Hold HCC says IDBI capital,

Although Q1FY11 revenue growth was marginally ahead of our estimates, higher interest cost led
to lower than expected earnings growth. With no respite on the working capital front and increased
leverage due to KSAG acquisition, HCC's balance sheet continues to remain under stress. Lavasa's
value unlocking remains the key potential driver for the stock in the short to medium term.
We maintain our HOLD rating on the stock.
Investment Highlights
􀂄 Construction business set to pick-up in FY11; Revenue to witness 20% CAGR
HCC's executable order book stood at 3.4x FY10 revenues. We expect 20% growth in construction
revenues over FY10-12E (8.5% in FY08-10), driven by 14% CAGR in order book.
􀂄 OPM to remain stable at around 13%; Adj. net profit to grow at 17% CAGR
We expect OPM to remain at ~13%, as the higher contribution of transportation segment to overall
revenues will come at the cost of water segment, which have similar margins of 10-12%. Due to higher
interest cost, adjusted earnings growth is expected to lag revenue growth.
􀂄 BOT: Scale-up in portfolio impressive but funding will be a challenge
Despite being a late entrant, HCC has scaled-up its BOT portfolio to 6 road projects worth Rs55 bn.
However, the significant investment of Rs7.8bn required in next 3 years, in the wake of an already
stretched balance sheet, remains a concern. We value the BOT portfolio at Rs8 (1x book value).
􀂄 247 Park: Phase 1 success reinforces HCC's ability to add value in real estate
HCC divested 74% stake in Phase 1 of 247 Corporate Park at an EV of Rs7.8 bn. Around 88% of the area
has been leased at an average rate of Rs70 psf. HCC will shortly commence work on Phase 2, which will
have 0.75 msf of leasable area. We value HCC's stake in 247 Park (Phase 1 & 2) at Rs2.
􀂄 Lavasa: Project time-line optimistic but listing may provide a good upside
Development plans for Lavasa has been extended from 12,500 to 18,000 acres (157 msf). It plans to sell
the balance 146 msf over FY10-22, which in our view is optimistic. We value HCC's 65% stake in Lavasa
at Rs28 based on DCF and land value.
􀂄 Valuation: Maintain HOLD
We maintain our HOLD rating on HCC, based on a SOTP based target price of Rs66 per share. We value
core construction business at Rs23 per share, based on 10x FY12 EPS, which is at a discount to IVRCL
and NCC. HCC's real estate and BOT portfolio contribute Rs34 and Rs8, respectively. Maintain HOLD.