23 January 2012
3QFY12 Results Update | Sector: Infrastructure
Hindustan Construction
BSE SENSEX
S&P CNX
16,739
Bloo mberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
5,049
HCC IN
606.6
43/16
17/-27/-36
12.7
0.3
CMP: INR21
TP: INR25
Neutral
HCC's 3QFY12 revenue was down 5.4% YoY
at INR9.6b (v/s est INR10b). Revenue de-grew due to slow order
booking during the last four quarters, execution bottlenecks, and payment delays by clients.
Reported EBITDA at INR1.1b was in line with estimate.
In the current quarter management has considered an
accumulated loss of INR1.6b, pertaining to future expected losses and the pending claims from various
ongoing and completed projects. We have accounted these cumulative losses as operating expenses, so we
have arrived at EBITDA loss of INR549b. According to the management booking of these exceptional expenses
would reduce the company's operating loss for the next 3-4 quarters. Therefore, going forward, it does not
expect to register any cash losses in the standalone business.
Reported net loss stood at INR1.3b
v/s net profit of INR79m in 3QFY11; after adjusting for forex loss of
INR67.9m, net loss stood at INR1.26b. This is significantly lower than our net loss estimate of INR397m.
3QFY12 order book stands at INR162.4b
(v/s INR165b in Mar-11). Intake for the quarter was INR5b, and for
YTDFY12 INR15b (down 44% YoY). BTB has declined to 4x now v/s 4.2x in 3QFY11.
Lavasa is still an overhang.
Construction work on the site has resumed, with 500-600 workers deployed at the
site. However, overall development work is moving at a very slow pace.
On the BOT front, HCC has already invested ~INR6.5b and additional investments of INR3.5b would be required
in FY12 and FY13.
We cut our FY12 and FY13 revenue estimates by 2% and 4%. We have also taken an additional loss of INR1.2b
in FY12 and INR314m in FY13. Revised net loss for FY12 stands at INR2.3b (INR1.15b earlier) and for FY13 at
INR612m (INR300m earlier). Maintain
Neutral.
Dhirendra Tiwari
(Dhirendra.Tiwari@motilaloswal.com ) +91 22 3029 5127
Pooja Kachhawa
(Pooja.Kachhawa@MotilalOswal.com) +91 22 3982 5585

Hindustan Construction
PAT significantly below estimates, impacted by operational loss of INR1.6b
pertaining to the future expected loss; cutting estimates
HCC's 3QFY12 revenue was down 5.4% YoY at INR9.6b (v/s est INR10b). Revenue
de-grew due to slow order booking during the last four quarters, execution
bottlenecks, and payment delays by clients.
Reported EBITDA at INR1.1b was in line with estimate. In the current quarter
management has considered an accumulated loss of INR1.6b, pertaining to future
expected losses and the pending claims from various ongoing and completed
projects. We have accounted these cumulative losses as operating expenses, so
we have arrived at EBITDA loss of INR549b. According to the management booking
of these exceptional expenses would reduce the company's operating loss for
the next 3-4 quarters. Therefore, going forward, it does not expect to register any
cash losses in the standalone business.
The exceptional items include:
(i) INR649m additional cost on account of substantial
delays in approval of claims, increase in estimated cost and execution delays, (ii)
INR520m provision made for expected future losses of two new projects, (iii)
INR160m for provision arising from future loss on sale of assets and impact of
adverse exchange rates of an overseas project, (iv) INR270m provision against
performance bank guarantee wrongfully encashed by the client in the earlier
year, which is disputed by the company, (v) INR66.9m for provision made against
dues to subcontractor.
Reported net loss stood at INR1.3b v/s net profit of INR79m in 3QFY11; after
adjusting for forex loss of INR67.9m, net loss stood at INR1.26b. This is significantly
lower than our net loss estimate of INR397m. Interest cost is up 39% YoY at INR1b
(v/s est INR1.12b).
Revenue growth expected to remain muted over next few quarters
R ev en u e ( I N R b )
40
31 33
22 20
30
16
2
6
19
9
4
5
4
8
12
5
-7
-7
R ev en u e gr o w th ( % )
Source: Company/MOSL
23 January 2012
2

