India Equity Research | Construction Initiating Coverage ... Hindustan Construction Company (HCC), with more than eight decades of experience in the engineering and construction (E&C)

Core contracting business: Strong legacy, bright future Hindustan Construction Company (HCC), with more than eight decades of

experience in the engineering and construction (E&C) space, is amongst the most

respected infrastructure majors in India. Its unmatched technical skills are evident

in several marquee projects it has executed over the years. With a robust order

book of INR 188 bn at FY10 end (and INR 44 bn of L1 projects) the company is

likely to chart a strong growth trajectory going ahead.

Asset ownership space: Solid beginning; ambitious plans With PPP projects gaining currency, HCC has drawn ambitious plans to leverage its

E&C strength as far as the asset ownership space is concerned. Its current ~ USD

1.2 bn portfolio consists of six road BOT projects, of which one is operational, two

are under development, and execution on three is yet to begin. The company plans

to build a sizeable portfolio in the transportation (roads, metro rail, railways and

airports) and energy (hydro, nuclear and thermal power) space.

Lavasa: The game changer for HCC HCC, through its 100% owned subsidiary, HCC Real Estate (HREL), is developing

Lavasa, free India’s first hill city. We believe Lavasa has reached an inflexion point

and is likely to redefine the company’s profile. Lavasa has already surpassed HCC

in terms of profitability and is likely to grow exponentially, thus emerging as a

game changer for the company. It is on its way to emerge as a breakthrough

project, changing the contours of domestic urban infrastructure development along

with significant value enhancement for HCC.

Outlook and valuations: In the value zone; initiating coverage with ‘BUY’ The company’s robust order book and strong execution capabilities are likely to

keep the core EPC business in fine fettle going ahead. Its realty and BOT

businesses are also entering the value creation zone and are expected to

significantly aid HCC’s transformation into a major infrastructure conglomerate in

the future. Our sum-of-the-parts-based target price for the stock is INR 146—EPC

business contributes INR 59/share, BOT projects contribute INR 16/share, Lavasa

contributes INR 52/share with the balance coming from realty businesses. We

initiate coverage on the stock with a ‘BUY’ recommendation. On relative return

basis, the stock is rated ‘Sector Outperformer’ (refer rating page for details).

June 8, 2010

Reuters : HCNS.BO Bloomberg : HCC IN

Absolute Rating BUY

Rating Relative to Sector Outperformer Risk Rating Relative to Sector Low

Sector Relative to Market Overweight Note: Please refer last page of the report for rating explanation MARKET DATA CMP : INR 110

52-week range (INR) : 162 / 89

Share in issue (mn) : 303.2

M cap (INR bn/USD mn) : 33.3 / 708.1

Avg. Daily Vol. BSE (‘000) : 4,180.8 SHARE HOLDING PATTERN (%)

Promoters* : 39.9

MFs, FIs & Banks : 12.7

FIIs : 28.7

Others : 18.7

* Promoters pledged shares : Nil (% of share in issue) PRICE PERFORMANCE (%)

Stock Nifty EW Const. Index

1 month (5.7) (0.3) (1.5) 3 months (23.9) (1.1) (4.0) 12 months (6.0) 9.5 5.7

Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Parvez Akhtar Qazi

+91 22 4063 5405

[email protected]

Rohit Patni

+91 22 6623 3392

[email protected]

India Equity Research | Construction Initiating Coverage

HINDUSTAN CONSTRUCTION CO. xxx

EDELWEISS 4D RATINGS

Expanding the infra horizons

Financials

Year to March FY09 FY10 FY11E FY12E

Revenue 33,138 36,292 43,425 51,764

Rev. growth (%) 7.5 9.5 19.7 19.2

EBIDTA (INR mn) 4,314 4,279 5,437 6,740

Net profit (Adjusted) 1,254 814 1,035 1,500

Shares outstanding (mn) 256 303 303 303

Diluted EPS (INR) 4.9 2.7 3.4 4.9

EPS growth (%) 15.3 (45.1) 27.1 45.0

P/E (x) 22.5 41.1 32.3 22.3

EV/ EBITDA 12.8 13.3 11.3 9.5

ROAE (%) 12.5 6.5 6.7 9.1

2 Edelweiss Securities Limited

Construction

Investment Rationale

Core contracting business: Strong legacy, bright future Founded in 1926, HCC is India’s premier E&C company, specialising in large-scale civil engineering projects and developing construction technologies. The company is reputed for its technical prowess, evident in the several marquee projects it has executed over the past eight decades. It was the first construction company in the country to receive ISO 9001, ISO 14001, and OHSAS 18001 certifications for its quality, environmental and occupational health and safety management systems. With a strong order book of INR 188 bn at FY10 end (and INR 44 bn of L1 projects) it is likely to chart a strong growth trajectory going ahead. The company undertakes projects in the power (hydro and nuclear), water supply & irrigation, and transportation (roads, bridges, metro rails etc.) segments. In addition, the company has recently entered the metals space.

Order book provides strong revenue visibility

HCC’s order book has been traditionally dominated by the power segment, followed by the transportation segment (on an average, these segments provide 60-70% of the order book). Share of the water segment had soared since FY07, but problems in Andhra irrigation projects have led to the company curtailing its exposure to this segment. The transportation segment’s share declined between FY06 and FY09 due to slowdown in NHAI project awards. However, with pick up in NHAI project awards during the last year, HCC has enhanced its exposure to this segment.

Chart 1: Order book and revenue break-up over the years

Source: Company, Edelweiss research

When it comes to revenues, the long gestation power projects contribute less than their proportionate share compared to the order book; for the comparatively shorter duration water and transportation projects, the situation is quite the opposite. A diversified segmental presence ensures that HCC’s order book is well spread geographically. This lessens concentration risks and minimises the impact of a potential slowdown/force majeure event in any particular territory.

