HDIL - Robust 3Q; to focus on non-MIAL -RBS

HDIL reported robust 3Q EBITDA and PAT growth of 41% and 57% yoy. As MIAL continues to face delay and uncertainties, HDIL's focus shifts to other redevelopment projects that could be value-accretive in the medium term, in our view. Reducing TP, but maintain Buy on attractive valuations.

Robust 3Q; significant delay in MIAL likely to continue due to uncertainty on policies
HDIL reported 3QFY11 revenues of Rs4.6bn (up 11% yoy, 22% qoq), led by 1.25m sq ft of TDR (transfer of development rights) sales @Rs3,120/sq ft (vs Rs2,500/sq ft in 3QFY10), which resulted in an EBITDA margin of 58.5% vs 46.2% in 3QFY10 (see Table 1). This, coupled with a lower tax rate of 6.3%, aided in PAT growth of 57% yoy. HDIL stated in its recent 3Q results release that while it continues to work on 33,000 slum units (7,000 units are ready for possession) under the Mumbai International Airport (MIAL) project, the timelines of handing over the project to the state government and beginning work on the remaining c52,000 slum units is still uncertain because of an impasse in the state government about policies pertaining to identifying slum dwellers eligible for rehabilitation.
HDIL shifts its focus to other redevelopment projects; tightening liquidity a concern
Given the uncertainty surrounding MIAL, HDIL has invested most of its QIP proceeds of Rs11.6bn into three other large redevelopment projects in suburban Mumbai and outskirts (see Table 9). We believe this could be value-accretive only in the medium to long term as they are long-gestation projects requiring up-front investment, which we believe could be challenging in the tight liquidity environment. Management maintains it would be comfortable funding the projects via internal accruals (residential projects, TDR and FSI sales). We value these redevelopment projects conservatively at 1x investment cost, given the lack of clarity on approval, development and funding plans on these redevelopment projects.
Reduce TP on concerns of MIAL delay and higher costs; maintain Buy on valuations
We increase our FY11F earnings 14%, maintain our FY12 forecast, and reduce our FY13 forecast 20% as we: 1) increase our TDR sales assumption from Rs1,800/sq ft to 2,000/sq ft; 2) increase our construction cost estimate for rehabbing slum units from Rs1,250/sq ft to Rs1,500/sq ft; and 3) factor in a delay in TDR/FSI generation and sales in the MIAL project. We raise our execution discount on MIAL to 50% from 15% due to persistent uncertainties and on non-MIAL to 20% from 15% due to sector headwinds. We factor in revised net debt and value the new redevelopment projects at 1x investments, for a new TP of Rs225 vs Rs310 previously (see Table 11). We maintain a Buy on attractive valuations. HDIL’s upcoming change in accounting from PCM to POCM could provide upside to our forecasts.