Housing Development & Infrastructure HDIL IN:: BUY : Nomura Research

Profit & Loss:
1. Revenues of INR4.5 bn missed our estimate of INR4.7 bn, up 11% y-y and down 17% q-q. The company now gives out its consolidated results as the revenue recognition shifts to some subsidiaries.
2. INR2.43 bn of the revenues were recognized from the sale of floor space index (FSI) or development rights done in Goregaon, Mumbai in 3QFY11. INR770 mn was recognized after 0.4mn sqft of the HDIL Industrial Park was completed and handed over to the owners. INR700 mn was recognized on transfer of development rights (TDR) sales down 59% q-q, as only 0.28mn sqft was sold at INR2,500/sqft. We were expecting INR3 bn of FSI sales to be recognized and INR1.7 bn of TDR sales and were not expecting recognition of revenues on ongoing projects till 4QFY12. HDIL follows the project completion method of accounting.
3. The part recognition of revenues from the Virar Industrial Park was a pleasant surprise and strengthens our view that diversification away from dependence on TDRs for revenues will reduce significantly from FY12F onwards.
4. EBITDA margins turned out 200bps higher than estimated though 400bps lower q-q on lower TDR sales. EBITDA margins on the FSI sales are in the range of 40%-45% vs. ~60%-65% for TDR sales, as per management.
5. Depreciation on the consolidated balance sheet is much higher than the standalone owing to amortization of goodwill created on account of acquisition of subsidiaries. The company expects to amortize this goodwill in five years as a conservative accounting practice.
6. Total interest cost was also higher at INR1.5 bn vs. an estimate of INR1.2 bn while the tax rate was 26% higher than the estimate of 23% owing to lower TDR sales.
7. This contributed to PAT missing our estimate by 15% and the consensus estimate by 23%.
8. The company expects to recognize the INR2.2 bn of sales from the Virar Industrial Park by 4QFY12 as it hands over  the project to buyers post receipt of occupancy certificate.
9. It also has to recognize INR7.5 bn of FSI sales though the time-line remains uncertain on it.
10. The target is to complete three more projects Metropolis Residences, Premier Residences and Galaxy Apartments in 4QFY12-1QFY13. We believe that completion of all three projects could spill over to 2QFY13 and beyond postponing revenue recognition on the same.
11. The company has only 1.25mn sqft of TDRs remaining to be sold from phase 1 of the airport rehab project.
Balance sheet and cash flows:
1. The company had sold INR9 bn of FSI in Goregaon in FY11 to four developers; it has signed the final agreement with one and recognized revenues on the same. They have received only ~INR2.8 bn on the FSI sales to date as the buyers are still looking to raise funds. On the Popular Car Bazaar, Andheri FSI sale also done in FY11 for INR6.5 bn the company has received only INR3 bn to date. The amount of cash received in 2QFY12 was insignificant given the tight liquidity situation for property developers in India which is affecting the ability of the FSI buyers to raise funds.
2. In our view, the receipt of cash on these FSI sales was crucial to debt reduction for the company and with the increasing likelihood of not being able to collect all the remaining INR9.7 bn on the two FSI deals in FY12F could result in the company missing its debt reduction target of INR8 bn in the year and could also result in a need for refinancing of its upcoming debt repayments.
3. Its net debt has gone down INR1 bn q-q or 3% of outstanding debt. It has to repay INR12.2 bn in the next 12 months and unless the company manages to collect cash from the existing FSI sales or sell a significant amount of new FSI or land going forward, it would have to refinance its upcoming debt repayments. It free cash flow post interest payment was INR870 mn in 2QFY12 and INR1.35 bn in 1HFY12, which is not enough to make a dent in the gross debt of INR41.6 bn.
4. Its cash inflow from residential sales in 2QFY12 was just INR1.5 bn, which is just 3% of sales value achieved of INR47 bn when it should ideally be at least 7%. Improvement here would definitely help its cash flows and debt situation.
5. It has a total of INR16 bn of customer advances on its consolidated balance sheet.
Operational performance:
1. The company sold 0.5mn sqft of residential space in 2QFY12 worth INR950 mn, which is half of the INR1.9 bn of sales done in 1QFY12 driven by the slowdown in the Mumbai property market and also owing to lack of new launches as result of abrupt policy reversals.
2. Construction is on track as per management and the company has spent INR1.8 bn on construction residential projects and another INR400 mn on the rehab project for the airport. We believe that construction progress on two projects, Exotica – Kurla and Majestic Towers – Nahur, Mumbai, has been visibly slow over last several quarters. This has been led by the slowdown in construction on the rehab project for the airport, to which these for sale residential projects are linked, due to lack of clarity in the shifting of the slum-dwellers from around the airport to the rehab site.
3. HDIL expects to launch three residential projects in Ghatkopar, Premier Residences – Phase 2, Kurla and Meadows – Phase 2, Goregaon, all in Mumbai, in the next few months as it has received almost all approvals on them
4. The sale of FSI in Vasai-Virar is in the last stage of negotiation and an announcement could happen soon, again in the next few months. These two announcements could be positive for the stock.
5. On the airport slum redevelopment project the company is still waiting for the government to firm up the eligibility norms and currently no further shifting of families has happened post the shifting of 150 families in June 2011.
We recognise the lack of imminent catalysts for the stock, but believe that a resolution on the airport slum redevelopment project could be forthcoming post the civic body elections in Mumbai in Feb’12. The stock is currently trading at 0.4x FY12 P/B and a 60% discount to NAV, which we think is attractive and we maintain our Buy rating.