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Best-in-class in terms of quality of construction

Edelweiss Securities Limited 3

Hindustan Construction

Chart 2: Geographical break-up of order book


HCC’s order book posted 25% CAGR between FY03 and FY08, a no mean feat. However, during the past two years, order intake has been particularly strong—36% CAGR in order book in FY08-10 has led to strong revenue visibility. The order book/revenue ratio at FY10 end was 5.2, the highest since FY02. We believe this will boost top line growth going ahead. Chart 3: Order book and order book/revenue ratio—On the rise


Future outlook

HCC’s technical skills and its proven expertise in completing complex and challenging projects within time have ensured that it will remain at the forefront of infra development in India. There is a huge opportunity for infra spending in each of the sectors in which the company operates. We analyze the potential offerings in various sectors: Hydel power: India was one of the earliest movers in the hydel power space. However, the development of hydel power in India has not kept pace with government plans. The share of hydel power capacity in total generating capacity is likely to decline from 45%

Andhra Pradesh19%

Maharashtra10%

J & K29%

West Bengal18%

Sikkim3%

Bhutan6%

Others15%

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Strong and diversified order book provides revenue visibility


Construction

at end of Third Plan to less than 23% by the end of the Eleventh Plan. Of the 15,627 MW of hydel power targeted to be added during the current plan, it is unlikely that more than 10,000 MW will be added. Chart 4: Hydro power capacity addition targets

Source: Govt documents, Edelweiss research

The government had launched a 50,000 MW hydel power initiative in 2003 for accelerated development of hydel power in the country. While progress has been tardy till now, the government has drawn up ambitious plans for the future. It is targeting development of 30,000 MW of hydel power capacity in the Twelfth Plan. This is likely to translate into a ~ INR 1,500 bn civil construction opportunity going ahead. Since it takes six-seven years for hydel plants to develop, we expect the tendering process to start sooner than later. With HCC being amongst the four-five players in this space, we expect it to garner a substantial share of the pie in the future. Chart 5: Hydro power potential in India


Over the long term also, prospects in this space are bright. India’s hydel power potential has been assessed at ~1, 50,000 MW. Of this, only about one fourth is likely to be utilized by the end of the Eleventh Plan, translating into a vast opportunity for firms in this space.

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Huge opportunity in store for the hydel power segment



Chart 6: Targets versus achievements for hydro power addition


While the potential is undoubtedly high, doubts continue to linger regarding the ability to translate potential into achievements. Actual achievements have lagged targets by a distance. However, it is heartening to note that actual achievement of targets is likely to edge higher for the third consecutive five year plan during the current plan. With government focus improving in this space, we believe opportunities for quality contractors like HCC are bound to grow by leaps and bounds. Nuclear power: India’s nuclear power capacity currently stands at 4,560 MW, ~3% of the installed capacity. In addition, construction of 5,520 MW new plants is already underway, which will push the country’s nuclear power capacity to ~ 10 GW. The government has set a 20-22 GW nuclear power capacity target by 2020, which means that orders for an additional 10-12 GW have to be placed over the next two-three years. India envisages a nuclear power capacity of 60,000 MW by 2032. It aims to enhance the share of nuclear energy in the overall energy basket to 9% within the next 25 years and 25% by 2050. The dwindling uranium reserves in the country had led to a sluggish growth in nuclear power over the past couple of years. However, with the waiver from the Nuclear Suppliers Group in September 2008, things are expected to move fast. With India signing nuclear deals with US, Russia, France, Kazakhstan, UK, etc., the nuclear power market is set to improve. Foreign majors like GE, Hitachi, and Toshiba Westinghouse of US, Areva of France and Rostam of Russia have drawn up plans to provide light water reactors to India. For this, the government is planning to set up five nuclear energy parks by 2032 with an overall capacity of 40-45 GW. It has selected Haripur in West Bengal, Chhayamithi Vardi in Gujarat, Jaitapur in Maharashtra, Kovvada in Andhra Pradesh, and Kudankulam in Tamil Nadu for the proposed parks.

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Ambitious plans for nuclear power development in India


Construction

Table 1: List of planned/proposed nuclear power plants

Source: NPCIL, Media reports, Edelweiss research

Note:* Please see annexure I for reactor types

** Additional 2 x 1,000 MW already under construction

*** Final capacity will depend on the actual rating of reactors selected

**** Two units will be at Kalpakkam, two units can be at another site

In addition, there are plans to set up plants at other locations as well. Details of plants are:

• Setting up two indigenously-made reactors of 1,000 MW each at Pulivendula in Kadapa district of Andhra Pradesh.

• Nuclear Power Corporation of India (NPCIL) has identified Pati Sonapur under Chikiti block of Ganjam district in Orissa to set up a 6,000 MW nuclear power plant.

• NPCIL plans to develop a 2,800 MW nuclear plant in Kumharia, Haryana. Four units of 700 MW each are to be developed on 500 hectares between the villages of Kumharia and Gorakhpur in the Fatehabad district. The plant will be modeled on an indigenous pressurised heavy water reactor design which already has been finalised and is ready for implementation.

• NPCIL plans to develop a 1,400 MW plant at Chutka in Mandla, Madhya Pradesh. Madhya Pradesh Power Generating Company (MPPGCL) will be the nodal agency facilitating the project’s execution.

• NPCIL has also entered into a JV with NTPC to set up nuclear power projects. While the former will have 51% equity in the new company, the balance will be held by NTPC. The JV plans to develop 2 GW nuclear power by 2017.

We believe the nuclear power scene in India will undergo a sea change in the future. With HCC being the dominant player in this space, it is in pole position to benefit from this opportunity. Transportation: As at April 2010 end, ~33,000 km of roads are still to be awarded under the NHDP (including Phase IV). This is likely to translate into a USD 70 bn opportunity over the next three-four years. Not just NHAI, various state governments such as UP, Gujarat, Andhra Pradesh, etc., have drawn up ambitious plans to develop roads on PPP basis. HCC is amongst the most experienced players in this segment and stands a good chance of cashing in on the opportunity.

