31
HINDUSTAN CONSTRUCTION COMPANY [EQUITY & EIC ANALYSIS] Submitted to Satya Acharya Submitted by Divyang Patel

HCC (Final)

Embed Size (px)

Citation preview

Page 1: HCC (Final)

HINDUSTAN CONSTRUCTIONCOMPANY[EQUITY & EIC ANALYSIS]

Submitted to

Satya Acharya

Submitted by

Divyang Patel

Page 2: HCC (Final)

TABLE OF CONTENT

Particulars Page No.INDIAN ECONOMY 3

INFRASTRUCTURE SECTOR IN INDIA 12HINDUSTAN CONSTRUCTION COMPANY(ANALYSIS)

19

BIBLIOGRAPHY 30

Page 3: HCC (Final)

INDIAN ECONOMY

Highlights

The global economy is reeling under the impact of the ongoing recession whichstarted with the sub- prime crisis in the US and was transmitted to the rest of theworld economies. Defying the advocates of the ‘decoupling’ theory, India has notbeen spared the impact of this crisis although the impact has been somewhat mutedcompared to some emerging economies. During the last year, India’s GDP (at constant1999-2000 prices) grew at just 6.7% breaking the high growth trajectory that was setin place over the past five years. GDP started to slow down since the third quarter of2008-09, as industrial output decelerated sharply to just 2.8% in 2008-09 comparedto 8.8% in the previous year. Exports have been declining since October 2008 andcapital flows have reversed. In this context, the immediate challenge would be tocreate an impetus for reviving growth through remedial measures.

The impact of the slowdown was clearly evident from the per capita GDP growthwhich broadly reflects the improvement in the income of the average person. It grewby an estimated 4.6% in 2008-09 compared to an average growth of 7.3% per annumduring the previous five years. Rising prices were a major cause of concern for theGovernment for the first half of the fiscal year after which the prices started movingalong a downward trajectory.

The series of fiscal and administrativemeasures adopted by the Government alongwith the monetary initiatives by the Reserve Bank of India led the WPI based inflationslip to an all time low of-1.67% from 12.9% in the first week of August 2008. Thecombined fiscal deficit of the Government, which stands at 11.6% of GDP, signifiesgreater need for fiscal restraint so as to retain the effectiveness of fiscal policy tocombat the emerging issues in the months ahead.

There is an air of hope and anticipation on the outcome of Lok Sabha electionswhich heralded the Congress-led UPA Government not vulnerable to Leftist blackmailinducing a new confidence among investors. However, it is important to recognizethe lurking dangers that can continue to keep the policymakers busy. India remainsvulnerable to oil price shocks, vicissitudes in the flow of Foreign InstitutionalInvestors’ (FII) funds, sluggish manufacturing sector output and stagnating exportdemand. With greater constraints on the use of both monetary and fiscal policyinstruments, the Government will have to contend with the risks emanating fromthese shocks with bold and innovative policy measures.

.

Page 4: HCC (Final)

Output of Goods & Services

The Indian economy’s GDP growth rate of 6.7% in 2008-09 is a clear break from theprevious spurts in growth (Figure 1). This slowdown in growth can broadly beattributed to the fallout of the global slowdown on the Indian economy workingthrough the fall in export demand, reversal in FII flows, slowdown in domesticinvestment as well as consumption and declining agricultural productivity. Consideringthe magnitude of the adverse economic developments in 2008, the projected dropfrom 9.0% last year to 6.7% this year is modest compared to several other economies.

The deceleration of growth in 2008-09 was spread across all sectors except mining& quarrying and community, social and personal services. The growth in agriculture andallied activities decelerated from 4.9% in 2007-08 to 1.6% in 2008-09, mainly onaccount of the high base effect of 2007-08 and due to a fall in the production ofnon-food crops including oilseeds, cotton, sugarcane and jute.

The manufacturing sector has taken the maximum hit with a growth of 2.4%, downfrom 8.2% inFY2007-08. This was mainly on account of fall in exports followed by adecline in domestic demand, especially in the second half of the year. Rising cost ofinputs and the higher cost of credit (through most of the year) reduced manufacturingmargins and profitability.

Electricity and Construction sectors were down to 3.4% and 7.2%, respectively during2008-09 from 5.3% and 10.1% in 2007-08. The slowdown in electricity sector wasdue to capacity constraints and scarce availability of coal, particularly during the firsthalf of the year. The construction industry, consisting of different segments likehousing, infrastructure, industrial construction, commercial real estate, etc. wentthrough a boom phase with high growth rates until last year. Subsequently, the rise ininput cost and interest rates started impacting the industry.

Services50%. Thithe econo

Anotherincreased(Figure 3that a larwhich prunemploy

sector continued to contribute the largest share to the overall GDP with overs sector has also shown commendable resilience to withstand the impact ofmic slowdown in India.

major indicator of slowdown is the increase in unemployment rate whichto 7.2% in the fiscal 2008-09 compared to 6.80% in the previous year.

) Although a modest increase, this assumes significance in light of the factge portion of India’s working population is employed in the public sectorovides virtual employment guarantee; hence, most of this increasedment has been in the private sector.

