Mumbai-based property developer Housing Development Infrastructure says it has pulled out of the Rs 15,000 crore Dharavi Redevelopment Project as the latter does not seem viable.

Instead of bidding first-hand, it says, it is looking to undertake contracts for the final winners of the DRP. HDIL is one of the largest slum redevelopers in the country.

"The project has become unviable and we are not sure when it will take off. There is uncertainty over the bidding process and the premium the government is asking. We do not want to look at projects which run over four-five years. Today, capital is not coming that easily and we do not want to invest a single rupee in an unviable project," said Hari Pande, deputy general manager, finance.

HDIL, which partnered with the fallen investor, Lehman Brothers, is among five consortiums that opted out of the plan, which aims to redevelop the 535 acre slum in the centre of Mumbai, supposedly the largest in Asia. Others who opted out include Limitless Llc, Reliance [Get Quote] Engineering Associates-Urban Infrastructure Venture Capital and Larsen and Toubro Ltd-Godrej Properties, among others.

The project aspired to transform the huge slum into a global financial centre, originally estimated to produce 5 million sq ft of new office and residential space in the near term and as much as 40 m sq ft over seven years. It was to start in December 2007. Since then, the project has been mired in controversies such as demand from bigger tenements, government delays, transfer of key project officials and so on.

"We can indirectly take part in the project by becoming a contractor to the winners," Pande said.

HDIL said it was selling apartments built on the land it got under the airport slum rehabilitation project and the accompanying transfer of development rights (TDRs) at lower prices to generate cash flows for the company during the downturn.

TRDs mean getting additional built-up area in lieu of the area surrendered by the owner of the land for any redevelopment or a public purpose project.

The company bagged the contract for rehabilitation and resettlement of slums around Chhatrapati Shivaji International Airport (CSIA) in Mumbai in October 2007, where it is required to rehabilitate 85,000 slum dwellers from 276 acres of land. Depending on the area cleared, HDIL will get 25 per cent of the area for sale and 10 million sq ft of TDR by March 2010.

It has recently launched a 650,000 sq ft project for 759 apartments in Kurla, one of the central suburbs of Mumbai, and is planning to launch other residential projects at Andheri and Kurla (East). In Kurla, the company is selling houses at Rs 5,251 per sq ft or 30 per cent lower than the market price, Pande says.

"At Rs 1,800 per sq ft land cost and Rs 1,500 per sq ft construction cost, we still make around 35 per cent margin. We have to take a call on profitability and cash flows today," Pande said. The company has booked half the flats since the launch last week.

Analysts said the fall in TDR prices from Rs 4,000 per sq ft in March last year to Rs 1,100 a sq ft now and competition from local developers after the hike in floor space index (FSI) under slum development was expected to hit company revenues.

"They have a TDR pile-up of 1 million sq ft and nearly 8 million sq ft is expected to come from the airport project. They cannot utilise everything by themselves. After the increase in FSI from slum redevelopment projects to 4, the TDR generation will be high and they have to face a lot of competition from local builders," said an analyst from the Mumbai brokerage who did not wish to be quoted.

But the company is not worried, as it feels there is still room for profits. "The whole analysis of margins has gone down in the last five-seven years. Today, when our TDR cost is Rs 850 a sq ft and we sell it at Rs 1,100 a sq ft, we still make a margin of 15 per cent. We cannot sit on our inventory. We can use the proceeds to repay our debt, reduce interest burden and improve cash flows," Pande said.

"As long as the company utilises TDR proceeds to repay the debt and residential projects, the strategy looks good. If they invest the money in any other projects where they do not make money immediately, it is not the right strategy," said the analyst.