Institutional Equities - Online Share Trading
Institutional Equities - Online Share Trading
Institutional Equities - Online Share Trading
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<strong>Institutional</strong> <strong>Equities</strong><br />
Initiate coverage with a Hold rating<br />
We initiate coverage on HCC with a Hold rating and a target price of Rs33 based on SOTP valuation. The<br />
core construction business, valued at a PE ratio of 8x (lower end of historical range of PE ratio of 8x-18x for<br />
pure EPC players), contributes 32% (Rs11/share) to our target price. Real estate business is valued on the<br />
basis of 1x P/BV due to uncertainty and regulatory issues related to development of Lavasa, a marquee<br />
project of the company. BOT assets are valued at a 40% discount to a recent deal, which implies a P/BV of<br />
1.3x. We have not included any contribution from real estate projects that are in early stage of development.<br />
At the current market price of Rs29, the stock is trading at a PE multiple of 18.7x and EV/EBITDA multiple of<br />
8.8x based on FY13E earnings. If we adjust the value of other businesses (BOT projects and Lavasa project)<br />
in the current market price, the stock is trading at a PE ratio of 4x FY13E diluted earnings. Hence, we believe<br />
the downside is limited, but lack of positive triggers and the focus on consolidating its businesses<br />
(higher leverage) will cap any upside.<br />
Exhibit 1: SOTP valuation<br />
SOTP valuation Basis Multiple (x) Value per share (Rs)<br />
Construction business FY13E, PE (x) 8.0 11<br />
BOT projects 40% disc. to recent deal 1.3 14<br />
Lavasa projects P/BV 1 8<br />
Total fair value - - 33<br />
Source: Company, Nirmal Bang <strong>Institutional</strong> <strong>Equities</strong> Research<br />
BOT assets valued at 40% discount to recent deal and implied P/BV of 1.3x<br />
HCC Concessions, a wholly-owned subsidiary of HCC, divested 14.5% stake to Xander group at Rs2.4bn for<br />
BOT assets portfolio. This transaction has valued the BOT assets portfolio at Rs16.5bn (Rs 28/share) and the<br />
remaining stake (85.5%) at Rs14.1bn (Rs 23/share). We have valued the BOT assets portfolio at a 40%<br />
discount to the recent deal, which implies a P/BV (based on equity invested till date) of 1.3x.<br />
Exhibit 2: Valuation of HCC Concessions<br />
Stake<br />
Rsbn<br />
HCC Concessions (Recent deal) 15% 2,400<br />
BOT asset valuation 100% 16,552<br />
HCC's stake valuation 86% 14,152<br />
Discount 40% 8,491<br />
Rs/share - 14<br />
Equity investment (till date) - 6,530<br />
Implied P/BV (of invested equity) - 1.3<br />
Total equity investment - 10,440<br />
Implied P/BV (total equity investment) - 0.8<br />
Source: Company, Nirmal Bang <strong>Institutional</strong> <strong>Equities</strong> Research<br />
Lavasa valued at P/BV of 1x on regulatory concerns<br />
Based on NPV method for Lavasa Phase I, the remaining land bank at realisable value contributes<br />
Rs17/share. However, looking at the uncertainty on regulatory issues related to environmental clearance, preconditions<br />
and delay in IPO of Lavasa and de-rating of the project; we have valued the project based on P/BV<br />
of 1x, which contributes Rs 8/share to our target price. Financial institutions have invested around Rs10.5bn<br />
through DDCD and CCPS with a valuation of around Rs100bn to Rs 200bn for the project. Our valuation<br />
stands at just 5% of the lower end of valuation done by financial institutions. We have not assigned any<br />
valuation for other real estate projects due to lack of development in these projects.<br />
Exhibit 3: Lavasa project details<br />
Lavasa details Phase I NAV 12,159<br />
HCC's stake 65% Area (acre) 1,739 Less: Net debt 7,000<br />
Total area of the hill station (acre) 25,000 FSI 0.3 NAV 5,159<br />
Lavasa master plan (acres) 12,500 Developable area 22.7 NRV for other land bank 15,522<br />
FSI 0.3 Realisation 2,800 Total value 20,681<br />
Total saleable area (mn sq ft) 150 Development cost 1,400 Discount rate 25%<br />
Initial infrastructure cost 7,000 Discount 5,170<br />
Tax rate 33% NAV (post discount) 15,511<br />
Discount rate 18% Company's stake 10,082<br />
Value/share 17<br />
Source: Company, Nirmal Bang <strong>Institutional</strong> <strong>Equities</strong> Research<br />
68 HCC