Hindustan Construction
EBITDA Margins have dropped from13% in 3QFY11
to 11% in 3QFY12
EBITDA
15
15
12
11
12
13
13
EBITDA Margi n (%)
14
Interest cost to EBITDA moved to 93% from 57% in 3QFY11
Intere st (INR m)
Interes t/EBITDA (%)
116
94
13
11
12
53
57
49
36
46
59
57
54
68
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
FY12
3Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
FY12
3Q
FY10
FY11
FY10
FY11
Source: Company/MOSL
3QFY12 order book stands at INR162.4b
(v/s INR165b in Mar-11). Intake for the
quarter was INR5b, and for YTDFY12 INR15b (down 44% YoY).
BTB has declined to 4x now v/s 4.2x in 3QFY11. We believe that this constrains
revenue growth for FY13.
Order inflow in 3QFY12 includes construction of super structure of Bogibeel Rail
cum- Road Bridge over river Brahmaputra in Assam. This project is in JV of HCC and
DSD - VNR - JV, in which HCC holds 51% stake. The total project value is INR9.8b.
Going forward, HCC is targeting to enter into (i) new business segments like
thermal power, hydrocarbons, and nuclear M&E. (ii) new geographies like SE Asia,
Africa and Gulf.
BTB declined to 4x in 3QFY11 vs 4.2x in 3QFY12
Order B ook (INR b )
Bo ok to Bi l l (x )
Order backlog composition in favor of power projects
Power
Tra nspo rtati on
W ater Supp l y & Irri ga ti on
Others
0 0
3 3
4 3 2
8 15 21
29 21 20 20 26 20 22 23 24
22 21 19 27
40 31 32 31
24 22 22 22 21 20
40 36
35 34 32 30 27
16 14 13 14 27 25
19
48 46 44 44 47 47 43 39 53 54 56 56 51 55 56 52 58 56 56 56
Source: Company/MOSL
23 January 2012
3

Hindustan Construction
HCC BOT arm sitting on a strong cash of ~INR2b
HCC BOT arm is sitting on a strong cash of ~INR2b after diluting 14.5% stake to
Xander group, a global investment firm focused on infrastructure, and hospitality,
retail and real estate sectors.
HCC is planning to grow its BOT portfolio to Rs150b in the next 2-3 years.
At present HCC has BOT road portfolio of six road projects where it has already
invested ~INR6.5b and additional investments of INR3.5b would be required in
FY12 & 13.
Construction work on the West Bengal (NH-34) concessions are proceeding as per
planned.
Dhule Palesner highway project is expected to start operations from 1QFY13.
HCC: BOT Portfolio (INR m) under construction
Project
cost
3,150
5,720
14,200
11,690
13,780
6,840
55,380
Equity
630
1,720
3,550
2,690
2,100
1,200
11,890
Equity
stake (%)
100
100
37
100
100
100
HCC's
Equity
630
1,720
1,314
2,690
2,100
1,200
9,654
Equity
Invested
630
1,720
790
3390
kms
31
4.4
89
103
103
50
380
Completion
Dec-09
Nov-10
Jan-12
Dec-12
Dec-12
Dec-12
Niramal BOT
Badarpur elevated expressway
Dhule - Maharashtra / MP road project
Behrampore - Farakka
Farakka - RaiGanj
Raniganj - Dhalkola
Total
6,530
Lavasa is still an overhang.
Construction work on the site has resumed, with 500-
600 workers deployed at the site. However, overall development work is moving
at a very slow pace.
Total infrastructure development cost is estimated at INR45b, of which INR15b
has been spent. Town Dasve is on the verge of completion while the second town
Mugaon is at the initial stage of construction. All construction work has been
stopped at present.
In the books of Lavasa, total debt stands at INR20b, including Convertible Bonds
of INR9.5b and long-term debt of INR8-9b. Total customer advances are INR6.5b
and the equity contribution stands at INR5b.
The cumulative sales booking in stands at INR180b including the collection of
INR6.5b.
Valuation and view
We cut our FY12 and FY13 revenue estimates by 2% and 4%. We have also taken an
additional loss INR1.2b in FY12 and INR314m in FY13. Therefore net loss for FY12
stands at INR2.1b and INR612m in FY13 on the back rising interest rates.
Our intake assumption currently stands at INR42.6b (up 26.7% YoY) for FY12E and
INR55b (+29% YoY) for FY13E. The average interest rate which stood at 8.25% in
1QFY11 has increased to 10.5-11% in 3QFY12.
We have arrived at a price target of INR25/sh, comprising of Core business of
INR2/sh (EV/EBITDA 7xFY13), Lavasa INR8/sh (50% discount to NPV), 247 IT park
INR2/sh and BOTs, SRA, KSAG etc INR13/sh. Maintain
Neutral
rating.
23 January 2012
4

