Topsy—turvy

Insider buying and selling is monitored by investors to gauge the financial health of a listed company. That is why the curiosity over promoter selling is much more intense than that caused by promoter buying. However, in the case of real estate company HDIL, the promoter’s stake sale seems to be a case of cutting the nose to spite the face. It all started when it was reported that HDIL’s vice-chairman Sarang Wadhawan had sold around 50 lakh shares in the market. Now, it was a fairly well-known fact that 96% of the promoter holding was already pledged with various lenders. Naturally, the sale had to happen from whatever free shares the promoter was holding. This development as well as speculation on why such a step was really taken pushed investors to the edge. As a result, over the next few sessions HDIL nearly lost 50% of its market cap from where it had closed on January 21. Given its inability to reduce its high debt, the fear of HDIL going bankrupt was clearly playing on investors’ minds. When you couple it with the fact that HDIL had never got high marks for its disclosure standards; hawking the family silver, clearly, acquired a whole new context. 

While it is too early to say that the dust has settled, the stock price has bounced back from the low of ₹68 that it hit and is now trading at ₹80. The entire extent of institutional buying and selling that happened during the carnage will only be clear after the March 2013 quarterly holding is disclosed. From what has been reported so far, Citigroup Global Markets and Credit Suisse were among the prominent sellers. While Credit Suisse seemed to have followed up on the part selling that it did in December, Citigroup Global Markets seems to have sold almost its entire 1% stake that it acquired in September 2012.   

Free falling

Wadhawan may have sold his shares on January 22, but the stock price had already started cracking on the 21st. So an explanation for the mayhem was needed and analysts were clearly worked up as the promoters continued to be tight-lipped. Holding fort on behalf of HDIL now is Hari Prakash Pandey, vice-president, finance, and he brushes aside rumours of a liquidity problem. “The shares were sold as an emergency measure to raise ₹57 crore to fund a land acquisition, which is in its final stages of closure. It was an urgent payment and our internal accruals are tied down for certain bank repayments. We didn’t want to default on that, so the promoter sold a 1% stake,” he says.

This explanation is clearly not cutting much ice with the analyst community, which feels that poor governance aside, HDIL has always been bad at disclosures with little or no clarity on cash-flow drivers. Brokerage firm Nirmal Bang has suspended its coverage of the stock after this incident. “There has been poor disclosure,” says Param Desai, an analyst with Nirmal Bang. “The company indicated that they had bought the land more than a year back. Land acquisition is an ongoing process and they were doing the last tranche of payment, but we have never been informed of the land deal.” Pandey says the company expects to close approvals for the land soon, after which details of the land acquired will be revealed. For now, the only detail Pandey is willing to part with is that the payment is for a land parcel acquired in  South Mumbai more than two years ago. 

Anubhav Gupta, analyst at brokerage Kim Eng Securities, says the urgency in making the payment for the land is not clear. “I think there must have been some pressure from financiers for debt repayment. Only the management can throw some light on that,” he adds. But, surprisingly, the promoters did not participate in the clarificatory conference call that the company held with investors on January 24.  

Clearing the air 

Is a bigger problem being masked here, then, and is the situation indeed so dire that the promoter’s hand was forced to raise ₹57 crore? After all, there is no precedent of selling promoter equity to fund a land purchase. And how does one justify the collateral damage that transpired? After Wadhawan’s latest selling bout, the company’s market cap collapsed from ₹5,065 crore to ₹2,850 crore before recovering to ₹3,370 crore. In the light of all this, how convincing is the explanation that all this was done to raise ₹57 crore? 

Meanwhile, the damage control at HDIL continues with the company assuring investors that in the next six months, the promoter will buy back the shares he has sold. Well, did the promoter not sell whatever free shares he had a little while ago to raise liquidity, so how he is going to buy it back? Pandey says this is where things are a little mixed up and HDIL has ₹250 crore as cash and bank balance. That being the case, why did it not fork out ₹57 crore? Pandey says that he was not informed when the promoter decided to sell his holding and maintains that Wadhawan was sticking to an earlier-decided strategy that the promoter will fund land purchases in his personal capacity and HDIL will conserve cash for debt repayment and for funding projects. If that truly is the case, then it is a strange strategy, given that Wadhawan had sold substantial shares in March 2012 as well. Further, the money raised through the latest stake sale has been lent as an unsecured loan to HDIL and it is not yet clear how the promoters will fund the buy back of shares in six months. In hindsight, Pandey rues, “Considering the reaction of the market and the rumours about bankruptcy, the best way to put an end to all this is by redeeming the pledged shares of the promoters.”

