Thursday, January 24, 2013

HDIL - Shaky foundations

"You may fool all the people some of the time, you can even fool some of the people all of the time, but you cannot fool all of the people all the time" - Abraham Lincoln
Housing Development and Infrastructure Limited, HDIL is down (-38%) in past three days.
Trigger was promoter selling 37 lac HDIL shares @114 on 22 Jan 2013. (NSE bulk deals).
Few days earlier , GOLDMAN Sachs bought 22 lac HDIL shares @121.
Waterfall drops

Detailed post below

I had recently posted similar themed article on Arshiya ; that suggested investors to be wary of such companies with poor earnings quality i.e high reported PAT (Profit After Tax) but poor / negative cash flows.
So lets examine how is HDIL earnings quality ratio & estimate its debt serviceability by calculating ICR & DSCR `s ( Interest Coverage Ratio & Debt Service Coverage Ratio)
  1. Data source is public data - Annual reports / Company presentations.
  2. All in Rs. Crores. ( 1 Crore = 10 Million)
  3. I have done my diligence & please do your own diligence /consult your professional financial adviser before relying on this analysis.
  4. ICR /DSCR are calculated based on Cash flow statement ( NOT from P&L / Income statement).
  5. CFO = Cash flow from Operations
  6. Adjusted CFO = reported CFO minus interest paid.
  7. Earnings Quality ratio = Ratio of PAT ( from P&L ) / Adjusted CFO
  8. Logic of above is that numerator PAT is post tax & post interest so the denominator CFO should also be after interest paid. And other reason is that India Accounting norms treat Interest paid as Financing acticity NOT as Operating activity.
  9. For other FAQ`s, one can refer previous posts on the same theme of Earnings Quality Check.
  • My view is the same - be wary of such companies with poor earnings quality,shaky debt service ratios & leveraged balanced sheets.
  • Earnings Quality Ratio for HDIL - does not inspire confidence. FY12 saw a slight positive Adjusted CFO of 190 crores but this is again very low as compared to reported PAT of 810 crores i.e very high PAT/ Adj. CFO ratio of 4.3x (i.e poor earnings quality)
  • ICR & DSCR - are /have been flashing red since past 2.5 years as HDIL `s ICR & DSCR are & have been below minimum levels of 2x & 1.2x.
  • Table below.Relevant ratios are highlighted as yellow rows. ( click to zoom)
  • Total Debt is Rs. 4000 crores as on Sep 2012. One can see the list of its 30 bankers. So again,my question is what does this speak about due diligence done by Bankers & Credit rating agencies /analysts ? The lesser said the better.
  • As on Dec 2012, FII`s hold 42% stake vs. Promoter 37%.
Key Public shareholders holding > 1% - Platinum Investment,Orbis Sicav,Credit Suisse,Stichting Pensioenfonds ABP ( Dutch Pension fund AUM of $320 Bn) ,GMO Emerging Markets Fund,ICICI Prudential Life Insurance & Citigroup.
Table below ( click to zoom)

Disclosure : No positions.

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