HDIL-Mired In Dharavi

HDIL-Mired In Dharavi
BSE 532873; CMP Rs 338

Industrialists/Businessmen/Investors must realise that charity and politics do
not go hand in hand in India. Look at HDIL which is undertaking a mammoth
project for the reconstruction and rehabilitation of the slums adjoining the
Bombay Airport, known as Dharavi.

What HDIL promoters and investors do not realise is that the project will see
huge arm twisting and flow of grease money to successive political parties which
are and would be governing Maharashtra, the labour unions and local legislators.

The Dharavai slum rehab will costs huge sums and will be spread over years if
not decades, and ultimately meet the same fate as Enron's 2000 MW LNG based $ 3
bn Thermal Power Plant at Dharwad, which inspite of its re-christening as
Ratnagiri Power and owners like NTPC, remains non-operational long after Enron
collapsed.

The HDIL stock is a Sell, even though the notes given below by the management
will make us feel otherwise.

Airport project to generate revenues from 1QFY09


Management expects that the company will convey ~53 acres of land for the first
phase of the project (involving resettlement of 18,000 – 22,000 families) in
1QFY09 . As per estimates this move will generate Land TDR of ~3m sf. Revenues
on the same could also be recognised in 1QFY09 itself.

The first phase of rehabilitation families is expected to take 24 months.


Recent policy changes on SRA beneficial
Management has welcomed the increase in size of tenement given under the slum
redevelopment scheme from 225sf to 269sf of carpet area (460 sf super built up)
as they believe that while increased FSI will compensate the developers for
constructing a larger house, a larger unit size will also make it easier to
convince the slum dwellers to move from their existing dwelling.

Increase in housing size also adds to the TDR receivable from the airport
project, which the management now expects to be 40m sf (construction TDR).


Land requirement for airport project
The increase in applicable FSI for high density slum rehab scheme from 3x to
4x brings down land requirement for resettlement of airport project to an
estimated 150 acres of land. HDIL expects to tie-up the land at an average price
of Rs200m/ acre. It has acquired and paid for about 1/3rd of land requirement,
which will be utilized for the first phase of the project.


TDR realisations
In the first phase of the Mumbai airport resettlement project, families will
likely move to Kurla, which will be considered as the source of TDRs. Hence,
these TDRs could fetch premium valuation as the point of origination will mean
that these TDRs could be utilised in high value zone adjacent to Bandra Kurla
Complex (BKC).


Increase in FSI in suburban Mumbai to 1.33x
The move is likely to impact the demand for TDRs adversely as developers will
likely buy 0.33x of FSI from the state government.


No immediate need to raise additional funds
The company’s outstanding debt has increased by Rs18bn so far in FY08 to
Rs22bn to buy land for airport resettlement project and the Vasai SEZ project.
The gross debt/equity ratio is still reasonable at 0.73. The current cash
balance of Rs17bn includes the recent commercial asset sale.


Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations &
outlook are included to enable a better comprehension of the Company prospects.
Actual results may, however, differ materially from those stated on account of
factors such as changes in government regulations, tax regimes, economic
developments within India and the countries within which the Company conducts
its business, exchange rate and interest rate movements, impact of competing
products and their pricing, product demand and supply constraints.

Nothing in this article is, or should be construed as, investment advice.