Set To Scale New Heights - Hindustan Construction Company

Hindustan Construction Company (HCC) is a Mumbai-based leading construction and infrastructure development company. It has been building large and complex structures for the last 80 years. Although HCC has underperformed the broader market, we feel that it has the potential of outperforming it in the next 12-18 months. HCC has strong management and is into business verticals which have huge potential of scalability. The NSG approval of nuclear deal which has the potential of more than Rs one lakh crore worth of business will open new window of opportunity for the company.

HCC operates in three divisions, viz.construction, real estate and infrastructure development. The combined order book currently stands at Rs 10,196 crore. The company has been lowest bidder for four more projects to the tune of Rs 4,924 crore. HCC's order backlog is 3.4 times its revenues of FY08 (excluding the orders in which it is lowest bidder), which gives a clear earnings visibility for the company. HCC has launched hill station project at Lavasa near Pune in which Axis Bank took 2.5 per cent stake at Rs 250 crore. HCC holds 63.53 per cent stake in this project. The company has a land bank of 13,977 acres (including Lavasa project) out of which developable area is 236 mn sq ft. The company expects major thrust for its business will come from irrigation projects. It is expected that more than Rs 7,000 crore worth of irrigation projects will be announced in India in the next five years. For FY08, the water segment contributed 20 per cent of its revenues and the company would bid aggressively for these projects.

But recent increases in key raw materials prices remain a big concern for the company. In the last one year, there has been more than 50 per cent increase in steel prices, 38 per cent in bitumen and 27 per cent in cement. But increase in these prices may not dampen the margins too much because out of the 31 projects the company has, 27 projects are index-based, which means that the price increase in raw materials will be compensated.

Performance and Valuation
For Q1FY09, the company reported 15.44 per cent rise in its topline, but posted a drop of 11.83 per cent in bottomline. It posted total income of Rs 878.33 crore and net profit of Rs 30.84 crore. The reason for drop in the net profit was due to the notional loss the company had to book on the FCCB issued by it. Last year, in the same quarter, HCC had posted a gain of Rs 31.5 crore, whereas this year it had to make a provision of Rs 50.6 crore on account of foreign exchange losses. HCC is currently trading at Rs 89.2 which discounts its FY08 earning by 26 times. Given that its current order book is Rs 100 billion, we expect the company to maintain the growth momentum and will post revenues of Rs 3,700 crore in FY09. But the company's share in Lavasa project valued at Rs 6,350 crore (HCC current market cap is Rs 2,212.12 crore) is not fully reflected in its current prices. Going forward, we feel that even if the company maintains P/E of 10 and adding the value of Lavasa project, investor scan look at a target price of Rs 120 in the next four quarters.