Location Type * Capacity (MW) Total capacity (MW)

Kaiga, Karnataka India, PWR 1 x 1000 1,000

Kaiga, Karnataka India, PWR 1 x 1500 1,500

Kumharia, Haryana India, PHWR 4 x 700 2,800

Bargi, MP India, PHWR 2 x 700 1,400

Kudankulam, TN Russia, VVER - 1200 4 x 1,200** 4,800

Jaitapur, Maharashtra Areva, EPR 6 x 1,650 9,900

Chhayamithi Virdi, Gujarat Westinghouse, AP1000 or GE-Hitachi, ESBWR 6 x 1,000*** 6,000

Kovvada, AP Westinghouse, AP1000 or GE-Hitachi, ESBWR 6 x 1,000*** 6,000

Haripur, WB Russia, VVER - 1000 6 x 1,000 6,000

Pati Sonapur, Orissa India, PWR 6 x 1,000 6,000

Kalpakkam, Tamil Nadu FBR 4 x 470 **** 1,880

Pulivendula, Andhra Pradesh India, PWR 2 x 1000 2,000

Chutka, Madhya Pradesh 2 x 700 1,400



Also, metro projects are gaining ground in India. The Bangalore Metro (Phase II), Chennai Metro (Phase II), Pune Metro, Kochi Metro, Kanpur Metro, and Lucknow Metro are some of the upcoming projects in this space. HCC being the earliest entrant in this space has good experience in handling them. Water supply and irrigation: With only 43% of the net sown area being irrigated in India, investment in irrigation needs to be stepped up. The government is aware of this fact and progress has been made through programmes like the Accelerated Irrigation Benefit Programme (AIBP). State governments have also realised that improving irrigation facilities will help tackle the food security issue. While Andhra Pradesh has been at the forefront of investments in irrigation over the past six years, other states like Madhya Pradesh, Karnataka, Gujarat, among others, are also stepping up their focus in this space. The government plans to spend INR 1,625 bn between FY10 and FY12 on irrigation projects. Similarly, focus on improving urban infra has resulted in INR 580 bn commitment from the government for 523 projects in 65 mission cities under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM). The World Bank has agreed in principle to give USD 1 bn to implement various schemes under JNNURM. INR 726 bn is targeted to be spent in FY10-12 on improving the water supply/sanitation facilities in the country. Also, JNNURM Phase II, likely to start from 2012, will further give impetus to urban infra projects. Metals/special projects: HCC has recently entered the metals space by bagging three orders from Hindalco aggregating ~ INR 4 bn for site grading work, super structure and pot shell fabrication. Orders in this segment are typically of short duration and have strong margins. HCC is now a part of the global supply chain for Aluminium Pechiney (world leader in electrolysis technology) for pot shell / pot superstructure. The company expects this segment to be an important part of its growth story going ahead. Also, HCC is undertaking certain special projects like building India’s first strategic crude oil storage at Vishakhapattanam (Andhra Pradesh) or constructing a strategic crude oil storage cavern in Karnataka. These initiatives are likely to broaden the company’s bouquet of offerings.

Asset ownership space: Solid beginning; ambitious plans With PPP projects gaining favour, HCC has embarked on an ambitious exercise to build an asset ownership portfolio using its inherent E&C strength. Its wholly owned subsidiary, HCC Infrastructure, undertakes projects in this space. HCC’s current ~ USD 1.2 bn portfolio consists of six road BOT projects, of which one is operational, two are under development, and execution on three projects is yet to begin. The company plans to build a sizeable portfolio in transportation (roads, metro rail, railways, ports, and airports) and energy (hydro power, nuclear and thermal power) space over the next five years.

Table 2: HCC – BOT projects


Project Project statusProject type

Total cost (INR mn)

Debt (INR mn)

Grant (INR mn)

Equity (INR mn)

HCC's stake (%)

HCC’s equity

Nirmal Operational Annuity 3,150 2,520 0 630 100 630

Badarpur Under development Toll 5,720 4,000 0 1,720 100 1,720

Dhule - Palasner Under development Toll 14,200 10,650 0 3,550 37 1,314

Behrampore - Farakka Yet to achieve FC Toll 11,691 5,612 3,934 2,146 100 2,146

Farakka - Raniganj Yet to achieve FC Toll 13,784 7,168 4,145 2,471 100 2,471

Raniganj - Dhalkola Yet to achieve FC Toll 6,843 3,216 2,255 1,372 100 1,372

Total 55,389 33,166 10,335 11,888 9,652

Entry into new segments to boost growth in future


Construction

A brief background about its various BOT projects:

Nirmal BOT project: The company ventured into the BOT space through the INR 3.1 bn Nirmal BOT Project, an annuity project in Andhra Pradesh. This project, which was bagged in December 2006, achieved financial closure in October 2007. It has a concession period of 20 years including 30 months for construction. It was completed 100 days ahead of schedule and is eligible for an early completion bonus of INR 133 mn. The project has a semi-annual annuity of INR 238 mn. Badarpur toll project: The INR 5.7 bn project won in July 2008 involves construction of a 4.4 km elevated six lane highway at Badarpur on National Highway 2 near Delhi. It has a concession period of 20 years including 30 months for construction. The project achieved financial closure in December 2008 at the height of the liquidity crisis, highlighting HCC’s ability to tie up finances during the most challenging period. The project was won on a revenue share basis with HCC promising a 4.5% revenue share to NHAI. It is 67% complete and expected to be completed by 2010 end. The project is on NH-2, which is the Delhi-Kolkata road and sees some heavy traffic. Starting from Delhi, it goes through Faridabad in Haryana, Mathura, and the tourist hub of Agra on its way. Dhule-Palesner toll project: HCC bagged this INR 14.2 bn project in partnership with John Laing and Sadbhav Engg. HCC’s stake in the project, which has a concession period of 18 years, is 37%. The project achieved financial closure in December 2009 and is ~10% completed. The company expects to complete it by the mid of 2012. HCC will start sharing 2% revenues with the government seven years after the project becomes operational. The project is on NH-3, commonly known as the Agra-Mumbai highway, which runs through the cities of Indore, Gwalior, Nashik, Thane, and Mumbai. West Bengal projects: HCC won three BOT toll projects in February 2010 worth INR 28.6 bn for developing three contiguous road sections of 256 km on NH-34 (in West Bengal). It received a cumulative grant of INR 10.3 bn for implementing these projects. NH-34 is an important road connecting Kolkata to NH-31, the gateway to the North-Eastern states in India. The first BOT project involves the Baharampore and Farakka section (103 km), the second project involves the Farakka and Raiganj section (103 km), and the last project involves the Raiganj and Dalkhola section (50 km). While the concession period of the first project is 25 years, it is 30 years for the balance two projects.

