CMP: Rs. 125.30              Recommendation: Buy

Background

HCC is amongst one of the largest private sector engineering and construction company in the country with global footprints. The company is in the process of transforming itself from being a pure construction contractor to an EPC player. Notably it has presence across various business in the construction segment. These include hydro, water, transportation, nuclear & special projects and EPC. In is also known to have a leadership position with 25 per cent share of the total hydel power construction capacity in the country.

Analyst’s Note

HCC has significant presence in the construction of nuclear power reactors and in line with it strategy to continue its dominance in the same, the company has tied up with  UK based  company, AMEC to offer Consulting and EPC services for the establishment of nuclear plants in the country. As AMEC specializes in identifying nuclear power technology suitable for a site, the agreement would enable the company to efficiently undertake construction activities at reduced cost for building nuclear plants.

The company is also known to be taking into consideration technology providers like Areva, GE, Westinghouse for tie-ups to hike its interest in the nuclear space.  The management has also indicated it foresight to foray into mining and aluminum industry as it aims to gain synergies from its nuclear business.

The order back-log for September 2009 increased by 44 per cent to Rs. 155 billion on a Y-o-Y basis and excludes contract in JV worth 19.4 billion in the state of J&K, which is subject to the decision of State High Court).  Segment wise, more than half of the current order book comprises of projects from Hydel Power followed by Water (31%), Road (13%) and Nuclear Power and other projects (2%).

However Irrigation projects worth of Rs. 50 billion of which around Rs. 38 billion is from Andhra Pradesh government and constitutes one-fourth of the overall order book is a cause of concern due to the recent floods and political instability in the state.

One of HCC’s BOT projects (road) namely Nirmal BOT achieved its commercial operation date (CoD) three months ahead of schedule and is expected to start generating annuity from the second half of FY 2010. With the current portfolio of road projects amounting to Rs 23 billion, the company plans to scale up the same to Rs 100 billion in next three years.

Overall order book provides a satisfactory visibility of revenues going forward.

During the quarter ended September 2009, HCC raised Rs 4800 million through the QIP issue which was used to retire high cost debt. Resultantly the interest cost  on a Q-o-Q reduced by 18 percent or Rs 613 million in the  previous quarter to Rs 500 million.  However the total debt of the company stands over Rs 23,000 million.

Lavasa Corp, 65% subsidiary of the company, whose contribution until the corresponding previous quarter was almost nil posted a turnover of Rs 1,022 million and the company earned a profit of Rs 305 million for the quarter under review. The sales from this property have been advanced by two years to at present, instead of the originally planned year of 2011. Resultantly the company is likely to post higher revenues going forward.

Investment Argument

With high exposure to the power and water segment, reduced debt and resultant lower interest cost augurs well for the company. With the Governments focus on infrastructure expected to continue, the company appears to be a satisfactory bet at declines for investors with a  long term view.