[T.S.R:16724] HCC-Sell (Citi)

Company Background:

HCC is an 80-year-old construction company and has cash contracting skills across power (thermal, hydel, nuclear), roads, bridges, dams, barrages, industrial, buildings, water supply, sanitation, ports, harbors and other marine works. The promoters hold 39.85% of the shares with the rest held by institutions (40.63%), corporate bodies (4.70%) and others (14.82%). 

Financial Performance: HCC will grow revenue, PAT and EPS at CAGR of 19%, 23% and 23% over FY10E-12E. FY11E net D/E is1.45x. ROE is expected to be in ~7.5%-8.5% range over FY10-12E.

Valuation: While we expect HCC's earnings to grow at 23% CAGR over the FY10E-12E, its earnings could be at risk due to orders in the OB being suspended/ delayed. Our 12x Mar-2011E target PE multiple for HCC's core business, resulting in a value of Rs23/share, is set at a discount to other midcap construction peers and large players like L&T, justified in our view given the risks to HCC's earnings if the near-term situation in AP doesn't improve.  

Risks: We rate HCC shares High Risk given increased risks to the business including from rising cost pressures, interest rates, and that 36% of orders in the OB are suspended/delayed. Upside risks that could sustain the shares above our target price include: 1) A stake sale to a strategic investor in real estate and infrastructure businesses - providing benchmark valuations, 2) Better execution of order backlog and real estate projects, and 3) Better than  expected margins on the core business. 
 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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