Hindustan Construction Co: Construction prowess on show…
A strong order book, positive outlook for new orders and value
unlocking opportunities in Lavasa make Hindustan Construction
Company (HCC) an attractive play in the construction sector. With an
order book of Rs 19,346 crore (Q1FY11), HCC enjoys strong sales
visibility (TTM book-to-bill ratio of 5.1x, 2.9x on adjusted basis).
Furthermore, listing of Lavasa would act as a key catalyst for HCC’s
share price. We are initiating coverage on the stock with a BUY rating
and a price target of Rs 77/share.
Order book to bill ratio of 5.1x provides strong revenue visibility
Growing at 28.4% CAGR during FY05-FY10, HCC’s order book stood at Rs
19,346 crore in Q1FY11, with a TTM book-to-bill ratio of 5.1x (2.9x
adjusted for contentious and captive orders). With strong revenue
visibility and healthy order inflows, we project HCC’s revenues will grow
at 23% CAGR in FY10-12E to Rs 5,514 crore.
Lavasa IPO - a game changer for HCC’s valuation
HCC is doing real estate development through its integrated township
project Lavasa which spans development of 12,553 acres of land with a
saleable area of 199.4 million sq ft. In this regard, the company is also
planning to raise Rs 2,000 crore through IPO by diluting ~10% stake. We
believe Lavasa could act as a key catalyst for HCC’s share price.
Aggressive expansion plans for BOT business
HCC plans to expand its road BOT portfolio by ~3x to Rs 15,000 crore,
over the next two or three years from Rs 5,539 crore, currently. HCC is
also partnering with various foreign entities to jointly bid for mega road
projects in India. We have valued all financially closed projects at Rs 373
crore.
Valuations
At the CMP, the stock is trading at a P/E of 10.0x in FY11E and 7.1x in
FY12E (after adjusting for real estate and BOT projects valuation). Given
the healthy order book, ensuring 27.3% CAGR in adjusted earnings
during FY10-FY12E, we believe the stock is currently priced attractively.
We are initiating coverage on the stock with BUY recommendation and
a price target of Rs 77/share. We have valued HCC’s construction
business at Rs 28/share, HCC’s real estate stake at Rs 43/share and the
road BOT projects at Rs 6/share.
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