HDIL IPO - Invest at cut-off

Housing Development and Infrastructure (HDIL), part of the Wadhwan group (formally known as the Dheeraj group), develops real estate mainly in the Mumbai Metropolitan Region. Since its incorporation in 1996, the company has developed 23 projects covering approximately 11 million square feet of saleable area, including about 5.7 million square feet of land sold to other builders after the development. It also have constructed an additional two million square feet of rehabilitation housing area under the slum rehabilitation schemes. Dewan Housing Finance Corporation, a listed company is part of the promoter group.

To fund acquisition of land or land development rights for its ongoing and planned projects and construction of its ongoing and planned projects, and to meet general corporate purposes, HDIL is coming out with an IPO.The price band is Rs 430- Rs 500 The issue opens on 28 June and closes on 3 July 2007.

Strengths

• HDIL has land reserves of approximately 112.1 million square feet of saleable area to be developed through 32 ongoing or planned projects. The company has 21 ongoing projects under construction and development, aggregating to approximately 45.5 million square feet of saleable area, and has 11 planned projects aggregating approximately 66.6 million square feet of saleable area. Of the land reserves, about 73.4% is actually owned by the company; and 15.7% of it is to be acquired under memoranda of understanding (MoU) and agreements. But these MoUs do not have any revocation clauses. Another 10.9% of the land reserve is under joint venture with partners. The execution, however, rests with HDIL.
• Has received in-principle approval from the Ministry of Commerce and Industry to develop, operate and maintain multi-services special economic zones (SEZs) in its name. However, given the uncertainty in SEZ regulations, HDIL has still not decided whether it would develop them on its own or in collaboration with others.
• Land bank has been built historically at a weighted average cost of Rs 200 per square feet.
• Advances from customers are Rs 512.1 crore end March 2007, representing amounts that have been received from customers but not booked by the company as sales. As and when the projects are completed, this amount will percolate to the top line. This represents 43% of the reported FY 2007 revenue. There was an inventory of Rs 1324.48 crore (approximately 98% constitutes work in progress) end March 2007.
• Under Section 80-IB (10) of the Income-Tax Act, 1961, real-estate companies are eligible for 100% deduction of the profit derived from development and building of housing projects for middle-income small families approved before end March 2007 by a local authority. The company has approved tax-exemption projects with estimated sales value of Rs 5000 crore.
• On account of the presence in the slum rehabilitation scheme, HDIL is partly hedged against fluctuation in land prices as the contraction cost does not vary significantly. Also, the company is not required to pay one-off land purchase costs at the beginning of each project.

Weaknesses

• Of the total land bank, 82% is in Mumbai Metropolitan Region, with a significant proportion in the Vasai-Virar region and in residential projects. The currently benchmark rates in Vasai-Virar region are in the range of only Rs 1000-1800 per square feet.
• The Union government has recently decided to completely ban the real-estate players and township developers from accessing external commercial borrowings (ECBs) to fund projects. The Reserve Bank of India (RBI) also earlier raised risk weights on housing loan, followed by an interest-rate hike, to curb the demand for the real-estate sector. Thus, real-estate companies are likely to face difficulties in funding the projects (particularly for buying land) and their interest burden is likely to increase.
• In the year ending March 2007, 69% of reported revenue was derived from selling of development rights/floor space index (FSI). Thus, one of the factors that would determine sustainability of revenue is likely to be the number of slum rehabilitation projects that will be bagged. Currently, the slum rehabilitation projects in the kitty will entitle it salable area of 64,26,222 square feet.
• About 22% of the revenue was derived from sale of land. In future, sustainability of profit is likely to depend on movement in land prices.
• As HDIL follows complete contract method of accounting, its earnings are likely to fluctuate significantly from year to year and quarterly results will be highly volatile. As other companies follow percentage completion method, comparisons will be difficult and may lead to wrong conclusions.
• Over the past couple of years, there has been a significant increase in interest rate and real-estate prices. This has increased the equated monthly instalment (EMI) on housing loans. The increase in EMI as a proportion to disposable income of household has raised concern regarding affordability of properties. Real-estate prices are already showing signs of softening. A drop in prices could also result in customers adopting a wait-and-watch approach before booking new properties, and existing customers deferring payments or canceling bookings made earlier when prices were high. This would impact cash flows and could lead to a cash crunch, which could significantly impact the company’s ability to complete existing/start new projects.

Valuation

Knight Frank had valued HDIL’s land reserves at Rs 21,095.10 crore on 15 December 2006 using the discounted cash flow (DCF) method. The per share value works out to Rs 984. Cushman & Wakefield has worked out the net present value (NPV) of the company’s projects at Rs 22039.40 crore on 22 January 2007. Per share value works out to Rs 1028. However, this valuation is about six months old and the real-estate market condition has changed after that.