Hindustan Construction
Equity Valuation of HCC
Business
Segment
HCC Standalone
Real Estate
Lavasa
247 IT Park
Vikhroli SRA
BOT Investments
Andhra Road
Badarpur Expressway
Dhule road project
NH-34
(Bahrampore to Dalkhola)
Other Investments
KSAG
Total
Construction
To wnship
Real Estate
Method
FY13E EV / EBITDA (x)
NPV, WACC 17%
NPV, Cap Rate 10%
NPV, WACC 15%
Book
Book
Book
Book
V alue
V alue
V alue
V alue
Valuation
(x)
7
Value
Value
(INR M) (INR/Sh)
1,237
12,261
4,941
898
630
1,720
790
2,543
2
8
2
1
1.0
2.8
1
4
BOT
BOT
BOT
BOT
Book V alue
1,500
23,976
2
25
23 January 2012
5

Hindustan Construction
Hindustan Construction: an investment profile
Company description
Established in 1926 by the Walchand Hirachand group,
HCC is one of the oldest and largest construction
companies in India with pre-qualification skills and
proven execution capabilities across sectoINR like
power, roads, bridges, ports, water irrigation and supply,
urban infrastructure and pipelines. HCC specializes in
the construction of technologically complex and long-
gestation period projects. The company has successfully
and gradually transformed from a civil engineering
contractor to an integrated infras tructure player.
Recently it has increased its focus on the BOT space and
has plan to increase projects in hydro pow er,
transportation, ports and water transmission. HCC has
also forayed into real estate space with developable
area of 186msf under its portfolio of Hill station (Lavasa),
IT park (Vikroli), SEZ etc. The Lavasa is an ambitious
project near Pune to develop a new hill station.
Key Investment Risks
Focus on key large projects increases the project
specific risks
Retention of experienced manpower is a challenge
Significant investments in the RE/BOT subsidiaries
Recent Developments
Lavasa is still an overhang; Construction work on the
site has began. At present ~ 500-600 workers are
deployed at the site. However the overall
development work is moving at a very slow pace.
We cut our FY12 and FY13 revenue estimates by 2%
and 4%. We have also taken an additional loss
INR1.2b in FY12 and INR314m in FY13. Therefore net
loss for FY12 stands at INR2.1b and INR612m in FY13
on the back rising interest rates, coupled with the
higher tax provisioning due to the introduction of
(Section 14 A). Our intake assumption currently
stands at INR42.6b (up 26.7% YoY) for FY12E and
INR55b (+29% YoY) for FY13E. The average interest
rate which stood at 8.25% in 1QFY11 has increased to
10.5-11% in 3QFY12.
Key Investment Arguments
Possesses pre-qualifications and proven execution
capabilities across sectors; will benefit from large
ticket sized orders in hydro and nuclear sectors
Focus on emerging as an integrated infrastructure
player with presence across the sectos like roads,
power, ports, airports and water transmission space.
Has the youngest fleet of specialized equipments,
skilled manpower, in-house fabrication facility and
EPC execution capabilities
Sector View
Increased government commitment towards
infrastructure projects is a long term positive.
Investments in BOT/Real estate projects have
adversely impacted the core balance sheet. This will
continue to have negative impact on the core
business till the SPV's in real estate and BOT start
generating cash.
Comparative valuations
P/E (x)
P/BV (x)
EV/Sale s (x)
EV/EBITDA (x)
FY12E
FY13E
FY12E
FY13E
FY12E
FY13E
FY12E
FY13E
Hind.Const.
-
-
1.0
1.0
1.2
1.3
16.6
10.5
IVRCL
20.5
11.5
0.5
0.5
0.6
0.6
7.0
6.5
NCC
9.6
9.5
0.5
0.5
0.9
0.9
9.5
9.1
Target price and recommendation
Current
Price (INR)
21
Target
Price (INR)
25
Upside
(%)
19.0
Reco.
Neutral
Stock performance (1 year)
Hi ndus tan Cons tructi on
47
39
S ens ex - Re base d
Shareholding Pattern (%)
Dec-11
Promoter
Domestic Inst
Foreign
Others
23 January 2012
39.9
3.7
24.4
32.1
Sep-11
39.9
4.9
24.6
30.7
Dec-10
39.9
10.7
24.6
24.8
31
23
15
Jan-11
Ap r-11
Ju l -11
Oct-11
Jan -12
6

Hindustan Construction
Financials and Valuation
23 January 2012
7

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