Reiterate ‘overweight’ on HDIL with a target price of R140 a share. HDIL is one of the cheapest stocks (P/B) in the sector. Debt concerns for HDIL have eased over the last three quarters.
Cash generation from core operations has been improving. Progress on asset sales would be the key and help sort the cash flow/execution issues. Approvals for new launches are progressing well and the company has a good launch pipeline going into FY15. Our March-2016 price target is based on 8x cash Ebitda and inline with the multiple used for other residential property developers. We think the stock’s valuation is cheap, given a 63% NAV discount and 0.4x PBV. The company is in transition to becoming Mumbai’s largest affordable housing developer and an extremely attractive opportunity.
As the company retires additional debt through FY16, we would expect the valuation discount to narrow. HDIL’s Q4 operating performance beat expectations on all counts. The company delivered positive FCF to equity of R110 crore (R2.6 a share) which was far higher than reported EPS of R0.8. Pre-sales continued to improve and went up 78% y-o-y.
Net debt declined by R110 crore as well. The company is now one of the few RE developers that is operating on a positive free cash flow model. We think HDIL’s projects embed enough cash flow to service entire debt / interest and, hence, credit risk on the business is completely removed.