Consolidated FY 2007 EPS on post-issue equity, assuming green shoe option is exercised, works out to Rs 25.3. At the offer price band of Rs 430 – Rs 500, the P/E range is 17-19.8, respectively. Comparable companies location-wise (focused on Mumbai) are: Akruti Nirman (mainly into slum rehabilitation) and Orbit Corporation (mainly into redeveloping projects) are trading at P/E of 31.5 and 16, respectively. However both these companies are much smaller compared with HDIL. Its EV of Rs 823 – Rs 954 per sqft of the developable areas of 112.1 million sqft 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.

reference:- www.capitalmarket.com

ANURAG DUJARI

Mobile - 09831909904, 09433988791, 09883059291, 09330911514

Messenger ID - anurag130

E-Mail - anurag130@yahoo.com

Spice Communications IPO - Apply

Promoted by Dilip Modi of the B K Modi group, Spice Communications provides cellular services in Punjab and Karnataka. Telekom Malaysia will hold a 39.2% equity stake post-issue compared with 40.8% of the Modi group. The company was the second largest cellular services provider in Punjab and the fifth largest cellular services provider in Karnataka, measured by the total number of subscribers with a combined market share of 14.49% in these two states (Punjab: 23.9% and Karnataka: 7.5%) end March 2007. The subscriber base was 3 million (2.05 million in Punjab and 0.95 million in Karnataka) with network coverage of 537 towns in Punjab, covering approximately 55% of the state population, and 229 towns in Karnataka, covering 33% of the state population end May 2007.

Spice Communications has pending applications for licences to provide cellular services in additional 21 circles throughout India. The company was recently awarded a national long distance (NLD) licence and international long distance (ILD) licence by the Department of Telecommunications and it intends to initially set up base infrastructure for a capacity of 30 million minutes per month across 15 locations in India.

The current initial public offering (IPO) is to raise Rs 464 crore at the lower band (Rs 41) and Rs 520 crore at the upper band (Rs 46). The net proceeds from the issue are to be used for part repayment of long-term debt, for payment of NLD and ILD licence fee, for meeting related capital expenditures to set up base infrastructure for NLD/ILD amounting to Rs 63.60 crore, for paying vendor(s) for network equipment and other capital expenditure amounting to Rs 177.63 crore, and for general corporate purpose and public issue expenses. Spice Communications has issued 2.49 crore of equity shares at a price of Rs 45 to certain investors pre-IPO and raised Rs 111.93 crore.

Strengths

• Has received NLD and ILD licences and proposes to offer data transmission services and voice transmission for calls originating and terminating on most of India’s and global telecom networks. It will be basically taking capacity on lease rather than setting up its own network. This will improve the operating profit margin.
• One of the objects of the issue is to repay part of debt, which is likely to reduce the interest burden.
• The Indian telecom industry is one of the fastest growing in the world adding nearly six million subscribers a month. The mobile subscribers base is estimated to increase to approx. 210 million by the year ending March 2008 (FY 2008), from the current level of 167.44 million subscribers end April 2007. Factors like falling handset costs, attractive tariffs and extensive reach have reduced the entry barriers for new subscribers and, thus, expanded the markets available to telecommunication service providers. The presence in the country’s richest state, Punjab, is likely to translate into volume growth.

Weaknesses

• In the absence of pan-India presence like other integrated operators, unable to provide seamless roaming services and is forced to share its revenue with other operators with whom it has roaming arrangement for its subscribers. Though licences in other circles have been sought, the current state of financials will hamper expansion in other circles in a major way in foreseeable future.
• Of the last five completed financial years, there were net losses in three years on account of low operating profit margin compared with the industry, high interest and depreciation. Losses have been incurred even in FY 2007. On account of continuous losses, the net worth has eroded. Accumulated losses stand at Rs 684 core (higher than the current issue size of around Rs 500 crore).
• Being a regional service provider, there is significant competition from larger integrated players with pan-India presence and greater financial, technical and marketing resources. In the past, key corporate clients were lost, particularly in Karnataka, primarily due to lack of coverage in certain geographic areas. Not been able to sustain its first mover advantage in both the states it operates.
• The Modi group’s track record is not encouraging.

Valuation

Spice Communication has made net losses in the six months ended December 2006 and year ended June 2006. However, it has been making profit at the cash level. The company will not be listed on NSE as it does not meet the financial track record prescribed by NSE for new listings.

At the price band of Rs 41 - Rs 46, the EV/EBITDA works out to 20.9 – 22.8, respectively. While Bharti Airtel, the largest integrated player in the sector with a pan-India presence in GSM (in all 23 circles), trades at EV/EBITDA of 21.5, and Reliance Communication, with CDMA presence in 21 out of 23 circles and GSM presence in eight circles constituting a pan-India presence in all the 23 circles, is trading at EV/EBITDA of 18.4. Idea Cellular, with operations in 11 circles, trades at EV/EBITDA of 22.6.

On the basis of FY 2007 consolidated revenue, the market capitalisation to sales works out to 8.5 for Bharti Airtel, 7.3 for Reliance Communication, 7 for Idea Cellular, and 3.4 for Tata Teleservices (Maharashtra). It is 3.7-4.1 for Spice Communications. The EV per wireless subscriber for Bharti Airtel, Reliance Communication and Idea Cellular is about Rs 41102, Rs 35382 and Rs 23434, respectively. For Spice Communication, it is Rs 13887 – Rs 15113. The blended average revenue per user (ARPU) of Spice Communication stood at about Rs 370 in the six months ended December 2006 against Rs 427 for Bharti Airtel, Rs 338 for Idea cellular and Rs 328 for Reliance Communication in the quarter ended December 2006.

At the price band of INR 41-46, Spice is trading at a steep discount to listed peers on an EV/subscriber basis. At the lower end of the price band, Spice trades at an EV/subscriber of USD 317, a 45-52% discount vis-à-vis listed peers. We believe there is scope for price appreciation given the substantial discount on an EV/subscriber basis, besides further scope for valuation upsides from two potential triggers in the near to medium term. Spice Communication is one of the suitable candidates for takeover.

Source:-www.capitalmarket.com, www.moneycontrol.com

ANURAG DUJARI

Mobile - 09831909904, 09433988791, 09883059291, 09330911514