Hindustan Construction – In value territory::RBS

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HCC is under pressure from high debt, slower infrastructure spending and rising interest rates,
prompting us to trim our EPS forecasts and valuation. However, we see it as comfortably in value
territory, while the recent change in environment minister could favour Lavasa environmental
clearance. Upgrade to Buy.


Core construction business may continue under pressure
We expect a slow start for FY12 with only 11% yoy sales growth for the June quarter, but with
EBITDA margins remaining at a healthy 13.4%. However, HCC’s debt was already high and has
been increased further to redeem foreign currency convertible bonds: as such, interest expenses
are likely to erode EBITDA and we expect normalised PAT to dip 89% yoy to Rs33m.
Management’s bill collection improvement effort should reduce working capital requirements but
we expect the process to be gradual and benefits to take a few months to appear. The good
NHAI order flow in the coming months should also help HCC increase its order book size as its
build-operate-transfer (BOT) subsidiary starts to fall into place.
We trim our standalone EPS forecasts by 79% for FY12 and 61% for FY13
We have reduced our standalone revenue forecasts by 14-16% for the next two years as we build
in only moderate growth given the decline in ordering activity by government entities. Although we
maintain our EBITDA margin forecasts, we cut our EPS forecasts for FY12-13 sharply due to a
higher cost of borrowing. However, we see signs of hope given the recent easing in CD rates and
our economist’s outlook that interest rates are nearing their peak.
We reduce our target price 25% but still see value in the stock; upgrade to Buy
We lower our TP 25% to Rs47.7 as we have lowered our valuation multiples for the core business
and Lavasa (project delay, reflected in lower per-acre valuation), offset somewhat by the inclusion
of some BOT projects (financial closure achieved). We feel the recent share-price fall is an
overreaction to concerns over the Lavasa project’s future given environmental issues and the
ongoing slowdown in construction business. Even on our TP and valuation cuts, we think the
current price is well below fair value and see a compelling proposition to Buy. We think the recent
change in environment minister makes a favourable decision on the Lavasa environmental issue

likely in the coming months, which could drive the stock to its fair value. Thus, with around 44%
potential upside to our TP, we upgrade to Buy.