Lavasa: At an inflexion point HCC, through its 100% owned subsidiary, HCC Real Estate (HREL), is developing Lavasa, free India’s first hill city. We believe that Lavasa has reached an inflexion point and is likely to redefine the company’s profile. It is on its way to emerge as a breakthrough project, changing the contours of domestic urban infrastructure development along with significant value enhancement for HCC. Lavasa is a planned city being developed by the private sector near Pune and Mumbai. The project is coming up on seven large hillocks surrounding the Varasgaon dam reservoir and has a 60 km lakefront. The city will eventually cover a vast expanse of over 25,000 acres (of which ~11, 000 acres have been acquired). HCC is the biggest shareholder in Lavasa with 65% stake. Lavasa being the largest urban infrastructure project in India has the potential to emerge as a game changer for HCC. While the project has been in progress for the past five-six years, we believe it has now reached an inflexion point. This is evident from the substantial progress in the first of the proposed four town centers as well as in the

Bouquet of quality road assets to enhance value



emergence of the broad contours w.r.t. overall vision and development plans for the entire city. With a variety of tie ups in place catering to the educational, entertainment, tourism, and hospitality sectors, Lavasa is now at a critical juncture in its journey, which will decide its eventual success in the metamorphosis from a weekend destination to a thriving urban center. The project was soft launched in October 2007 and has since notched up cumulative sales upwards of INR 11 bn. Its financial performance during the past two years is summarised below: Table 3: Lavasa financials (INR mn)


We have attempted to cover salient features of the project below: Concept: The concept of Lavasa has four major cornerstones:

• Focus on economic drivers, state-of-the-art infrastructure and development of a city in close harmony with nature.

• Use of private sector efficiency in planning, implementing, and ensuring sustainability.

• Incorporating best-in-class practices from similar urban centers developed abroad along with multitude of partnerships to cater to every aspect of city life.

• City governance Long term goal: To be a new urban center with a permanent population of 300,000 residents and tourist inflow envisaged at 2 mn per annum. Overall developed space will be upwards of 200 mn sq ft. Development will cover the entire socio-economic strata since the focus is on developing a new city rather than a ‘gated community’ catering to only a select segment of the society. Development plan: Lavasa will be developed over ~20 years, with completion planned by~2025. While the current plan revolves around four phases, the planning exercise is dynamic in nature and can adjust to change in the overall socio-economic environment. Indeed, some of the plans meant for later stages have been advanced, driven by the success of initial phases. The current plan is given below:

• Phase I: Dasve, Mugaon, Bhoini. Main aim to establish the Lavasa brand. Development will be mostly mixed use with focus on front-loaded economic drivers.

• Phase II: Focus on meeting residential demand driven through development of economic activities and scaling up of tourism, hospitality, and leisure activities.

• Phase III: Sakhari, Wadavali. In addition to residential development, focus on developing a commercial business district.

• Phase IV: Bhode, Mose, Saiv. Development of the second commercial business district.

FY09 FY10

Income from operations (includes other income) 2,120 4,816

Operating expenditure 770 2,721

EBT 1,350 2,095

EBT margin (%) 63.7 43.5

Tax 120 693

PAT 1,230 1,402

PAT margin (%) 58.0 29.1

Lavasa to emerge as a breakthrough project


Construction

USP of Lavasa: For the permanent population, the key draw will be an improved quality of life manifested in picturesque landscape, freedom from long commute and traffic jams. For tourists, the ‘pull factor’ will be the availability of various leisure and recreation facilities in the form of resorts, sports, cinemas, theatres, academies, theme parks, and wellness centers. HCC has entered into over 30 tie-ups in education, hospitality, and wellness for ensuring the project’s success. A host of factors, we believe, differentiate Lavasa from a typical real estate project. Lavasa will continue to generate revenues for HCC even after completion and handing over of real estate assets (both residential and commercial). This will be possible as the company will continue to have a stake in each of the SPVs involved in tourism, leisure, entertainment, etc. Also, city management (which will be a continuous process) as well as intellectual property rights will expand Lavasa’s revenue base.



Table 4: Lavasa tie ups


Entity Particulars Details

Hospitality

Fortune Select Dasve Business hotel - Welcome group 60 rooms

Novotel 4 star resort 200 rooms

Accor Convention and event center Capacity is 1500

Accor Mercure - luxury hotel 132 room

Accor Pullman - 5 star deluxe hotel 256 rooms

Hilton Group DoubleTree Hilton - 5 star boutique hotel 125 rooms

Langham Palace Luxury hotel 200 rooms

Langham Eaten Economy hotel 200 rooms

IHG Holiday Inn 200 rooms

Velvett Country Resort 125 rooms

Velvett Country Business hotel 125 rooms

Bona Sera Hotels Waterfront Shaw service apartments

SOL Hospitality Various dining options

International Leisure Consultants Dasvino Town and Country Club

Leisure activities

Lakeshore Water sports

Z–Bac Adventure Institute Outdoor adventure institute

Nick Faldo Golf Academy Golf course

Healthcare

Apollo Hospital Health care, medicity, medical tourism

Education

Ecole Hotelier de Lausanne Hotel management institute

Educomp Millennium residential school Residential school for 1,200 students

NSHM – Knowledge Campus, Kolkata Retail university

Symbiosis Multi disciplinary university

Christ University Multi disciplinary university

IBR, Berlin University Executive MBA programme

SBS, Oxford University Executive education programmes

US Space & Rocket Center Asia's first edutainment park Demonstrations of space and aviation technology through NASA synchronized curriculum and equipment


Construction

Funding: Funds for the current phase have already been tied up. The overall funding currently stands at ~ INR 23 bn, of which ~ INR 3 bn is the equity portion. Various banks/other financial institutions have invested in the project in the form of Deep Discount Convertible Debentures (DDCDs) / Compulsory Convertible Preference Shares (CCPS) / warrants. The overall funding through this mechanism is ~ INR 10.5 bn. The balance has come in the form of debt and customer advances. Table 5: Investments in Lavasa

Source: Company Edelweiss research

Key challenge: We believe Lavasa has crossed the initial hurdles pertaining to land acquisition, regulatory approvals, creating brand awareness. The big success, in our view, has been in gaining acceptability as a concept, since such a project is being tried for the first time in India. In our view, Lavasa’s eventual success will depend upon its ability to transform itself into a ‘first home’ destination. This will be possible only if it emerges as an urban centre with viable economic opportunities in terms of employment, education, and other necessities for its residents. For this, the key determinant will be Lavasa’s capacity to pull in manufacturing/services industries providing employment opportunities across the entire socio-economic strata. Evolution: We believe the hard yards related to design and conceptualisation and brand introduction and acceptance have already been put in. Hence, success of the first phase does not come as a surprise. Lavasa has already cleared the first milestone in terms of developing a significant base to attract the transient population i.e., those related to tourism (may include medical tourism eventually), business conventions etc. With a couple of hotels/resorts already operational and 1,500 hotel rooms under construction, the initial tourism aspect which will create the ‘word of mouth publicity’ has been catered to. The various tie-ups should help establish Lavasa as a buzzing tourist hotspot over the long term. Emerging as a manufacturing/services hub is likely to involve much more effort. In case of the manufacturing sector, only non-polluting industries will be allowed. The focus will be on attracting firms in bio-technology, IT/ITeS services, education and entertainment. We believe software firms from the Pune IT hub will be the first to shift to Lavasa. While currently it takes upwards of an hour to reach Lavasa from Pune, the distance between

