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Sunday, October 28, 2012

Hindustan Construction (HCC) Stock Analysis: Turnaround in offing!

India faces a chronic shortage of anything which remotely resembles Infrastructure. With more than 50% of India’s 1.3 Billion population squeezed in urban areas, this rapid urbanization of India creates a tremendous shortage of roads, highways, power supply, residential spaces, clean drinking water, sewage systems and  transportation to name a few. There are a few renowned private sector players which operate in these doomed sectors, doomed currently because of government apathy, high interest rates, shady practices and cloudy political ecosystem.

Hindustan Construction Company (HCC) is a 85 year old business conglomerate operating in Infrastructure space and have delivered marquee projects in engineering, construction, hydro power, nuclear power, expressways, water and social infrastructure to name a few. HCC has developed Lavasa, a new hill city, a huge project over 12,500 acres executed for the first time in the history of modern India. India, with rapid urbanization, needs dozens of new Lavasa’s to reduce and manage population pressure on top 5 metros.

HCC started its journey in 1926 with construction of Bhor Ghat Tunnel and has completed many landmark projects in India such as Tata Thermal Power Station, Haldia Port, Farakka Barrage – World’s longest Barrage, Rajasthan Atomic Power project, Bhilai Steel Plant, Narora Atomic Power, Kapurthala Rail coach factory, Mumbai-Pune expressway, Delhi Metro, Bandra-Worli Sea Link and Lavasa Hill City.  India’s landscape is thus dotted by creations from HCC in past 85 years.

Infrastructure industry in India has crumbled due to project execution delays, sky-high interest rates and political-economic uncertainties in past 2 years. For HCC, issues such as environmental clearances on Lavasa has been a major dampener, after firm faced major issues on Bandra-Worli Sealink project completion due to similar issues. Delays in project completion locks up company’s working capital, affects their ability to take up new projects, subdued margins, and piling up debt and interest rate expenses. HCC has been affected by all this and much more. This obviously reflects in their stock price, which has seen a 85% crash over the past few years.

HCC has a annual revenues of INR 3988 crores, with marginal improvement in past 5 troubled years. Bottom-line from past one year has been in red due to above mentioned issues and in recent quarterly result (Sep, 12) gross profit is back in black, signaling changing tide for the firm. If we compare results for past 3 quarters, Interest expense is coming down, from Rs 150 crores to Rs 130 crores in latest quarter. Employee expense is down as well and so is Raw material costs and other expenses, hence driving improvements in Operating profits which is up 10% compared with same quarter last year. Net sales for the firm was also up 3% compared with same quarter last year.

HCC has an order book of over 15,000 crores and its subsidiaries have also delivered positive results. Steiner AG, HCC’s Swiss Subsidiary has reported a profit of 0.96 million CHF and revenue of 185.6 million CHF during the quarter. Lavasa Corporation has resumed development and launched new range of apartments at its second town, Mugaon, during the quarter. Dhule Palesner Highway (NH3), under another subsidiary HCC Infrastructure has achieved 100% completion for phase I of the project with Phase II in progress.

In a nutshell, though the realities on the ground are very hard to digest, with HCC under a Corporate Debt Restructure (CDR) program, there are winds of change visible with latest results. The entire company is available at a paltry valuation of Rs 1065 crores market cap. HCC is trading at 20% discount to its Book Value of 21.43. With Lavasa IPO on hold currently, there is significant unlocking of value achievable when Lavasa IPO is re-launched.

Technically speaking, HCC is very close to its multi-year lows and support zone of Rs 14.75, which was the 2008 low as well. At current price of Rs 17.5, there is very little downside risk to investors. Rs 15 to Rs 30 would be a trading range for the scrip, where one can buy at lower levels and cash out at higher levels as this range seems unlikely to break unless there are major changes at the firm, or interest rate regime changes. 

Once the overhead resistance of Rs 32 breaks, HCC could venture to higher resistance levels of Rs 40-41, Rs 49-50, Rs 58-60 and Rs 80-85, which will be the biggest resistance zone for the firm in near 2-3 year future.

The stock can be hence accumulated by long term investors at current valuations over the period of next few quarters, when interest rates start to decline, HCC’s projects complete and Lavasa Corporation starts to see key traction in its new developments and possible IPO plans.

Thanks for reading this article and keep writing in to us. 

1 comment:

  1. Good analysis - was very helpful as I am an investor in this stock. I am also very bullish on a long term on the infra story and HCC no doubt is a good company - albeit being plagued by sectoral issues. Hopefully it should turn around and your analysis also vindicates my viewpoint.

    Best wishes,


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