Subscribe to HDIL issue; valuation looks good: Arihant

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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.

Arihant Capital Markets report on HDIL IPO:

Investment Positive

Established developer in Slum Rehabilitation Schemes

HDIL is the established & experienced player in Slum Rehabilitation development which is primarily involved in the construction of residential building for slum developers. The company has experience in identifying the appropriate slum rehabilitation projects as well working with the Government authorities who regulate these projects.

The company has acquired the land at a lower cost from the slum dweller, constructed the residential building in those slum land in exchange of FSI & TDRs. HDIL has generated these TDR's on slum development and is using them to buy lands from the third party for the development purpose. This has contributed to its total Topline.

Diversification

In addition to its core business of developing residential, commercial, retail projects & SRA projects, the company is now diversifying into hotels, SEZ development and development of "mega- structures" complexes, which are large scale mixed use retail, commercial & residential development. This will help the company to take the benefits of new opportunities & reduce it's over exposure in a particular segment. The company has already received the approval from the Ministry of Commerce & Industry to develop a SEZ around 50 kms North of Mumbai.

Land Reserves

The company currently owns 70% of the development rights of the total developable area. This leads to low probability of the disputes or stalling of the property by court cases. Further, 83% of the total land reserves is in the lucrative Mumbai Metropolitan Region, where there is much demand mainly for retail & commercial space.

Concerns

Large part of land in the outskirts of Mumbai, Vasai -Virar region

HDIL has acquired large part of land in the Vasai- Virar region of Mumbai. Of the total land bank (112.1 mn sq ft) for ongoing & Planned Projects, 65% is in Vasai - Virar region. The realization of the markets in this region is low compared to other Mumbai Metropolitan region. The residential projects are mainly targeted to middle & lower income group as a result; the margins that the company will realize will not be high as compared to the other areas in Mumbai.

Besides, increase in the interest rates has slowed down the demand for housing loans; this may negatively impact the sale of the property. The company may face a significant execution challenge in executing its projects.

Long gestation period for SRA projects

The slum rehabilitation project is administered by SRA (Slum Rehabilitation Authority), before proceeding, the developer have to obtain the consent of at least 70% of the affected slum dwellers. Taking approval of the slum dweller is a big task & can take anywhere between 15-18 months to start the project.

Secondly, even after the approval of the slum dwellers, the execution of the project may be delayed due various risks such as litigation by some slum dweller due to non consensus view. HDIL's SRS project is around 20% of the total residential project.

Asset Risk

The company has acquired large chunk of land & is enjoying the benefit of increase in land prices in last two years. This advantage is visible in the current year's earnings. The total income has increased by around 135% from Rs 671 crore to Rs 2096 crore. But, hardening of the interest rates along with increase in the property prices has lead to decrease in the real estate demand. So there are chances of property rates coming down to increase the transaction volumes. This may have negative impact on the total revenues of the company.

Valuations

The issue is priced at 16x FY07 earnings on post issue capital at floor price and at 19x at cap price (excluding green shoe option)

The comparable peers are valued as follows

Company             P/E     EPS (Rs)
Ansal properties   34.3     9.4
Parsvanath
Developers           21.6    14.7
Sobha Developers 42.1   22.2
Unitech                49.2   12.1

Recommendation

The company has a strong presence in the Slum Rehabilitation Development. Currently, it has the land reserve of 112.1 mn sq ft of land of which 83% is situated in Mumbai & Mumbai metropolitan region which is major advantage for the company. Besides, diversifying into Hotels, SEZ Development & "Mega Structures "complexes like malls & theatres would be a growing trigger for the company.

Looking at current on-going project, company appears to be concentrated on the residential & retail segment of which around 65% is located in Virar Vasai region of Mumbai. Besides, development of residential & retail projects in the Bhandup region would have positive impact on its Top line. Also, Company can look forward to bank upon the large opportunities available for the development of Dharavi slum.

Based on the valuation, issue looks good. We recommend the investors to subscribe the issue.