Subscribe to HDIL IPO; reasonable valuations: Networth

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The initial public offer, IPO of Real Estate Developer Housing Development and Infrastructure (HDIL) is open for subscription with 29.70 million shares at a price band of Rs 430-500 for each Rs 10 face value share.

The company is looking to raise around Rs 15 billion in the upper end of the price band.

Networth Stock Broking report on HDIL IPO:

Company Profile

• Incorporated in 1996 HDIL is a real estate development company with significant operations in the Mumbai Metropolitan Region. Its business focuses on Real Estate Development, including construction and development of residential projects and, more recently, commercial and retail projects, Slum Rehabilitation and Development, including clearing slum land and rehousing slum dwellers, and Land Development, including development of infrastructure on land which the company then sells to other property developers.
• Since incorporation, the company has developed 24 projects covering approximately 11.3 million squares feet of saleable area, including approximately 5.7 million square feet of land sold to other builders after Land Development, primarily in the Mumbai Metropolitan Region. HDIL has also constructed an additional 2.0 million square feet of rehabilitation housing area under slum rehabilitation schemes.
• HDIL's residential projects generally are comprised of groups of apartments, towers or larger multi-purpose "Township" projects in which individual housing units are sold to customers. Commercial projects are a mix of office space and multiplex cinemas while retail projects focus on shopping malls. HDIL usually follows a "build and sell" model for the properties we develop.
• The company undertakes slum rehabilitation projects under a Government scheme administered by the Slum Rehabilitation Authority (SRA), whereby developers are granted development rights in exchange for clearing and redeveloping slum lands, including providing replacement housing for the dislocated slum dwellers.
• Although historically focused on real estate development in the Mumbai Metropolitan Region, as part of its growth strategy HDIL is considering projects in other locations, including Kochi and Hyderabad. The company is also considering expanding into hotel projects, special economic zone developments and "megastructure" complexes, which are large-scale mixed-use retail, commercial and residential developments.
• With total land reserves of approximately 112.1 million square feet of saleable area 82% of which falls under Mumbai Metropolitan Region, HDIL is best placed to take advantage of real estate growth of Mumbai Real Estate.
• The company is raising Rs 12771- 14850 million to fund its part of cost of land and towards construction expenses of ongoing projects.

Investment rationales

Promoters Group's three decades track record of real estate development in Mumbai Metropolitan Area

Wadhawan Group (Promotors), has been involved in real estate development in the Mumbai Metropolitan Region for almost three decades. As of May 31, 2007, the Wadhawan Group has developed (including HDIL's developments) approximately 73.2 million square feet of saleable area, which includes 13.7 million square feet of residential saleable area, 15.3 million square feet of commercial saleable area, 0.7 million square feet of retail, 35.6 million square feet of land development and 7.9 million square feet of saleable area under slum rehabilitation schemes, and additionally, has constructed approximately 5.5 million square feet of rehabilitation housing area under slum rehabilitation schemes.

Play on MMR Development

Of 112.1 million sqft of developable area the 82 % comes from Mumbai Metropolitan Region. Given modest land acquisition cost, the company is poised to take advantage of growth of Mumbai Suburbs of Virar/Vasai. Besides the companies is diversifying into newer areas of Palghar, Kochi and Hyderabad for future growth.

Retail and Slum development throws lucrative opportunities

Besides the company has 6.6 million sqft under ongoing and planned projects under SRS and 19 million sqft to be developed as retail space which is lucrative and high margin business segment for the company. Given the companies past experience of slum rehabilitation project and ambitious SRS for Mumbai the company is poised to benefit from the Slum Rehabilitation Schemes for MMR.

Valuation

At Rs 430-500 bands the stock would be valued at a FY07 PE of 14.1-16.4 x FY07 EPS and EV of Rs 823 - Rs 954 per sqft of the developable areas of 112.1 million sqft which is at a substantial discount to DLF's valuation of Rs 1680 and Unitech's valuation of Rs 680 per sqft. Given the company's presence in MMR and lucrative opportunities of SRS we believe the offer is at reasonable valuation and recommend the investors to subscribe.