When Sarang Wadhawan, Vice-chairman and MD, in what seemed to be an innocuous move, decided to sell his 1% stake in open market, little did he knew that it would trigger an immediate fall of the stock wiping out nearly 40% of the investor wealth in just 3 trading days. Frantic attempts for damage control thereafter came to no avail as investors did not buy the argument of raising money to meet payment obligations for a small piece of land.

HDIL, till a few years back, widely acknowledged as the in Mumbai real estate projects is now fallen to dust with a burden of debt and issues of corporate governance. The saga of this Mumbai based property developer fall from grace makes it an example of failure of investing where the dangerous combination of promoters with questionable integrity and unhealthy levels of debt are in play. Once the darling of institutional investors, the scrip is now weighing down on their portfolios.

Rise of HDIL
HDIL is part of Wadhawan group which has been involved in real estate development in Mumbai Metropolitan region since last three decades. It is among the leaders in slum rehabilitation projects in Mumbai having developed ~100 million sq. ft. (msf) of saleable area. The total land reserves with the company are over 225 msf.

Riding on favorable market conditions in 2007, the company got its maiden listing through IPO in July 2007. The company raised Rs 1485 crores at the price of Rs. 500 per share. By December, the stock was trading around Rs. 1000/- i.e twice its issue price.

HDIL claimed expertise in SRS projects and in 2007 was awarded the contract from MIAL (Mumbai International Airport Ltd.) for the rehabilitation of approx. 85000 slum dwellers. By FY08 the largest slum rehabilitation projects in the country were handled by HDIL, and 40% SRS projects in Mumbai were also entrusted to HDIL.

With its leadership position in SRS projects and SRS (including TDR) constituting the major chunk of its project profile for the period 2008-2012, HDIL was poised to outperform the market in this period. Yet even though majority of the analysts at leading equity research and brokerage firms giving an OUTPERFORMER rating y-o-y, the stock failed to live up to the expectations as can be seen from its price chart.

And the FALL
The downfall was primarily due to adapting aggressive growth plans accompanied with high debt, continuous decrease in the promoter holding and misguiding the investors.

Aggressive growth plans
The company took on too many projects without having significant management bandwidth. Over confidence from small projects executed in the past led to reckless planning of growth i.e buying projects with unclear titles and incomplete documentation. And with the old of practice of arm twisting the laws not working well for the company, the projects got delayed significantly. In desperation, the promoters tried manage the expectation of the investors and debt providers by talking about a bright future of its project pipeline including the long delayed Mumbai airport slum rehabilitation project. However, none of this ever materialized. Although residential projects constituted nearly 40% of HDIL project portfolio, the revenue from this segment remained significantly less. This was even more startling considering the fact that a large amount of capital and resources were blocked in the residential projects.

accompanied by high debt
The biggest disappointment for HDIL came from its unabated dependence on excessive leverage that can be seen from the debt chart over the years.

Ever since it got listed, the company debt has been in the range of Rs. 4000 crore. The company kept on accumulating debt for land purchases and advance payments for residential projects, commercial projects and SEZs. However the projects never got executed and the capital was blocked thereby creating a liquidity concerns. High debt on balance sheet meant higher finance charges. This interest costs were continuously higher than what it cash flow could generate through its business operations which is evident from its negative net cash flow for last three out of last four years. The use of excessive leverage by HDIL can be aptly conveyed in a saying by Dr. Joyce Brothers, Credit buying is much like being drunk; the buzz happens immediately, it gives you a lift. The hangover comes the day after

Misguiding Investors
For a quant based analyst, the Debt-to-Equity (D/E) ratio for HDIL looked comfortable in the range of 0.2 - 0.9 times. However, the fact that the company could never reduce its debt as per its guidance was quite worrisome. This coupled with consistently low cash flows and higher debtor-days raise serious doubts about the correctness of its net-worth and its servicing capabilities from core operations.

In FY12, HDIL had Rs 868 cr. debtors (mostly dues from customers) on inventories worth Rs 11,671 cr. For a company whose annual turnover was just Rs 2,006 crores, the debtors and inventory was reasonably high indicating a possibility of cooking its books.

Pledging of promoter shares A trigger to bust
Since January 2011 capital markets was extremely volatile, inflation pressures rose and Indian rupee saw a very sharp fall against many world currencies. Raising funds from the capital markets in such an environment was very difficult. Costs for borrowing from banks and other financial institutions were rising in general and specifically for HDIL. This prompted the promoters to pledge their entire shareholding to raise funds for the projects run under their personal capacities.

When no more pledging was possible, the promoter sold a small amount of stake in Jan13, triggering a loss in confidence on management and investors shunned the stock by 40% of its price. The price went down to Rs. 74 on Jan 24 from Rs. 120 on Jan 21. Frantic attempts by the management to calm anxious investors regarding speculated bankruptcy were of no use. Investors knew that HDIL will soon go bust. In a matter of another few days HDIL touched the record low of Rs. 35

MIAL cancellation the final jolt?
The main project, the MIAL, where the company is rehabilitating slum dwellers and getting transferable development rights (TDR) had been stuck forever for various reasons. Recently MIAL has served a notice of termination of the slum rehabilitation project citing non-fulfillment of commitments by HDIL. However, the company maintains that there is no ground for termination as the project was delayed due to the non-finalization of the eligibility norms by the Government and is exploring its legal options.

On a concluding note
HDIL represents a scary combination of improper understanding the market conditions, poor corporate governance, misguiding investors at all times and a very high leverage among others. In the entire journey of last 5 years, there were enough instances where it was clear that HDIL would not be able to service its debt obligation and is being extremely dishonest with the investor community. Existing investors had all the chances to get rid of the company from their portfolio; however, the glorious projections made it too lucrative for the investors to ignore the problems.

With the beating that the stock has taken in the past few months it might appear as though the worse has been factored into the price by the market. However we won be surprised if we see HDIL non-existent after a couple of years. The reason is simple -If you don't pay your debts you are finished.

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