Page 5: HCC (Final)
Page 6: HCC (Final)
Page 7: HCC (Final)

Figure 9: FDI and FII net inflows

Page 8: HCC (Final)

The Monetary Sector

The first half of the fiscal year 2008-09 saw the monetary policymakers battling withthe problem of rising inflation with the WPI peaking at 12.8% in August 2008, whichwas immediately followed by an equally sharp fall, with the WPI inflation falling tounprecedented level of close to zero % by March 2009. This was driven largely by theunbridled volatility in the global and domestic commodity prices during January 2008to March 2009. The rising oil and commodity prices with their subsequent fallcontributed to both the rise and the fall in prices.

In order to contain the price levels, the RBI moved to signal a contractionarymonetary stance. The repo rate (RR) was increased by 125 basis points in threetranches from 7.75% at the beginning of April 2008 to 9.0% with effect from August30, 2008. The reverse- repo rate (R-RR) was however left unchanged at 6.0%. Thecash reserve ratio (CRR) was increased by 150 basis points in six tranches from 7.50%at the beginning of April 2008 to 9.0% with effect from August 30, 2008. Bank rateremained at the same level of 6%

(Figure 4). The Prime Lending Rate (PLR) moved up marginally from 12.8% to 13%during FY 2008-09. These policy initiatives coupled with a fall in commodity pricesresulted in the WPI reaching close to 0.8% at end-March 2009 on a year-on-yearbasis for all commodities.

The average WPI inflation for 2008-09 was 8.4% as against 4.7% in 2007-08. In astark contrast to the movement in the WPI, the Consumer Price Indices (CPIs)remained at a fairly elevated level throughout the fiscal year 2008-09. The averageinflation on Consumer Price Index for Rural Laborers (CPI-RL) and CPI for IndustrialWorkers (CPI-IW) for the year 2008-09 was 10.2% and 9.1%, respectively. (Figure 5)

The ongoing economic slowdown has seen the Government take an active role intrying to jumpstart and revive the Indian economy through a series of fiscalinitiatives to boost Government spending on infrastructure and other demand andemployment generating projects. The result has been a burgeoning fiscal deficit whichstood at 11.6% of GDP as of March 2009 (Figure 6). Against this backdrop, fearsurrounding its medium term non-sustainability has resulted in India’s sovereignrating being recently revised downwards by several international rating agencies.

An additional concern arising from this fiscal deficit is the potential inflationarypressure this is likely to generate within the economy. A high inflation in thenextfiscal will limit the Government’s primary objective to fuel growth and revive thegrowth momentum within the economy.

The supply-demand imbalance in the domestic foreign exchange market, brought aboutby the widening of the trade deficit and deceleration in capital flows led to thedecline in the rupee exchange rate vis- a-vis US dollar. The value of rupee declinedfrom Rs 40.0 in April 2008 to Rs 48.66 in October 2008. The collapse of theLehman Brothers in September 2008 brought the currency under further stress.

Page 9: HCC (Final)

The Reserve Bank intervention aimed at augmenting supply in the domestic foreignexchange market in order to reduce undue volatility. The rupee thereafter attained ameasure of stability. The exchange rate was Rs. 51.2 per US dollar in March 2009,reflecting 21.9% depreciation during the fiscal 2008-09. Further, the fallout of theglobal crisis and strengthening of the US dollar infected the country’s foreignexchange reserve. During 2008-09 (April- December 2008), the current accountdeficit was 4.1% and capital account surplus of 1.8% of GDP, leading to decline inforeign exchange reserves of $57.8 billion over the fiscal year 2008-09 as against theaccretion to reserves of US$ 47.6 billion during the previous fiscal.

The External Sector

The external sector in India saw a reversal in trend especially in the second half of2008-09. This period was marked by adverse developments such as slowdown indomestic demand, reversal of capital flows and reduced access to external sources ofcredit. It is due to these reasons that India’s external debt has grown this fiscal, butat a much slower rate as compared to the previous fiscal. The external debt stands atan alarming 26.2% of GDP this fiscal.

The foreign exchange reserves have declined by $57.8 billion in the year 2008-09(Figure 8) and stand at $252 billion. The current account deficit has attained a lowof 4.1% this fiscal. The sluggish growth of exports and the rising oil import billhasled to the worsening of the trade deficit which has nearly doubled over the pastone year. These trends are indicative of the fact that much caution has to be exercisedin bringing the state of the external economy to a strong, stable and healthy position.

Overall export growth during fiscal year 2008-09 was 3.6% (in US dollar terms) asopposed to 28.9% during the previous fiscal. Compared to exports, importsregistered a growth of 14.4% (in US dollar terms) resulting in an overall increase inthe current account deficit from 1.5% to 4.1%. The continuous decline in exportssince October 2008 has been and continues to be a source of concern for policymakers.

Overall growth rate of exports was due to the improved export performance of thechemicals and related products, engineering goods and automobiles (mostly two-wheelers) sectors. The growth was somewhat offset by the fall in overall exports inthe manufacturing, textiles, steel and petroleum products sectors. On the import side,high domestic demand of edible oils and fertilizers increased imports of thesesectors although electronics and petro products dominated the import basket. India’smajor trading partners have remained the same over the past two fiscals, though theshare in exports and imports for most of the trading partners (with the exception ofEurope) have fallen. India’s imports from Europe, USA and China have contractedwith imports from USA recording the steepest fall. Share of exports have also fallenin the case of USA and China, but have marginally increased in the case of Europe.

Page 10: HCC (Final)

Finally, the description of the external sector can hardly be said to be completewithout a look at the volume of FDI and FII into India. These inflows have beenmajor drivers of growth in several emerging market economies, and India is noexception. However, this fiscal evinced a severe decline in the FII investment, takingit into the negative territory. The net FDI inflow into the country, though not asimpressive as the growth in the previous period, has displayed an increase (Figure 9).