Coal India: Air of uncertainty ::Kotak Sec

Coal India (COAL)
Metals & Mining
Air of uncertainty. Media reports on Government’s proposal to meet its disinvestment
targets through cross-holdings among PSUs is yet another addition to Coal India’s (CIL)
list of uncertainties ranging from mining tax to ongoing wage negotiations. We,
however, base our investment thesis on a sustained earnings growth (16% CAGR)
driven by modest volume and price increase coupled with benefits of gradual reduction
in employee headcount. Maintain our ADD rating with a revised PT of Rs380 (from
Rs420) to factor the risk of unknowns.
Stock price factoring a fairly pessimistic scenario, potential upside in store
CIL stock has corrected by 23% in the past three months weighed by investor concerns pertaining
to (1) potential impact of mining tax as and when it becomes applicable, (2) impact of nonexecutive
wage revisions due in FY2012E, (3) potential miss on volume guidance, (4) potential
diversion of e-auction sales to power sector and (5) proposal of cross-holding among PSUs to meet
Government’s divestment targets for FY2012E.
Although these concerns are valid and could weigh on sentiment in the near term, it presents an
opportunity at the CMP that seems to factor a stress-case scenario of low volumes, reduction in
e-auction sale higher wage cost and full impact of the mining tax. In our view, the potential
earnings impact could be muted (in cases such as mining tax and wage revision) or the events less
likely to pan out (diversion of e-auction sales), and we discuss each of them in detail in the
subsequent section.
Pricing remains buoyant, demand intact, wage cost contained
CIL’s realizations have improved 23% yoy, employee attrition maintained at 5% per annum
although dispatch growth has been at the receiving end of environmental concerns and lower rake
availability. Our investment thesis on CIL is based on modest volume and price increase, coupled
with benefits of a contained cost of production due to gradual reduction in employee headcount,
ensuring a steady expansion of margins coupled with sustainable earnings growth (16% CAGR)
without assuming aggressive growth in volumes (3.6% CAGR) or pricing (6% CAGR).
Maintain ADD with revised target price of Rs380/share
We maintain our ADD rating with a revised target price of Rs380/share, as we factor a lower
multiple (11X versus 12X previously) to factor risk of unknowns such as (1) potential impact of
mining tax and (2) continued uncertainty over wage revisions. Our target price is based on 11X
FY2013E EPS adjusted for overburden removal and interest income and implies an EV/EBITDA of
7.5X on FY2013E EBITDA (adjusted for overburden removal).


Disinvestment target—utilization Rs150 bn towards buyback and investments
As per media reports, CIL has offered to invest ~Rs150 bn (Rs24/share) through a
combination of buyback and/or investments in order to help the government to meet its
disinvestment targets. From an investor’s perspective, while purchase of other state-owned
entities remains a less-preferred option, a similar exercise undertaken in the late 1990s did
not erode shareholder value for the investors.
Ban on e-auction—power sector bid for only 5% of quantity allocated
Out of 4 mn tons of coal offered to the power sector, ~0.2 mn tons was bid for by the
power sector in the month of October. In our view, this will likely put to rest the demand
from the power sector for ban of e-auction sales to meet the requirements of the power
sector, and re-affirms our view that a ban on e-auction may further aggravate, rather than
ease the coal deficit.
Mining tax—3% increase in coal prices can absorb the impact of mining tax
A price increase of ~3.5% (assuming tax deductibility) will suffice to compensate the
incidence of the mining tax, as and when it is passed by the parliament. The power sector
(at large) has not seen in increase in prices of coal since October 2009 and our earnings
currently do factor any revision in prices of notified coal. We note that the full EPS impact of
mining tax without a price increase is ~13% on FY2013E assuming tax deductibility of the
contribution. Exhibit 2 below highlights the potential impact of mining tax on fair value and
FY2013E EPS. Also refer our note dated October 3, 2011 – ’Mining Bill moves ahead’.
Wage revisions—CIL has provided for a 17% increase in wage cost
Employee cost for 2QFY12 increased to Rs56.9 bn (24% yoy, 17% qoq) lending some
credence to a contained wage revision in the ongoing negotiation process. We further
highlight that welfare expenses (earlier classified as social overheads) have been significantly
reduced to Rs3.4 bn (-53% yoy, 15% qoq)—a trend seen over the last two quarters.
Media articles had previously highlighted demands of various trade unions of CIL, asking for
an increase of 100-500% in the basic wage—which translates into a less exaggerated 32%
increase in non-executive wages (excluding gratuity and other benefits).
We note that the demand for revision in basic wages should be seen in conjunction with the
reset of inflation-linked dearness allowance which currently stands at ~50% of basic wages
(see Exhibit 3). We further highlight that since the revision is restricted to non-executive
category (accounting for ~75% of total employee cost), the overall impact would be further
muted. Refer our note dated August 30, 2011 titled ’Vagaries of labor negotiations‘. We
factor a 27% increase in average wages in FY2012E on account of the revision, compared to
the 17% increase in wage bill provided for during the quarter.
Despatch growth—environmental hurdles are easing, we factor modest growth
Coal production has been impacted due to excessive rains and flooding of mines and has
raised concerns on CIL not being able to meet its volume guidance for FY2012E. We
currently factor volumes of 440 mn tons in FY2012E and note that 5% lower volumes in
FY2012E could impact our FY2012E EPS by ~10%. We also present below sensitivity of our
fair value estimate to FY2013E volumes (see Exhibit 4).
Further, few positive developments on the environmental front such as (1) Ministry of
Environment and Forest’s (MOEF) agreement to revoke the extant ’go-no go‘ categorization
of coal mining regions in the country in wake of BK Chaturvedi committee report, (2) lifting
of CEPI moratorium from selected clusters allowing CIL to proceed with development
projects and above all (3) a general recognition amongst policymakers about the gravity of
the situation and urgent need to ramp up domestic production (heightened further by the
recent coal shortage) makes us hopeful of CIL gradually ramping up its production going
into FY2013E.