Name of bank Type Amount (INR mn)

Axis Bank DDCD 2,250

Axis Bank CCPS 250

Bank of India DDCD 1,500

Allahabad Bank DDCD 500

Indusind Bank DDCD 500

Andhra Bank DDCD 250

United Bank of India DDCD 500

Allahabad Bank DDCD 500

ICICI Bank DDCD 2,500

Bennett, Coleman & Co. Warrants 813

Jammu & Kashmir Bank DDCD 1,000

Total 10,563

Long-term plan, but deep inherent value



Hinjewadi Phase III (major presence of IT companies) and Lavasa will be reduced to ~30 km post the construction of a tunnel. The tunnel will obviate the need of traversing the hilly terrain and ensure much better connectivity. To this end, we view completion of the tunnel as a key milestone for Lavasa in the short to medium term. By the time the tunnel is completed in 2012, the Dasve township will also have seen operations stabilising. Also, the student population will have reached a sizeable level, acting as an economic driver for many other ventures. Over the long term, the city’s success and consequently its valuations will be influenced by two factors: • Visibility on corporate tie ups, which will result in companies setting up facilities in

Lavasa. This will improve the city’s population base as well as advance its overall economic activity.

• Lavasa boasts of a ‘Global FSI’ which currently is at 0.2. It may be enhanced to 0.3 going ahead which could be beneficial for Lavasa.

Lavasa impact on HCC: The sheer amount of value that can be potentially created in Lavasa means that it can emerge as a game changer for HCC. Within just a year of its launch, Lavasa matched HCC’s core contracting business in terms of absolute profits in FY09 and actually surpassed it in FY10. Going ahead, while the parent company is likely to grow at a steady pace, Lavasa’s growth is likely to be exponential. Thus, the project can potentially change the HCC Group’s growth profile going ahead.

Realty initiatives: Entering the value creation zone HCC’s realty initiatives are being carried out through HCC Real Estate (HREL), its 100% owned subsidiary. HREL has already completed the first phase of 247 Park (a corporate park in Vikhroli, Mumbai) and now plans to go ahead with its second phase. It also has plans to undertake a slum rehabilitation project in Vikhroli (E), Mumbai. Details of various realty initiatives are given below: 247 Park: 247 Park is a 1.8 mn sq ft corporate park located in Vikhroli (W) on LBS Marg, an upcoming business hub in Mumbai. Possessing a LEED gold certification, it is India's largest standalone green building and boasts of a leasable space of 1.2 mn sq ft. Construction on the project has been completed and ~90% space has been leased at an average rent of INR 70/sq ft. The company is now going ahead with the second phase of developing 1.55 mn sq ft (leasable area of 0.75 mn sq ft). This INR 3.3 bn project is expected to take off from October 2010. SRS project: HCC owns a 14.8 acre land and has acquired another 13.2 acres at Hariyali village, Vikhroli (E), Mumbai. It plans to undertake an integrated real estate development project here in phases. Currently, the entire 28 acres of land has been occupied by slum dwellers. The land parcel has been declared as a slum under the Slum Rehabilitation Act (SRA) of 1973. The company has received the consent of more than 70% slum dwellers (minimum required for the project) to be classified under the SRA for the first phase of 14.8 acres. It has filed for the requisite regulatory approvals to develop the land parcel and expects to start construction during the current year.

Exploring new growth avenues in realty ventures


Construction

Karl Steiner acquisition: HCC recently acquired 66% stake in Swiss developer, Karl Steiner AG (KSAG), by issuing new shares worth CHF 35 mn. The money will be infused in KSAG as fresh capital. HCC will buy the balance 34% from KSAG’s owner Peter Steiner in 2014 at a pre-agreed price based on KSAG’s earnings from the current year to 2013. KSAG specializes in the construction of world-class integrated buildings and is the second largest operator in the Swiss real estate market with a market share of 18%. KSAG is a total solutions provider for real estate services—planning and developing real estate projects, undertaking construction and renovation work. HCC has acquired the company’s core Swiss business, which represents a relatively stable turnover of CHF 700 mn and has 370 employees. It has constructed over 1,200 residential projects, 540 office buildings, 45 hotels, and 150 social infrastructure buildings. We believe this acquisition will help HCC gain a foothold in the fast growing ‘building construction’ segment in India, Europe, and the Middle East. The company also plans to use KSAG’s expertise in Lavasa. While we await financial details of KSAG to ascertain the impact of the acquisition on HCC’s financials, we believe the acquisition makes sense from a business strategy point of view, creating opportunities in a hitherto unexplored segment for HCC.



Valuation As HCC is an infrastructure conglomerate with exposure to EPC, real estate, and BOT businesses, we have valued the company using the sum–of-the-parts (SOTP) approach, applying the following methodology across its three business segments: EPC business: We have valued the EPC business via the P/E method, in line with our methodology for valuing other construction companies. We have assigned a P/E multiple of 12.0 to HCC’s FY12E EPS of INR 4.9. BOT segment: BOT projects have been valued by using the DCF methodology. We have used the ‘free cash flows to equity’ method by using a cost of equity of 13%. For projects under development, we have used a higher equity cost of 13.5% to take into account execution risks. We have not assigned any value to the three new projects pending financial closure. Lavasa: We have valued Lavasa at INR 52/share. We have currently valued 12,500 acres in Lavasa, for which land acquisition has been substantially completed. For the residential and commercial spaces, we have used the DCF methodology with graded escalation in selling price in each phase using a higher discount rate for back-ended projects. We have valued the hotel properties in Lavasa using the EV/EBITDA approach. Real estate ventures: We have valued the first phase of 247 Park on NAV basis at INR 4.1 bn, which translates in to ~ INR 14/share. We have valued the potential investment by HCC for KSAG acquisition at book value. We have not valued the SRA project in Vikhroli (E) for the time being as we await more clarity on the timeframe for development of the same. Our sum-of-the-parts-based target price for the stock is INR 146. We initiate coverage on the stock with a ‘BUY’ recommendation. On relative return basis, the stock is rated ‘Sector Outperformer’.


