<strong>Institutional</strong> <strong>Equities</strong> This page has been intentionally left blank 66 GMR Infrastructure
Initiating Coverage <strong>Institutional</strong> <strong>Equities</strong> HCC Reuters: HCNS.BO Bloomberg: HCC IN Downside Risk Limited We assign a Hold rating and a target price of Rs33 to HCC as we believe the company’s sales would grow moderately due to higher working capital requirement and greater leverage. Lavasa, a marquee project, is in trouble due to dispute with the environment ministry, which has given a big jolt to its valuation. We believe the downside risk is limited (as the recent transaction relating to divestment of stake in HCC Concessions is valued equal to the market capitalisation of the parent company), but lack of triggers and the company’s focus on consolidating its business due to higher leverage would cap any upside. Despite order inflow slowdown, order book-to-bill ratio at comfortable level: In FY11, HCC’s order backlog declined 4% YoY to Rs170bn. However, its current order book-to-bill ratio stands at 4.1x FY11 revenue (excluding the slow moving Sawalkot hydro-power project of Rs17bn), which is in line with the five-year average. Hence, we believe the order book is at a comfortable level and augurs well for revenue visibility. Higher working capital to restrain project execution: Despite the order backlog persisting at 4.1x, we expect project execution to improve moderately due to a sharp rise in working capital requirement. The company may consider increasing subcontracting to expedite project execution, but it would impact the margins. BOT asset portfolio valued at Rs16.5bn: HCC Concessions (a 100% subsidiary of HCC) has a portfolio of six BOT assets at a total project cost of Rs55bn, five based on toll collection and one based on annuity. Recently the company diluted its 14.5% stake in HCC Concessions to the Xander Group, for Rs2.4bn which has valued HCC Concessions at Rs16.5bn (equivalent to market capitalisation of the parent company). Key value driver Lavasa under dispute: A dispute between the environment ministry and Lavasa on project clearance has delayed the development process and fund raising plans through an initial public offer (IPO). We believe the company will get the clearance in coming months (with some pre-conditions) considering the developments that are skewed towards Lavasa. However, losses due to stoppage of construction, cost over-run and pre-conditions that will be attached to the project will hurt the valuation and delay the IPO process. Valuation: We assign a Hold rating and a TP of Rs33 to HCC based on SOTP valuation (core construction PE ratio of 8x, real estate business is valued at 1x P/BV and BOT assets at a 40% discount to the recent deal). We are conservative on the valuation front. Yet, we believe the downside risk is limited, but lack of positive triggers and the focus on business consolidation will cap any upside. Y/E Mar (Rsmn) FY09 FY10 FY11 FY12E FY13E Net Sales 33,137 36,442 40,932 47,414 55,267 YoY (%) 7.5 10.0 12.3 15.8 16.6 EBITDA 4,314 4,429 5,398 5,903 6,936 EBITDA Margin (%) 17.6 2.7 21.9 9.4 17.5 Adj. net profit 1,254 815 710 514 907 YoY (%) 15.2 (35.0) (12.9) (27.6) 76.5 Adj. EPS 2.1 1.3 1.2 0.8 1.5 PER (X) 14.0 33.9 24.8 34.2 19.4 P/BV (x) 1.8 1.2 1.2 1.1 1.1 ROCE (%) 13.5 11.6 11.6 10.8 11.3 ROE (%) 12.5 4.1 4.7 3.3 5.7 Source: Company, Nirmal Bang <strong>Institutional</strong> <strong>Equities</strong> Reearch 26 September 2011 HOLD Sector: Infrastructure CMP: Rs29 Target Price: Rs33 Upside: 14% Amit Srivastava amit.srivastava@nirmalbang.com +91-22-3926 8116 Nitin Arora nitin.arora@nirmalbang.com +91-22-3926 8169 Key Data Current <strong>Share</strong>s O/S (mn) 606.6 Mkt Cap (Rsbn/US$bn) 17.4/0.38 52 Wk H / L (Rs) 68/25 Daily Vol. (3M NSE Avg.) 3,834,104 <strong>Share</strong> holding (%) 3QFY11 4QFY11 1QFY12 Promoter 39.9 39.9 39.9 FII 24.6 24.9 23.8 DII 10.7 5.0 4.8 Corporate 6.4 7.9 7.2 General Public 18.5 22.3 24.4 One Year Indexed Stock Performance Price Performance (%) 1 M 6 M 1 Yr HCC 2.9 (20.6) (51.9) Nifty Index (1.6) (11.2) (18.3) Source: Bloomberg
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