KeyCharacteristics

Retail Construction Pharma Media &Entertainment

Key Drivers Increasingurbanization.

Rising disposableincome.

Growing share ofyoung populationand increased brandconsciousness.

Increased use ofplastic money,availability of retailcredit.

Growth in FDI inflows.

Favorable policychanges, $492bninvestment outlay as per1 1th Five year plan.

Growing populat ionupcoming of SEZ,increasingindustrialization.

Low manufacturingcost.

Signing of theTRIPSagreement.

Economic growth

leading to

expansion of

healthcare sector,

health insurance and

infrastructural

growth.

Increased instanceof chronicdiseases.

Growing proportionof young populationhigh customer base.

Rise in disposableincome.

Increasedtelecommunicationand internet services.

100% FDI in filmindustry and printmedia.

What will be the future interest rate scenario be?

Amidst the global slowdown and recovery, the RBI has made necessary changes inthe interest rate scenario. During the early part of the financial year, it hadincreased the key interest rates to contain inflation, and later on during the endof the year it had decreased it.

In the current scenario, it is expected that the Government along with RBI makenecessary reform changes and decrease interest rates, with the intent toincrease consumer spending. Such a move is expected to be implemented inthe short-medium term. Market interest rates are likely to rise marginally towardsthe end of the fiscal year.

Page 11: HCC (Final)

How is the banking and financial sector gearing up to cater to Indian businesses?

The increasing degree of financial integration of the Indian economy with globalmarkets had earlier put the Indian banking and financial institutions on acommon international platform. The impact of the economic downturntherefore had an impact on the liquidity available within the system. Most ofthe Indian banks have managed to cope with this relatively well and the impactof the downturn on the Indian financial sector has been comparatively moderateas compared to the effect globally.

In most sectors, the significant expansion of credit granted by the commercial banksin the first half of the past fiscal year reduced. There were moderations in thecredit growth overall from a 22.3% to 17.3%.

The sectoral deployment of bank credit has also been rationalized. Deceleration inbank credit to the food processing, textiles, vehicles and transport equipmentsectors is noticeable.

It is expected that these trends are temporary. The Indian banking system hasresponded well to the external shocks emanating from the economicdownturn. If the monetary policy resorts to rate cuts, borrowings are expected toincrease.

Stock Market: Boom or Bust?

The global slowdown emerging from the turmoil in the global financial marketshad made it difficult for investors in all markets, including India. Themovements in the Indian capital market were in tandem with trends in majorinternational stock markets with a moderate lag.

Fears of slowdown and shift in investors’ preferences have led to significant outflowof funds by the FIIs. Equity price movements were in tandem with trends in theinternational markets. The Indian equity market declined further during theperiod September to December 2008.

The volatile capital market scenario resulted in the decline in savings inflow intomutual funds. Steady rise of such instruments from 2005 onwards showed adecline in 2008.

The recent increase in the stock market should be seen in the light of increasingconfidence and potential volatility that might arise in the markets for emergingeconomies. Higher volatility index of 35% to 40% in India and in emergingmarket economies may not be cause for concern and investors can add value tothe decision making process by looking at longer-term prospects

Page 12: HCC (Final)

Infrastructure Sector in India

Bottom line zoomed

Construction industry demonstrated good performance in JFM07 compared to JFM06, though

growth momentum somewhat slowed down compared to last OND 2006. Net sales jumped by

31% to Rs. 117,649.1m and EBITDA rose by 38% to Rs. 15,540m in JFM07 compared to

JFM06. The hike in EBITDA is due to revenue generated by the completion of projects. OPM

and NPM are at 13.21% and 8.36% respectively. Order book position for the industry at Rs.

803,850.3m shows a huge growth potential for the industry.

Page 13: HCC (Final)

Note: The industry aggregate is calculated by taking the average of results of AnantrajIndustries, BL Kashyap & Sons, DS Kulkarni, Era Constructions, Gammon India Limited,Hindustan Construction Company, IRCON International, IVRCL Infrastructure, Larsen & TubroLimited, Madhucon Construction, Mahindra GESCO, Nagarjuna Construction Company, NitcoTiles Limited, Peninsula Land Developers, Punj Lloyd Limited, Simplex Infrastructure andUnitech Limited.

11th Five year plan determines the growth of construction sector

Construction sector remains the biggest beneficiary of the infrastructure boom. The investmentin this industry accounts for nearly 11% of India’s Gross Domestic Product (GDP) and nearly50% of its Gross Capital Formation (GFCF). In the eleventh five year plan (2007-11),government planned investment of US$350 billion in infrastructure sector. Constructionaccounts for more than 8% of the GDP and will be the most benefitted sector in the eleventh fiveyear plan.

INDUSTRY FOCUS - CONSTRUCTION

Construction industry plays a major role in the economic growth of a nation and occupies apivotal position in the nation’s development plans. India’s construction industry employs a workforce of nearly 32m and its market size is worth about Rs 24,800 m. It is the second largestcontributor (nearly 20%) to the GDP after the agricultural sector. It generates substantialemployment and provides growth impetus to other manufacturing sectors like cement, bitumen,iron and steel, chemicals, bricks, paints and tiles, whose combined value is Rs.19,200m annually.The construction equipment market is valued at Rs. 10,500 million.