While that may help regain confidence, the fact remains that things have not been great at HDIL for a long time now. This isn’t the first time the company has had difficulty in arranging funds for a land transaction. Last year, a land owner in Aurangabad terminated a deal with HDIL, after the company’s cheque for ₹7 crore bounced thrice. It is no secret that HDIL’s operating cash flow has suffered due to lower floor space index (FSI) sales and slow offtake in residential projects. Then, the Transferable Development Rights (TDR) market, HDIL’s mainstay, has completely dried up. In FY10 and FY11, about 94% and 69% of its revenues, respectively, came from TDR sales. TDR is a right given to slum rehabilitation or redevelopment builders to sell or develop built-up area that is lost while undertaking these types of developments. In the last quarter, HDIL did not add any revenue from TDR due to minimal inventory. TDR sales have declined since the Mumbai International Airport (MIAL) project has got stalled due to uncertainty over eligibility of slum dwellers for rehabilitation. HDIL has undertaken the biggest slum rehabilitation project in Mumbai, to relocate 85,000 families for development of MIAL, but work has stopped since Q3FY11. Analysts are hoping that the sluggish TDR market might pick up in the second half of 2013. “We believe with their Kurla project getting conversion approval from commercial to residential project, 2 million sq ft of TDR will get generated and monetised in second half of FY13,” writes ICICI Securities analyst Shaleen Silori in a recent report.  

Changing tack

With a TDR inventory of only 0.1-0.15 million sq ft, HDIL has shifted focus to sale of FSI and asset sales to reduce its consolidated debt of ₹4,000 crore. Silori says HDIL is targeting FSI sales of 1.5-2 million sq ft per quarter with a realisation of less than ₹1,000 per sq ft and expects to repay ₹600 crore of debt by end-FY13. In an FSI sale, instead of developing a plot and selling it to end buyers, builders sell the construction rights to develop that plot to other developers. This is certainly a low risk strategy but the ride has not been smooth here either.

Analysts say the company has booked ₹800-1,000 crore of revenue from FSI sales but of this around ₹700-800 crore of cash has not been collected. Subsequently, debtor days have gone up from 158 days in FY12 to 373 days in the first half of FY13. “HDIL’s profit is driven by FSI where cash conversion cycle is much longer, unlike TDR where you get cash upfront,” says Nirmal Bang’s Desai. “Normally, you get cash from FSI sales in three to six months but because of delays in approval or certain milestones that are yet to be achieved, the company has not received money. New launches have also remained subdued over the last 12-15 months impacting cash flows.” 

In the face of dismal cash flows, it will be hard for HDIL to repay the ₹450-500 crore of debt due for repayment in late 2013. Pandey disagrees and says that the company’s debt reduction plan is on track. He clarifies, “We have converted ₹800 crore of short-term debt into long term with an eight-year tenure. The first tranche of ₹300 crore has a moratorium of four years on principal repayment and we intend to reduce debt by 15% every fiscal.” Analysts, though, continue to be sceptical about HDIL’s debt reduction plan. Kejal Mehta, an analyst with Prabhudas Lilladher, writes in a note that despite the company continually guiding lower on debt reduction, its debt has remained stable at ₹4,000 crore. “In our opinion, debt reduction is purely dependent on debtor realisation of FSI sales, which currently stands at ₹850-900 crore,” says Mehta.

 Corporate governance issues aside, there are lingering concerns over FSI receivables, lacklustre TDR sales, slowdown in other business verticals and debt. No wonder most analysts either have a sell or a reduce rating. “When there are other real estate companies with better corporate governance, why should an investor buy HDIL?” asks Desai. He likes Prestige Estates for its strong presence in the Bengaluru market. Prabhudas Lilladher and ICICI Securities have a reduce rating, Kim Eng has a neutral rating and Motilal Oswal has put its rating under review. The only positive report is from KC Research, which has a buy on the company with a target of ₹143. Amit Anwani, analyst, KC Research, says, “HDIL still has an edge in the TDR market in Mumbai and once that picks up, it will do well.”