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