Nature of Construction IndustryHouses, apartments, Factories, offices, schools, roads and bridges are only some of products ofthe construction industry. This industries activity includes work on new structures as well asadditions, alterations and repairs to existing ones.

The construction industry is divided into three major segments:

1. Construction of buildings contractions or general contractors, build residential buildings,industrial, commercial and other buildings.

2. Heavy and civil engineering construction contractors, build sewers, roads, highways,bridges, tunnels and other projects.

3. Special trade contracts such as carpentry, painting, plumbing and electrical work.

Page 14: HCC (Final)

Construction boom in India

The Indian construction industry recorded a consistent double-digit year-on-year growth of 12%during 2000-2005, and is expected to grow at 25-30% during 2005-2010. The key drivers of thisgrowth are government investment in infrastructure creation and real estate demand in theresidential and industrial sectors. The unprecedented increase of activity in the constructionspace appears to continue for long time. While roads are the taking the centre stage, othersegments are too beginning to show momentum. Investments in the road sector have picked upsignificantly, funded by cess on petrol and diesel and spurred by government’s active interest. Itaccounts nearly 65% of the total investment in infrastructure and is expected to be the biggestbeneficiary of the surge in infrastructure investment over the next five years.

Major construction companies in India

Construction sector is dominated by large scale infrastructure developers and real estatedevelopers. While companies like L&T, Gammon India and Hindustan Construction Company(HCC) belong to the first group; DLF Universal and Ansal Housing, Fern builders & developersbelong to the second category.

Construction industry focuses on capacity building in 11th five year plan

The government has planned for large scale investment in the 11th plan to develop physicalinfrastructure of the country. The huge investment would be made mainly in railways, freightcorridors, surface transport, road, highways, ports, aviation and power 15-20% of the totalinvestment would come from private sector in PPP model.

Housing construction

Based on the results of Census of India 2001, it has been estimated that the housing shortage is at24.7m, out of which 14.1m is in rural areas and 10.6m is in urban areas. According to the latestprojections of the Planning Commission's "Technical Group on Housing Sector", nearly 34mrural housing units are required for an additional population during 1996-2016.

The growth of Indian housing finance industry reflects the momentum this sector has picked up.The industry saw a compound annual growth rate (CAGR) of 30% in the last 5 years. Housingloans by scheduled commercial banks (SCB) and housing finance companies (HFC) grew by20% during 2000-2005. The robust growth experienced by the industry in the few years has beentriggered by a number of factors such as by certain fiscal, social and regulatory drivers. India’shousing demand will probably expand fourfold to 80m units by 2015, requiring an investmentof US$670 billion.

Page 15: HCC (Final)

Physical infrastructure projects

Construction Companies in India and their Performance

Government incentive to the construction sector

Page 16: HCC (Final)

Heavy and civil engineering construction contractors, build sewers, roads,Highways

The Indian infrastructure sector is currently going through a vast transformation. Even with thethird-largest road network of 3m kilometers crisscrossing the country. The government hasalready embarked upon massive road construction projects, with the National HighwayDevelopment Program building the North-South and East-West.

Corridors and the Golden Quadrangle Project connecting major cities. Besides, the government'sdecision to throw open the construction of roads, bridges, airports and ports to the private sectorand allowing 100% foreign investment in real estate projects has provided a boost to theconstruction industry as well as generate demand for construction machinery.

Housing and infrastructure projects like roads, bridges and ports are expected to grow about 20%per annum for the next 15 years. The total investment of the road and highway constructionprojects is estimated at US$40bn over the next 15 years, of which 20% is expected to be inconstruction machinery. Simultaneously, the housing and real estate construction business isexpected to involve another US$40bn over the next 15 years, of which 5% will be inconstruction machinery. Hence, a total demand of US$10bn of construction machinery isanticipated through 2020.

Challenges of Indian construction industry

The Indian construction industry is facing the challenges of outdated land and propertyownership regulations, infrastructural bottlenecks and a shortage of civil engineers. The industryis experiencing increasing polarization between large and small players. The top 10 players, suchas Gammon India, Patel Engineering Limited (PEL), and Hindustan Construction Company(HCC), contributed to 75% of the total revenue in 2005. These players are increasing theirmarket share through large-scale contracts, joint ventures and foreign operations. Though anincreasing number of small players are also entering the market, most of them do not have theresources to bid for big contracts.

In 2005, the government allowed Foreign Direct Investment (FDI) up to 100% under theautomatic route in townships, housing, built-up infrastructure and construction developmentprojects to catalyze investment in a vital infrastructural sector of the economy. FDI has alsobeen opened up for construction-development projects over 50,000 sq mtr including housing,hotels and resorts, hospitals, commercial premises and educational institutes.

However, a minimum investment cap of US$10m in 100% FDI projects and US$5m in jointventure projects has been imposed. Huge amount of credit is distributed by the banks sector toreal and housing sector with 15% growth rate during April-September 2006 as compared to samein year 2005.

The government has pegged investment requirements for the country's infrastructure sector at Rs145bn. India should double gross capital formation in the infrastructure sector to 8% by 2012 tosustain the current pace of economic growth of over 8%.

Page 17: HCC (Final)

Outlook

Infrastructure development in India has taken a major leap in the last two years and is witnessingimpressive growth across various segments. A recent study shows that India needs to investUS$331 billion over next five years to upgrade its infrastructure. Even the approach paper for11th five year plan states that the investment in the infrastructure needs to be increased to 7 to8% during the 11th plan period from the current level of 4.6%.

