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Initiating Coverage
Institutional Equities
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 Institutional Equities 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 Shares 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
Share 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