Construction

Table 6: Valuations

Source: Edelweiss research

Particulars

Construction business

Contracting PAT FY12E (INR mn) 1,500

Outstanding No of HCC shares 303

Contracting EPS FY12E (INR/share) 4.9

P/E multiple (x) 12

Value per share (INR/Share) 59

BOT projects

DCF value of projects (INR mn) 4,940

Value per share (INR share) 16

Lavasa

Value of Lavasa (INR mn) 15,678

Value per share (INR/share) 52

Real estate

Value of 247 Park (INR mn) 4,136


Investment in KSAG at FY11 end (INR mn) 1,500

P/BV multiple (x) 1.0

Value derived from KSAG investment (INR mn) 1,500


Total value per share from real estate (INR/share) 19

Total value per share 146

Current share price 110

Upside (%) 32.4

RECO BUY



Key Risks

Equity dilution threat HCC has ventured into real estate and BOT segments, both of which entail upfront investments with returns generally being back-ended. In this context, fund raising in Lavasa has emerged as a key monitorable for the company. Notwithstanding this, there will be demands on the company’s balance sheet since the core contracting business also requires funds. Also, working capital management has become a key issue for the company which has stretched its working capital cycle in FY10.

Execution risk due to long gestation projects The company’s order book is geared towards hydel projects that are typically long gestation and mostly in difficult terrains. There are inherent risks in execution of such a long duration portfolio.

Slowdown in Andhra Pradesh Andhra Pradesh had been a major source of orders for most companies during the past four-five years, particularly in the irrigation segment due to the Jalayagnam project. However, most companies have faced delays in payments during the past seven-eight months due to the state government’s stressed financial condition (exacerbated by the Telangana statehood issue). As a result, most companies have slowed down execution on projects in the state till clarity emerges on the situation. Chart 7: Share of Andhra projects in order book


Though HCC has reduced its exposure to the state, it still stands at a substantial 19% of the order book. Continued uncertainty in the state may lead to slow execution and/or stretched working capital cycle due to payment delays.

0.0

7.0

14.0

21.0

28.0

35.0

Irrigation projects

Water supply projects

Cavern project Road project Total

(%)

2008-09 2009-10


Construction

Company Description

HCC is a leading civil engineering and construction company, engaged primarily in the construction of hydel and power projects, irrigation, water supply, urban infrastructure and transportation projects. It is developing Lavasa, an ambitious project aimed at creating a hill city near Mumbai and Pune. Apart from this, it is also involved in some other real estate development projects. HCC is also making inroads in the asset ownership space with entry into the roads space and has plans to build its BOT portfolio significantly going ahead. Most of its customers are central government bodies/public sector units like NHAI, NHPC, NPCIL and state governments like Andhra Pradesh, Gujarat, and Maharashtra. It has also worked on hydel power projects in other counties like Bhutan.

Fig. 1: HCC Group structure


A snapshot of the work done by the company in various segments is given below:

Hydel power: HCC has built over 25% of India’s installed hydel power capacity. It has been involved in two out of India’s five largest underground power houses and five out of India’s top 10 highest concrete dams. It is currently executing India’s largest EPC hydel power project, the Kishanganga hydel power plant. The company has also worked on a couple of hydel power projects in Bhutan. HCC’s major achievements in this segment are:

• Building India’s first major underground power house at Maithon (Bihar) in 1954; the first of its kind in South East Asia.

• Tunneling work of over 90 km in the Himalayas; maximum tunneling work ever done by any construction company in the world.

• Construction of head race tunnel and surge shaft at the Nathpa Jhakri hydel plant, the largest underground hydel power project in India. This plant has the largest and longest head race tunnel, the largest desilting chambers, the deepest and largest surge shaft, and the largest underground power complex.

Nuclear power: HCC is the leader in nuclear power plant construction in India and has been associated with over 50% of the country’s operational nuclear power capacity. The company has recently worked on Asia’s largest nuclear power plant in Kudankulam (2x1000 MW) which is also India’s first light water reactor (LWR). The list of operational nuclear power plants where HCC has worked is given below:

HCC Real Estate (HREL)Real estate development arm

Lavasa CorporationDevelopment of Lavasa

HCC Group

HCC Ltd

Engineering and construction arm

HCC InfrastructureAsset ownership subsidiary

100% subsidiary 100% subsidiary

65% subsidiary



Table 7: List of nuclear power projects executed by HCC


In addition to the above projects which are operational, the company has recently won an INR 8.9 bn project for the RAPS nuclear power plant (Rajasthan) units 7 and 8.

Table 8: New projects in nuclear power space

Source: NPCIL, Company, Edelweiss research

Water supply and irrigation: HCC has built seven dams for irrigation projects along with 18 major barrages (with a combined length of more than 12,000 meters), 35 large water treatment plants, and 70 large sewerage treatment plants. It has built the Farakka barrage (2,253 meter long), which is the longest barrage in the world, and has recently been included into the Guinness Book of World Records. Transportation projects: HCC has completed more than 3,600 lane-kms of highways over the years. It has been associated with over 300 road and rail bridges, the country’s first two metro rail projects, and over 2,200 km of roads. Some of its major projects in this space are:

• India’s first sea-link, the Bandra-Worli sea-link project.

• India’s first access controlled rigid pavement expressway project, the Mumbai-Pune Expressway project.

• The Naini-Allahabad bridge, India's first cable stayed four lane road bridge.