This alone will ensure the continuous growth in the construction sector since it is the biggestbeneficiary of the investments in the construction sector. India is aiming to achieve 10% annualGDP growth by the year 2011-12. It needs over US$300 billion to upgrade its infrastructure overthe next five years. The Indian economy has grown at an average 8% in the past three years, anda 10% annual GDP growth is difficult to achieve unless the country improves its infrastructure.

The investment in infrastructure would have to come from the private sector. But private playershave shown little interest to invest in power projects and roads due to the absence of proper usercharges.

UNION BUDGET 2010

While talking about bridging the policy gaps in Infrastructure sector, the Finance Minister in his

Union budget 2010 speech proposed the sustain the driving force for improving infrastructure in

urban and rural districts. He allocated Rs.1, 73,552 crore for infrastructure growth in the country

in budget 2010.

Government has set the target of constructing 20km of national highways on daily basis and to

trigger these changes projects have been undertaken via public private partnerships (PPPs). The

FM increase the allotment of road transport to Rs.19, 894 crore against the previous Rs.17, 520

crore for 2010-11. In an attempt to revise and enlarge the railway network, he also allocated

Rs.16, 752 crore while presenting the union budget.

He notified the completion of introductory activities for the establishment of 6 industrial

investment nodules with ecological infrastructure of international standard. In addition, the

Delhi-Mumbai Industrial Corridor project has been undertaken for integrated local expansion.

Restoration of Infrastructure Bonds after a period of 5 years was also in the Budget 2010 agenda.

It is one of the best tax saving schemes and keeping this in consideration the FM has proposed an

extra limit of Rs.20, 000/- for investing in Infrastructure Bonds.In order to provide long term

monetary support to infrastructure projects, government has also set up the India Infrastructure

Finance Company Limited (IIFCL). The expenditures of IIFCL are likely to reach Rs.9, 000

crore by the end of March 2010 and Rs.20, 000 crore in the corresponding period of FY 2011.

Page 18: HCC (Final)

Snapshot of Physical Targets for Infrastructure in the Eleventh Plan

Power

Additional power generation capacity of about 78,577 MW

Reaching electricity to all un- electrified hamlets and providing access toall rural households through

Rajiv Gandhi Grameen Vidyutikaran Yojna (RGGVY)

National Highways

Six-laning 6,500 km of Golden Quadrilateral and selected National Highways

Four-laning 6,736 km on North-South and East-West Corridors

Four-laning 20,000 km of National Highways

Widening 20,000 km of National Highways to two lanes

Developing 1,000 km of Expressways

Constructing 8,737 km of roads, including 3,846 km of National Highways in the North

Constructing 1,29, 707 km of new rural roads, and renewing and upgrading existing 1,77, 726 km

covering 60,638 rural habitations

Ports

Capacity addition of 485 million MT in Major Ports, 345 million MT in Minor Ports

Airports

Modernization and redevelopment of 4 metro and 35 non-metro airports Constructing 3 greenfield

airports in North East Constructing 7 other greenfield airports Upgrading CNS/ ATM facilities

Railways

Constructing Dedicated Freight Corridors between Mumbai-Delhi and Ludhiana-Kolkata 8,132

km of new railway lines; gauge conversion of 7,148 km

Modernization and redevelopment of 22 railway stations

Introduction of private entities in container trains for rapid addition of rolling stock and capacity

Telecommunications and Information Technology

Achieving a telecom subscriber base of 600 million, with 200 million rural telephone

connections

Achieving a broadband coverage of 20 mn and 40 million internet connections Irrigation

Page 19: HCC (Final)

Porter Five Force Analysis

Threat of New Entrants

1) Product Differentiation is moderate

2) Capital Requirements is very high

3) Impact of Government Policy is very high

4) Switching Cost is moderate

Bargaining Power of Suppliers

1) There are many players in the Steel and Cement Industry

2) Suppliers of product has no substitute

3) Suppliers product is important input to buyers product

4) Suppliers product have low switching cost

Bargaining Power of Buyers

1) Products are less differentiated

2) Buyer presents a credible threat of backward integration

3) Purchases of buyer is very high

4) Buyer industry earns good profit

Threat of Substitute Products

1) Flat in place of apartment

2) Flat on rent in place of owing a house

Rivalry among Existing Competitors

1) There is competition for strategic position

2) Price competition among competitors

3) Lack of differentiation & switching costs

Page 20: HCC (Final)

HINDUSTAN CONSTRUCTION COMPANY

Company Overview

HCC is one of the largest private sector construction companies in India and the foremost in

infrastructure building. Businessman and nationalist, Seth Walchand Hirachand, founded the

company. With a vision for a modern and prosperous India, Seth Walchand entered into the core

sector of industry and on 27th January 1926 Hindustan Construction Company Ltd.,(HCC) was

born. Company started initially with tunneling works has today grown to a Company with a

dedicated, experienced and expert team of people achieving remarkable feats in the field of civil

engineering construction. The Subsidiary Companies of HCC are Hincon Technoconsult Ltd,

Western Securities Ltd, HCC Infotech Ltd, Pune Paud Toll Road Company Ltd and Hincon

Realty Ltd. The company has staff strength of over 1250 people, including over 600 people

with technical and engineering skills and experience. HCC's highly trained manpower and up-to-

date machinery are, in large measure, responsible for the quality and excellence of HCC's

project implementation. For its immense contribution in the field of construction, HCC has won

accolades from several prestigious organizations within India and abroad. Company plans to play

a role in a major initiative - that of developing a strong, lease-based sub-contractor base.

