IVRCL vs HCC: Which is a better infra play? - Views on News from Equitymaster

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IVRCL vs HCC: Which is a better infra play?

Jan 7, 2011

Comparing companies across the construction space is a difficult task as apart from core construction business, the valuations are predominantly driven by embedded values. Hence, there may be wide differences in earnings multiple across companies, increasing the possibility of assuming the lower multiple business as the best bet. This could prove to be fatal as the overall business might appear cheap (lower multiple one) due to the non-performance of the embedded businesses. Now, let us first make it clear for our readers what embedded business actually means in the construction industry parlance. Except for the core construction business, any other venture which the construction company undertakes could be deemed as an embedded business. For instance, construction companies have exposure to the real estate and asset ownership space. Asset ownership includes projects undertaken on BOT basis by the company. Sometimes these embedded values have a larger share in the overall business, thus driving valuations. Hence, those factors have to be considered while comparing construction companies.

In this article, we make an effort to compare two leading players in the construction industry: - IVRCL Infrastructures (IVRCL) and Hindustan Construction Company (HCC). We have shortlisted a few parameters, including the embedded ones to effectively compare the two companies.

Operating Margins

The following table displays the EBITDA margins of the two companies over the last five years:-

EBITDA Margins FY06 FY07 FY08 FY09 FY10
IVRCL 9.0% 10.1% 9.9% 8.6% 9.7%
HCC 9.3% 10.1% 11.9% 13.0% 11.8%

A cursory look at the table reveals that the EBITDA margins of HCC have been consistently higher than IVRCL. This is mainly due to higher share of hydro power projects in the order book. Hydro power projects typically command higher margins due to the technical nature of the work involved. Thus, in terms of margins HCC scores over IVRCL.

Net Working Capital Cycle

The following table displays the net working capital cycle of the two companies over the last five years:-

Net Working Capital Cycle FY06 FY07 FY08 FY09 FY10
IVRCL 122 179 179 164 139
HCC 77 185 164 192 241

The working capital cycle of HCC has been deteriorating due to higher share of hydro power projects which have long gestation period. Apart from this, the share of government projects in HCCs overall order book has increased recently. Higher share of government projects can stretch the working capital cycle due to possible delays in payment from government. Although IVRCL has higher share of government projects when compared to HCC its working capital cycle has improved recently due to improving situation in Andhra Pradesh, where most of the finances were blocked until now. Thus, in terms of working capital management, IVRCL scores over HCC.

BOT Asset Portfolio

The following table reveals the BOT asset portfolio of the two companies:-

BOT Asset Portfolio IVRCL HCC
Asset size (Rs bn) 130 55
No of Assets 13 4*
* 3 stretches in West Bengal are considered one

IVRCL has a much larger BOT asset portfolio. However, in an environment where credit is hard to come by, one needs to look at the funding requirement rather than size. BOT assets typically have a D/E of 70:30. Hence, companies who are yet to tie up debt or infuse equity in BOT assets are vulnerable if the interest rate cycle moves upwards. Further, if the parent is unable to bring in the necessary equity, it will have to dilute the stake and rope in some strategic investor. However, valuations play a key role here. Right now, IVRCL is aggressively looking to raise equity in order to meet the funding requirements of the current projects in hand. Even HCC is looking out for strategic investors to dilute stake at the SPV level. Here, we believe HCC has an edge due to lower number of projects in hand.

Real Estate Exposure

Both the companies have exposure to real estate sector. Although IVRCL owns huge land reserves, it plans to sell off the land bank at appropriate price and exit from the real estate business soon. On the other hand HCC has a huge real estate component. The company plans to create a one its kind hill city in Lavasa. However, the project has been under the environment scanner off late. Thus, HCCs real estate exposure (embedded value) faces severe execution risk as of now. In this case, we believe IVRCL has a slight edge over HCC.

Thus, comparing the two companies on the above set of parameters reveals an interesting picture. Although the core construction business for both the companies overlaps the embedded values tell a different story, making the comparison difficult.

Since embedded value typically plays a larger role in valuations one has to be careful while selecting any construction company. We typically look out for companies that do not indulge in dilution frequently, undertake sensible bidding (better RoEs) and have better managed working capital cycle. This reduces the margin of error.

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12 Responses to "IVRCL vs HCC: Which is a better infra play?"

dilip r.nagda

Mar 27, 2011

HCC is better in terms of return



Jan 26, 2011

Both stocks have sunk in to seemingly a bottemless pit.
IVRCL is less than half of its peak last year. HCC also down in dumps due to regulatory issues.



Jan 25, 2011

what is BOT and RoC's give full details of the abbriviattions. One has to derive his own conclussion out of the blurred up picture shown in the article, kindly provide something decissive.



Jan 17, 2011

The study is good. However the article does not conculde with the response to the title. I wonder why the author is sitting on the fence. Please be clear on the opinion based on data. Whether IVRCL or HCC is better is still not clear. Even the Bharti & RCOM comparison does not have any favoured conclusion.

Equitymaster- Please improve on these apsects


jiwan kumar puri

Jan 16, 2011

ivrcl is better and free from legal problem.it is my personal view and ivrcl has mariginal edge over hcc



Jan 16, 2011

why to go for constructio when analyst not clear for the sector ,buy ithl when indian economy is booming and per capita income on the rise buy, ithl make fate your portfolio



Jan 15, 2011

I find the comparison interesting but feel the equitymaster shies away from giving a firm opinion. The right question was posed in the header of the article but answer was deliberately not provided. Disappointing article!



Jan 15, 2011

HCC is better.



Jan 14, 2011

ivrcl better than hcc stock.



Jan 14, 2011

of course IVRCL

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