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COMMENT
Hindustan Construction Company (HCNS.BO) Rs39.80
Equity Research
Clarity over environment clearance an overhang; maintain Neutral
News
MoEF (Ministry of Environment and Forests) submitted its final order to the
Mumbai High Court and LCL (Lavasa Corporation Ltd) after the MoEF panel
visited the site earlier in the month. The MoEF order states that EIA
notification 1994, 2004 & 2006 is applicable to LCL and Lavasa has
damaged the environment. In light of this, status quo is to be continued on
the stop work notice issued in 2010. MoEF is prepared to consider the
project on merits, with imposition of various terms and conditions
including possible substantial penalty for violating green laws, creating an
environmental restoration fund, and preventing further environmental
degradation.
Analysis
The recent order by the ministry challenges the authority of the
Maharashtra State Government in approving the 2001 and 2004 clearances.
It also challenges the Maharashtra State Government’s Hill Stations policy
of 1996. Hence, the recent order has gone beyond environmental issues
and refers to jurisdiction related irregularities.
Due to lack of clarity on the environment clearance for Lavasa, the stock of
HCC (65% owners of LCL) has declined by 18% ytd vs Sensex falling by 7%.
HCC has a US$96.6 mn FCCB due in April 2011. We believe the cash
balance of the company along with existing credit lines should be sufficient
to fund this. However if the penalty imposed by MoEF is substantial and
depending on how much HCC has to contribute – its balance sheet and
cash position might stretch. Further there might be pressure on HCC in
case the debt of Rs 4.9 bn on Lavasa recourses back to HCC.
Implications
We retain our Neutral rating on the stock and our 12-month SOTP-based TP
of Rs 62. In our current valuation, Rs 32.6 (53% of the value) is attributed to
LCL. Downside risks: increase in commodity prices; rising interest rates;
Upside risks: stronger order inflows, translating to higher billings.
INVESTMENT LIST MEMBERSHIP
Neutral
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