S. No Plant UnitCapacity

(MW)Date of commercial

operation

1 Tarapur Atomic Power Station (TAPS) , Maharashtra 1 160 October 28, 1969

2 160 October 28, 1969

2 Rajasthan Atomic Power Station (RAPS), Rajasthan 1 100 December 16, 1973

2 200 April 1, 1981

3 220 June 1, 2000

4 220 December 23, 2000

5 220 February 4, 2010

6 220 March 31, 2010

3 Narora Atomic Power Station (NAPS), Uttar Pradesh 1 220 January 1, 1991

2 220 July 1, 1992

4 Kakrapar Atomic Power Station (KAPS), Gujarat 1 220 May 6, 1993

2 220 September 1, 1995

S. No Plant Unit

Capacity (MW)

Scheduled date of commercial operation

1 Rajasthan Atomic Power Station, (RAPS), Rajasthan 7 700 Jun-2016

8 700 Dec-2016


Construction

Financial Outlook

Revenue growth to pick up going ahead HCC’s order book/revenue ratio is at 5.2 currently, the highest since FY02. In addition, it is L1 in INR 44 bn worth of projects. This has led to good revenue visibility for the company. After a sluggish top line growth for a couple of years, we expect HCC’s execution rate to pick up, driven by a robust order book and the likelihood of strong order inflows. Against revenue CAGR of 8.5% between FY08 and FY10, we expect a top line CAGR of 19.4% in FY10-12E. Chart 8: Revenue growth


13% margins likely by FY12E; PBT margins set to improve The Bandra-Worli sea link imbroglio had impacted HCC’s margins prior to FY09. Margins improved to touch the 13% mark in FY09, but declined again in FY10 due to one off items. Going forward, we expect margins to recover and touch 13% by FY12E. With capital charges expected to be under control, we expect PBT margins to rise tracking the improvement in operating margins.

Chart 9: EBITDA margins – On an uptrend Chart 10: PBT margin – Regaining lost ground


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(IN

R b

n)

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0

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R m

n)

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FY06

FY07

FY08

FY09

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FY11E

FY12E

(%)

(IN

R m

n)

PBT PBT margins



Chart 11: Leverage level likely to be under control


HCC’s leverage stood at 1.7x at FY10 end. The company had raised USD 100 mn in FY10 through a QIP issue. Leverage could have been even lower, but for the increase in the company’s working capital cycle. Its net working capital cycle (excluding cash) increased to INR 24.0 bn in FY10 (66% of revenues) compared to INR 17.5 bn in FY09 (53% of revenues). This rise was primarily due to two reasons: increase in receivables for the company (due to delays in payments from NHAI and Andhra irrigation projects) and sharp jump in loans and advances to subsidiaries (INR 4.5 bn in FY10 against INR 1.9 bn in FY09). Loans and advances increased sharply in FY10 as the parent company extended support to its realty and infrastructure subsidiaries. We expect the deterioration in working capital cycle to be checked in the future. This, along with improvement in execution and margins going ahead, is likely to help the company keep leverage under control.

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(x)

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R b

n)

Net worth D/E ratio


Construction

Annexure I

Table 1: Type of nuclear power plants

Source: Edelweiss research

PWR Pressurised water reactor

PHWR Pressurised heavy water reactor

VVER Russian: Water-water energetic Reactor

EPR European pressurised reactor

ESBWR Economic simplified boiling water reactor

FBR Fast breeder reactor



Financial Statements

Income statement (INR mn)

Year to March FY08 FY09 FY10 FY11E FY12E

Income from operations 30,820 33,138 36,292 43,425 51,764

Direct costs 23,050 23,901 26,477 31,363 37,128

Employee costs 2,972 3,749 3,944 4,719 5,625

Other expenses 1,140 1,173 1,593 1,906 2,272

Total operating expenses 27,162 28,823 32,013 37,988 45,025

EBITDA 3,659 4,314 4,279 5,437 6,740

Depreciation and amortisation 962 1,152 1,139 1,338 1,484

EBIT 2,697 3,162 3,140 4,098 5,256

Interest expenses 1,524 2,244 2,262 2,677 3,130

Other income 387 727 340 147 148

Profit before tax 1,560 1,646 1,218 1,568 2,273

Provision for tax 473 392 404 533 773

Core Profit 1,087 1,254 814 1,035 1,500

Profit after tax 1,087 1,254 814 1,035 1,500

Adjusted net profit 1,087 1,254 814 1,035 1,500

Equity shares outstanding (mn) 256 256 303 303 303

EPS (INR) basic 4.2 4.9 2.7 3.4 4.9

Diluted shares (mn) 256 256 303 303 303

EPS (INR) fully diluted 4.2 4.9 2.7 3.4 4.9

CEPS (INR) 8.0 9.4 6.4 7.8 9.8

Dividend per share 0.8 0.8 0.8 0.8 0.8

Dividend payout (%) 22.1 19.1 34.8 27.4 18.9

Common size metrics- as % of net revenues


Operating expenses 88.1 87.0 88.2 87.5 87.0

EBITDA margins 11.9 13.0 11.8 12.5 13.0

Depreciation 3.1 3.5 3.1 3.1 2.9

Interest expenditure 4.9 6.8 6.2 6.2 6.0

Other income 1.3 2.2 0.9 0.3 0.3

Tax 1.5 1.2 1.1 1.2 1.5

EBIT 8.8 9.5 8.7 9.4 10.2

Net profit margins 3.5 3.8 2.2 2.4 2.9

Annualised growth metrics (%)


Revenues 29.4 7.5 9.5 19.7 19.2

EBITDA 52.7 17.9 (0.8) 27.1 24.0

Net profit 37.1 15.3 (35.0) 27.1 45.0

EPS 195.4 15.3 (45.1) 27.1 45.0


Construction

Balance sheet (INR mn)

As on 31st March FY08 FY09 FY10 FY11E FY12E

Equity capital 256 256 303 303 303

Reserves & surplus 9,784 9,792 14,869 15,620 16,836

Shareholders funds 10,041 10,049 15,172 15,923 17,140

Secured loans 5,208 9,041 9,630 10,630 11,130

Unsecured loans 13,241 14,177 15,517 18,566 21,340

Borrowings 18,449 23,218 25,147 29,197 32,471

Net deferred tax 1,133 1,132 1,426 1,426 1,426

Sources of funds 29,622 34,398 41,745 46,546 51,037

Gross block 14,097 16,828 18,142 20,142 22,392

Depreciation 4,566 5,547 6,645 7,983 9,467

Net block 9,531 11,282 11,497 12,159 12,925

Capital work in progress 675 464 349 349 349

Total Fixed Assets 10,206 11,746 11,845 12,507 13,273

Investments 2,955 3,655 4,087 7,087 9,087

Inventories 21,680 27,766 35,652 41,469 46,597

Sundry debtors 45 47 27 32 38

Cash and equivalents 2,644 1,539 1,883 1,334 1,919

Loans and advances 2,733 5,322 8,681 9,518 11,346

Total current assets 27,101 34,674 46,242 52,353 59,900

Sundry creditors and others 10,174 14,026 18,520 22,638 27,985

Provisions 466 1,651 1,910 2,763 3,239

Total CL & provisions 10,640 15,677 20,430 25,401 31,223

Net current assets 16,461 18,997 25,813 26,952 28,677

Uses of funds 29,622 34,398 41,745 46,546 51,037

Book value per share (BV) 39.2 39.2 50.0 52.5 56.5

Cash flow statement (INR mn)