Products & services

Company is one of the largest construction and infrastructure building company in the country.

HCC specializes in the construction of technologically complex & Long-gestation period

projects. The Company executes various projects from diversified areas like Hydel, Power,

Roads, Bridges, Dams, Barrages, Marine Works, Buildings & Environmental Projects. The

company has also undertaken several projects in Bhutan, Saudi Arabia, Iraq, Myanmar,

Tanzania, Sri Lanka etc. The company also specializes in construction techniques like pre-cast

units for industrial structures and jetties, slip forming for tall structures and underground shafts,

bridge builders for segmented construction of long-span bridges, three-dimensional computer-

aided design technology for bridges, and dredgers for speedy sinking of monoliths, etc.

HCC has contributed its civil engineering construction expertise with leading edge

technologies for building some of the foremost infrastructure projects in India and abroad.

Among these are over 300 road and railway bridges and several outstanding landmarks

around the country. HCC has been involved in construction of the most diverse projects ranging

from power to road projects.

Page 21: HCC (Final)

Visibility for new orders inflows

In the 11th five year plan (2008-12) infrastructure investment was 135% higher than 10th five year

plan (2002-07) to $437bn which had enhanced the opportunity for construction companies.

However due to election in centre and states and slow down in economy, new projects announcement

was put on hold or deferred. Post continuity of Congress led government in centre with better

majority and sign of improvement in macro environment would drive the strong order inflow

from sectors like roads, power, urban infrastructure, ports, Irrigation, etc. Infrastructure investments are

projected to grow at a CAGR of 24% each year during FY10-12 (refer appendix) on account of

increasing thrust of government on infrastructure and clearance of due orders in last two years.

Order backlog of Rs 233bn by FY11

HCC has order book position of Rs 155.5bn as on September 2009, which works out to 4.7x of FY09

revenue which is providing strong revenue visibility for next 4 years. Order backlog in last four year

has grown at CAGR of 35% to Rs. 16.5bn by FY09. The company is L1 bidder for Rs 10bn worth

of projects and has submitted bids worth Rs 150bn; based on that, expect the order backlog would

grow at CAGR of 19% in next two years to Rs. 233bn by end of FY11E.

Page 22: HCC (Final)

Vast expertise in execution of large and complex project

HCC has considerable expertise in completing complex projects in difficult climatic and geographical

condition. The company has been involved in the construction and development of over 600

diversified projects, including dams, tunnels, bridges, hydroelectric, nuclear and thermal power plants,

expressways and roads, marine works, water supply and irrigation systems and industrial buildings.

The company has undertaken construction of 25% of India's installed hydel power capacity and

50% of installed nuclear power capacities which shows the company's expertise in execution of

complex projects. Looking at the company's expertise in execution of complex project and industry

knowledge; the company is able to execute the current order book on time and would drive the

revenue at CAGR of 26% over FY10-11.

Focus toward higher yield projects

HCC has shifted its focus towards the power segment to tap the huge investment that is flowing into

the sector. The company has experience of power projects across all segments including thermal,

hydro and nuclear. The power sector accounts for 48% of order book in FY09 from 14% in FY05

which has resulted into improvement in EBIDTA margin by 250bps to 13% in FY09 from 10.5% in

FY05. Power sector projects require expertise due to higher complexity, which results into higher

yield than other segment projects. The company's order book would be skewed toward power projects

in FY10 and FY11 which will sustain EBIDTA margin at higher level. Some of the projects under

implementation in the hydro power sector are Chamera hydroelectric project, Uri-II hydroelectric project,

Chutak hydroelectric project.

Page 23: HCC (Final)

Major Projects in Progress

Tie-up in Nuclear space with UK based AMEC

HCC has entered into an agreement with Britain-based AMEC to offer consulting and EPC services

for the establishment of nuclear power plants in India. The tie-up will also enable HCC to execute

services in the field of mechanical and electrical components of nuclear power plants by sourcing

the latest global technologies through AMEC. The company expects India would add 40GW

through nuclear power and would award around 20 nuclear reactors by 2014. The company would

benefit from its expertise of building more than 50% of containment structures.

Margin Protected with around 75% of project under strict cost escalation

For any construction project, price escalation of key raw materials like steel and cement is an

important factor for financial performance of the company. The company has order book position

as on Sep.09, of Rs. 155.5bn in which 90% of projects are covered under the cost escalation.

Hydro projects and irrigation projects contribute 75% of current order backlog. Mostly hydro

projects and irrigation projects covered under the star rated clause as compared to the other

segments. The pass on of incremental costs in hydro projects is as high as 90% and in irrigation

projects it is in the range of 75%-80%.

Particulars Order Value (Rs.mn)

Kishanganga 27,250Godavari – II 14,890

JCR devadula lis phase III package III 11,070Pranahita chevella lis – pkg 10 9,400MP Dhule Road 7,330Punatsangchhu 6,880

URI HEP 6,670JCR devadula LIS Phase III Package I 6,290

Source: HCC website

Page 24: HCC (Final)

Asset ownership portfolio worth Rs 100bn by 2013-14

HCC has diversified its scope of business from just being constructor to owner of the project. The

company has portfolio of four BOT projects worth Rs 28.5bn, three based on toll collection and

one based on annuity. The company has been a late entrant in the BOT project but has secured four

projects in short span of time on account of its vast experience of construction in Highways, bridges

on cash contract basis. Looking on the factors like government thrust on infrastructure development,

strong political commitment and easing liquidity with revision in framework for PPP projects; PPP

projects are on the path of steep growth trajectory and the company would achieve the target of

asset ownership worth of Rs 100bn by FY13- 14. This will provide the stability to cash flow of the

company.

