrowing costs that have prompted potential buyers to delay property purchases. Laden with debt, many developers have been hit by a liquidity crunch as banks shy away from lending to the sector.

Pandey said about 98% of promoter holdings in HDIL had been pledged with financial institutions and banks, but the company was comfortable with its debt and repayment schedule. As on 31 December, it had a consolidated debt of 4,000 crore and a stand-alone debt of 3,466 crore. The cost of debt is around 13.5%.

Before HDIL could fully recover from the harsh reaction to the January share sale, Credit Analysis and Research Ltd (CARE Ratings) on 19 March downgraded its non-convertible debenture (NCD) issues to a D rating, indicating potential default after the company delayed payments on the issues.

Adding to its woes, HDIL’s profit fell 31% from a year earlier to 107.3 crore in the latest December quarter, while revenue slipped 0.58% to 423.17 crore.

Recovering ground

Pandey, in an interview, said HDIL delayed a payment of about 1.3 crore to one of the NCD holders by five-six days in the first week of March because the tax department had frozen an account over service tax issues. The tax matter has since been resolved.

“Investors reacted because the message goes out and creates panic in the system. Though we had informed the stock exchange on 20 March, people started calling the bankers and the market reacted in its own way," Pandey said by phone from Mumbai. “The company hasn’t faced any major delay in servicing NCD payments (in the last two years since they were issued). We have been speaking to our investors day in and out, trying to reach out to them and not hiding anything."

HDIL has asked CARE to review its rating; the agency has said it will review the ratings based on the company’s submissions.

“There was a delay in repayments with one of the accounts of HDIL, but they repaid it and there are no issues with the account as of now," said a banker with a leading state-run bank that has lent to HDIL. He didn’t want to be named considering the sensitivity of the matter.

Mumbai-based HDIL, among India’s largest developers, has been in the real estate business for almost three decades, with expertise in the lucrative slum redevelopment business. It is currently constructing around 104 million square feet of space across 22 projects, according to a company presentation.

On Monday, its shares lost 2.47% to 45.45 on BSE while the benchmark Sensex gained 0.12% to 18,704.53 points and the BSE realty index fell 1.95% to end at 1,760.53 points.

Since January, HDIL has lost 58.19% of its stock value, while the S&P BSE Sensex has lost 3.84% and the realty index 16.6%.

Paring debt

Analysts tracking HDIL say the company can find its way out of the present mess by selling some assets, reducing its debt and ensuring it completes its projects in time, though a recovery could take a while.

Anshul Jain, chief executive of DTZ India, part of DTZ International Property Advisors Pvt. Ltd, said liquidity or availability of cash is the key challenge for most developers, both large and mid-sized.

While it is important for developers to service debt, the companies should also be able to sufficiently generate cash to run their businesses, he said, without specifically referring to HDIL.

“We are looking at a fine balance between growth and debt reduction. Even when the fourth quarter numbers are out, there would be a reduction in debt," Pandey said

Two years ago, around 70% of HDIL’s debt was linked to its crucial Mumbai International Airport Pvt. Ltd (MIAL) project, but now not more than 20% is directly linked to it, he said.

Pandey added that the company is looking to reduce its debt by 1,000 crore in a year by selling some assets and through internal accruals, though analysts are sceptical if it can meet the target.

What lies ahead?

Last week, HDIL launched an office space project—54, Corporate Park—in Mumbai’s Santacruz area, its first launch in nearly five months, and it has two more residential project launches planned in May.

Property analysts say that while liquidity and sales are still an issue in the real estate sector, buyer and investor sentiment has improved from last year. Residential sales have picked up in the past two months, but the improvement is gradual and even slow in key markets like Mumbai.

HDIL’s key risks include delays in cash realizations from pre-sales and floor space index sales (asset sales) already done, persistent weakness in the Mumbai residential market and the delay in formal notification of eligibility norms for the Mumbai airport project, JPMorgan said in a 14 February report.

The MIAL project, which involves shifting thousands of slum dwellers to free land for the airport, hasn’t progressed much in the past two years, with the Maharashtra government dithering on deciding on matters such as eligibility norms for slum dwellers.

“Disappointment is there that nothing is moving and not much concrete action has happened, but a lot of it was not in our hands," said Pandey. So while HDIL has built tenements for the slum dwellers, it hasn’t been able to shift them yet.

Cash position

But HDIL’s cash position is comfortable now post a refinancing of its loans and the company does not have any significant repayments due in the next 12 months, JPMorgan said in its report. The developer has 220 crore in cash on its books and a net debt equity ratio of 0.36, it said.

HDIL, in its 24 January investor call, said it had arranged a 800 crore loan for a subsidiary with a tenure of eight years and moratorium of four years, as part of its efforts to pay back some of its short-term borrowings or converting them into long-term borrowings.

Over the past two years, the company has also sold assets that are difficult to be monetized or developed. It is also working on exiting from Kochi and Hyderabad to focus on its core market—Mumbai.

“The main fear is that the costs that HDIL would have incurred on MIAL may have to be written off if the project doesn’t happen," said an analyst with a Mumbai-based brokerage firm, who didn’t want to be named. “The project promised to be the main generator of TDR for HDIL, which has also not happened so far."

Developers get transfer of development rights (TDR) in lieu of slum projects. They can either sell or use the development rights themselves.

On the January share sale, HDIL’s management has said the company will be able to buy back those shares after six months as a reverse transaction is not permitted before that under Indian stock market rules.

“We know the damage has already happened. People will have to give us time, it will take time for recovery," said Pandey.

Dinesh Unnikrishnan in Mumbai contributed to this story.

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