Net profit 1,087 1,254 814 1,035 1,500

Add: Depreciation 962 1,152 1,139 1,338 1,484

Add: Deferred tax 278 365 402 0 0

Gross cash flow 2,087 2,531 1,924 2,090 2,701

Less: Changes in W. C. 1,755 3,641 6,471 1,688 1,139

Operating cash flow 332 (1,110) (4,547) 401 1,561

Less: Capex 2,248 2,520 1,198 2,000 2,250

Free cash flow (1,916) (3,631) (5,745) (1,599) (689)

Cash flow metrices


Operating cash flow 332 (1,110) (4,547) 401 1,561

Financing cash flow 2,938 4,769 6,522 4,050 3,274

Investing cash flow (2,917) (3,220) (1,630) (5,000) (4,250)

Net cash flow 353 439 345 (549) 585

Capex (2,248) (2,520) (1,198) (2,000) (2,250)

Dividends paid (240) (240) (284) (284) (284)

Share issuance / (buyback) 0 0 4,593 0 0



Ratios


ROAE (%) 11.4 12.5 6.5 6.7 9.1

ROACE (%) 10.8 11.0 9.2 10.6 12.9

Current ratio 2.5 2.2 2.3 2.1 1.9

Debtors (days) 0 1 0 0 0

Inventory days 309 378 437 449 433

Interest coverage ratio (x) 1.8 1.4 1.4 1.5 1.7

Average working capital turnover (x) 2.0 1.9 1.6 1.6 1.9

Average capital turnover ratio (x) 1.2 1.2 1.1 1.1 1.3

Net debt/ Equity 1.6 2.2 1.5 1.7 1.8

Debt/Equity 1.8 2.3 1.7 1.8 1.9

Creditor Days 147 185 224 239 249

Cash conversion cycle 162 193 213 210 184

Debt/EBITDA 5.0 5.4 5.9 5.4 4.8

Adjusted debt/Equity 1.8 2.3 1.7 1.8 1.9

Operating ratios


Total asset turnover 1.1 1.0 1.0 1.0 1.1

Fixed assets t/o (x) 3.6 3.2 3.2 3.7 4.1

Equity turnover 3.2 3.3 2.9 2.8 3.1

Dupont analysis


NP margin (%) 3.5 3.8 2.2 2.4 2.9

Total assets turnover 1.1 1.0 1.0 1.0 1.1

Leverage multiplier 2.9 3.2 3.0 2.8 3.0

ROAE (%) 11.4 12.5 6.5 6.7 9.1

Valuation parameters


Diluted EPS (INR) 4.2 4.9 2.7 3.4 4.9

Y-o-Y growth (%) 195.4 15.3 (45.1) 27.1 45.0

CEPS (INR) 8.0 9.4 6.4 7.8 9.8

Diluted P/E (x) 26.0 22.5 41.1 32.3 22.3

Price/BV(x) 2.8 2.8 2.2 2.1 2.0

EV/Sales (x) 1.6 1.7 1.6 1.4 1.2

EV/EBITDA (x) 13.5 12.8 13.3 11.3 9.5

Dividend yield 0.7 0.7 0.7 0.7 0.7

Basic EPS (INR) 4.2 4.9 2.7 3.4 4.9


Construction

Company Absolute

reco

Relative

reco

Relative

risk

Company Absolute

reco

Relative

reco

Relative

Risk

BL Kashyap & Sons Ltd BUY SP H C and C Construction BUY SO L

Gammon India BUY SP M IRB Infrastructure BUY SO L

IVRCL Infra BUY SO L Jaiprakash Associates BUY SU H

Nagarjuna Construction Co BUY SO L Patel Engineering Ltd BUY SP M

Simplex Infrastructures Ltd REDUCE SU M

RATING & INTERPRETATION

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria

Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria

Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return



Edelweiss Research is also available on www.edelresearch.com ,Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021, Board: (91-22) 2286 4400, Email: [email protected]

Vikas Khemani Head Institutional Equities [email protected] +91 22 2286 4206

Nischal Maheshwari Head Research [email protected] +91 22 6623 3411

Coverage group(s) of stocks by primary analyst(s): Construction: BL Kashyap & Sons, Gammon India, Hindustan Construction, IVRCL Infrastructures & Projects, JMC Projects (India), Madhucon Projects, Nagarjuna Construction, Patel Engineering and Simplex Infrastructures.

Hindustan Construction EW Indices

This document has been prepared by Edelweiss Securities Limited (Edelweiss). Edelweiss, its holding company and associate companies are a full service, integrated investment banking, portfolio management and brokerage group. Our research analysts and sales persons provide important input into our investment banking activities. This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied on as such. Edelweiss or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors. We and our affiliates, group companies, officers, directors, and employees may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as advisor or lender/borrower to such company (ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Edelweiss and affiliates/ group companies to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. Edelweiss reserves the right to make modifications and alterations to this statement as may be required from time to time. However, Edelweiss is under no obligation to update or keep the information current. Nevertheless, Edelweiss is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Neither Edelweiss nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Past performance is not necessarily a guide to future performance. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. Edelweiss Securities Limited generally prohibits its analysts, persons reporting to analysts and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Analyst holding in the stock: no.

Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved

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Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 101 56 9 169

* 3 stocks under review

Market Cap (INR) 103 53 13

> 50bn Between 10bn and 50 bn < 10bn

Buy Hold Reduce Total

Recent Research

18-May-10 Gammon Steady performance; 198 Buy India Result Update 18-May-10 Patel Going strong; 421 Buy Engineering Result Update 30-Apr-10 IRB Strong performance; 289 Buy Result Update

Date Company Title Price (INR) Recos

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105

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180

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R)

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1,400

5-Jun-09 5-Dec-09 5-Jun-10

Hindustan Construction Co. Ltd.

EW Construction Index

Nifty

Documents

India Equity Research | Construction Initiating Coverage ... Hindustan Construction Company (HCC), with more than eight decades of experience in the engineering and construction (E&C)