Pune Paud Toll Road: This is the first BOT project for the company to construct a toll road from

Pune to Paud (approach road for Lavasa) worth Rs 322mn which is operational. The accumulated

loss in this project has exceeded the net worth of the project. However it is expected that traffic on

this road would significantly increase post completion of Phase I of Lavasa project.

Nirmal BOT project: The project is located in Andhra Pradesh and got completed 3 months ahead

of schedule and eligible for bonus of 133mn apart from 238mn of annuity amount.

BadarpurElevated Expressway (Connecting Delhi - Haryana): The project is on track and currently

around 30% of the project is completed. The project is expected to be completed by Dec'10. The

total project cost would be ~ Rs. 5.7bn.

Dhule road project (Maharashtra - MP border): The company has got this project in

consortium with John Laining and Sadbhav Eng in the ratio of 37:36:27 respectively. The

concession agreement was signed in June'09 and financial closure of the project is expected in

Dec'09. The total project cost would be around Rs 14.15bn in which company's stake would be Rs

5.23bn.

Real estate: value unlocking on card

HCC has entered the real estate development business through its 100% owned subsidiary HCC

Real Estate Ltd (HCCREL), which has a land bank of 14038 acre and developable area of 186mn

sq ft. The company is currently in the process of developing its two major projects called Lavasa

Corporation, first private hill station and Vikhroli Corporate Park under the brand name of '247

Park'. Apart from that the company is also working on Mumbai rehabilitation project in 28acre of

land which we have not included for our valuation. The company would unlock the value of its real

estate business through sale of a stake to a private equity player or through listing. This will create

significant value for HCC’s shareholders.

Page 25: HCC (Final)

HCC: Real Estate Venture

Lavasa phase I by December 2010

HCC is developing a township spread over 12,500 acres at Lavasa Hill near Pune, through Lavasa

Corporation Ltd (LCL). HCC holds 65% stake in the LCL, with equity investment of Rs 2.1bn

and other major shareholders are Avantha group (15%) and Venkateshwara Hatcheries (12.5%).

LCL has already acquired 9,691acres, formalizing the transfer of title for 356acres and remaining is

under various stages of negotiation. LCL has planned to develop the project in four stages by

FY2021. In first phase (FY08- 11) LCL, is developing the 3200acre are in Dasve and Mugaon. The

first town of the project Dasve is expected to be operational by Q3Y11 and the sold villas and

apartments would be started to handover from Dec.'09. For Lavasa Phase I, the funding of Rs20-

22b has been tied up: equity of Rs3b, Rs6.6b as quasi-equity by various banks and rest as

customer advances and debt.

Page 26: HCC (Final)

Lavasa Valued at 100 bn

The Lavasa project has received an investment of Rs 6.56bn from financial investors and private

institutions for a stake of 6.56% valuing the project at Rs 100bn. Financial institutions has

invested in the form of Deep discount convertible debt (DDCD) and Compulsory

convertible preference share (CCPS). These investors have an option to convert the DDCDs/CCPS

into shares within a period of five years at the valuation of Rs 100bn. Bennett Coleman &

Company Limited (BCCL) has invested Rs. 812.5 million in LCL against issuance of a warrant

on preferential basis entitling BCCL to subscribe to 0.81% of the fully diluted equity share

capital of LCL upon exercise of the warrant.

Pre-sales performance encouraging

The current rate of villa is Rs 3500/sq ft and for apartment Rs 3200/sq ft which is higher than our

assumption of Rs 2800/sq ft for valuation. The company has received cumulative presales amount of

Rs 10.3bn in which Rs 2.1bn from land sales and Rs. 8.2bn through sales of build space. For

H1FY10, Lavasa has recognized revenues of Rs 1962mn and EBT of Rs 858mn (EBT margin of

43.8%) and PAT of Rs 568mn.

Land Sales Rs mn Build Space Sales Rs mnInstitutional Land 850 Apartment 1,904Residential Land 199 Villa 4,325SPV Land Sale 1,051 Retail, Commercial 916Subtotal - Land Sales 2,100 Affordable rental 400Club Membership 21 Hostel 691

Subtotal - Build Space 8,236Grand Total 10,357

Source: Company & KSBL Research

Vikhroli Corporate Park & Mumbai rehabilitation project

Vikhroli Corporate Park, partnership firm between HCC and HREL launched its IT Park under the

brand name `247 Park’ with a total of 1.9mn sq. ft built up area. The project has got completed and

70% of the area leased out at the average rate of Rs 65- 70/sqft/month. The company expects the full

area would be leased out by March'10 which will give around Rs1bn of annuity per year. HCC

owns a 14.8 acre of land in Vikhroli East and has acquired another 13.2acres land in Hariyali village,

Vikhroli to develop integrated real estate project in phases. The entire land is currently occupied by

slum dwellers. The company has received the consent of more than 70% of slum dwellers (minimum

required for the project) to be classified under the SRA for its 14.8acre of land.

Page 27: HCC (Final)

SWOT ANALYSIS

Strengths1) Increasing Market Share

demonstrated by increasing sales

2) Improved process efficiencies by

deploying ERP packages

3) Increasing profitability – by moving

to BOT mode & thereby diversifying its

operation

4) High growth rate

Weakness

1) High cost of funds

2) Capital intensive business

3) Profit not realized immediately

4) Rising operating expense

Opportunity

1) Booming Infrastructure sector

2) High Growing economy

3) Huge investment planned in

infrastructure by government

4) Booming Housing construction

Threats

1) Increasing competition

2) Rising cost

3) Government regulations

4) Lack of companies involved in

leasing machineries and

equipments

5) Lack of skilled manpower

Page 28: HCC (Final)

Ratio Analysis

Particulars Mar '05 Mar '06 Mar '07 Mar '08 Mar '09

Operating Profit Margin (%) 11.14 12.7 14.49 15.66 14.12

Net Profit Margin (%) 4.89 8.22 4.23 4.06 4

Return On Net Worth (%) 20.97 14.03 8.77 10.99 12.66

Current Ratio 1.02 2.15 1.75 1.49 1.61

Debt Equity Ratio 1.21 1.46 1.72 1.87 2.35

Inventory Turnover Ratio 2.59 1.38 1.08 1.48 1.25

Return On Capital Employed(%) 16.43 6.7 8.62 11.57 10.36

Return On Net Worth(%) 20.97 14.03 8.77 10.99 12.66

Revenue to grow at a CAGR of 26%

The company's turnover has grown at a CAGR of 22.2% over FY05-09 and expects it would

grow at CAGR of 26% over FY10-11 driven by strong growth in order backlog. The company has

reported 61% growth in order backlog to Rs 16.4bn in FY09 which is 4.9x of FY09 revenue and

provides revenue visibility for next four years. The company would report net sales of Rs 43.2bn in

FY10 and Rs 52.8bn in FY11.

EBITDA margin to sustain at higher level

During FY05-08, the company has increased contribution of low margin road sector in order

book to capitalize on growth which has suppressed the margin. The c om pa ny ha s reported

improvement in EBIDTA margin by 110 bps to 13% in FY09 on account of h igher

contribution from power sector in revenue. The company would margina l ly improve its

EBIDTA margin to 13.1% for FY10 on account of again shifting its focus toward higher margin

power projects.

Improving return ratio

During FY05-07, the company's return ratio was in declining mode due to shift toward lower

margin road segment to capture the high growth couple with losses on bandra-worli sea link

project. RoE has fallen from a peak of 20.97% in FY05 to 12.66% in FY09 and ROCE from 16.43%

in FY04 to 10.36% in FY09. We expect the RoE would decline by 200 bps to 8.36% in FY10 due to

withdrawal of section 80IA tax benefits. However we believe ROE and ROCE would improve from

FY11 onwards driven by operational efficiency and change in revenue mix toward higher margin

project.

Page 29: HCC (Final)

Qualified Intuitional Placement (QIP) eases gearing

The company has raised Rs4.80bn by allotment of 47mn shares to qualified institutions at the price

of Rs 102. It has lead to increase of equity shares by around 18.3% to 303mn shares from 256mn

shares. The company has used this money to partially repay the existing debt which has come

down to Rs 22bn from Rs 23.2bn in FY09. We expect debt: equity ratio would come down to 1.3x

in FY10 from 2.3x in FY09.

Debt Equity Ratio

Shareholder equity has remained same. The increase in debt equity ratio is due toincrease in unsecured loans.

High debt equity ratio reflect that it is capital intensive industry HCC has large leverage on books, with DER of 2.35, as of March 2009 HCC has high DER as compared to the industry average of 0.6 IVRCL and Simplex enjoy comfortable financial leverage positions v/s peers

Liquidity Ratio

Current Ratio has increased to 1.62 from 1.02 mainly due to increase in inventory andcash and bank balance.

The current liability has also increased Inventory Management need focus as there is opportunity for improvement Low Quick Ratio is a cause of concern for lenders and short term creditors

Return on Capital Employed (ROCE)

ROCE has decreased from 16.43% to 10.36% HCC’s ROCE is far lower than industry average of 15%

Page 30: HCC (Final)

Hindustan Construction Company (HCC)Split

(Rs.10to Rs.1)

Particulars 2004-05 2005-06 2006-07 2007-08 2008-092009-10

(E)

Profit After Tax (PAT) 74.02 124.80 79.28 108.77 125.25

Equity Dividend 6.00 0.70 0.75 0.80 0.80 0.86

Original Dividend 6.00 7.00 7.50 8.00 8.00

EPS 32.28 4.87 3.09 4.24 4.89 5.71

Original EPS 32.28 48.7 30.9 42.4 48.9

Growth Rate

PAT 0.69 -0.36 0.37 0.15 0.21

Equity Dividend 0.17 0.07 0.07 0.00 0.08

EPS 0.51 -0.37 0.37 0.15 0.17

Market Price 478.25 172.95 89.5 132.4 39.1

P/E Ratio 14.82 35.51 28.96 31.23 8.00

Average P/E 23.70

Expected Rate of Return 0.15

Current Market Price 135

P/E Average Method 135

Average Price 73.4741

Stock of HCC is fairly valued. It is neither undervalued nor overvalued.

BIBLIOGRAPHY

Page 31: HCC (Final)

1) Karvy Research Report

2) Angel Broking Report

3) www.moneycontrol.com

4) www.cygnus.com

5) Jaypee Research Desk

6) www.economictimes.com