X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2019 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
IVRCL vs HCC: Which is a better infra play? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

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 HCC’s 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, HCC’s 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 RoE’s) and have better managed working capital cycle. This reduces the margin of error.


Equitymaster requests your view! Post a comment on "IVRCL vs HCC: Which is a better infra play?". Click here!

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

Like 

rk77

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.

Like 

ms

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.

Like 

George

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

Like 

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

Like 

ngb

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

Like 

ak

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!

Like 

mah

Jan 15, 2011

HCC is better.

Like 

charan

Jan 14, 2011

ivrcl better than hcc stock.

Like 

JB

Jan 14, 2011

of course IVRCL

Like 
Equitymaster requests your view! Post a comment on "IVRCL vs HCC: Which is a better infra play?". Click here!

More Views on News

IRCON International IPO: Is This PSU Worth Betting On? (IPO)

Sep 17, 2018

Should you subscribe to the IPO of IRCON International Ltd?

Capacit'e Infraprojects Ltd. (IPO)

Sep 12, 2017

Should you subscribe to the IPO of Capacit'e Infraprojects Ltd?

Bharat Road Network Ltd. (IPO)

Sep 5, 2017

Should you subscribe to the IPO of Bharat Road Network Ltd?

More Views on News

Most Popular

Stocks that Could Be Out of Reach Post Elections(The 5 Minute Wrapup)

Apr 9, 2019

It's a matter of time before the stocks catch the fancy of the markets and big investors.

3 Indian Stocks with Amazon-Like Potential(Profit Hunter)

Apr 10, 2019

We have identified 3 stocks with huge wealth building potential which meet our 'Click of a Button' criteria.

This Company is Making a Big Comeback and You Can Now Profit from Its Example(The 5 Minute Wrapup)

Apr 10, 2019

How Dell got its mojo back.

This is Why the Stock of Jubilant FoodWorks Went Up 1,160%(The 5 Minute Wrapup)

Apr 12, 2019

This critical business strategy has enabled companies to scale their operations faster.

Pocketing Massive Gains with HDFC And HDFC Bank(Profit Hunter)

Apr 12, 2019

Here's how one could have generated gains of Rs 59,250 in 10 days by trading HDFC and HDFC Bank with a capital of Rs 4 lakh.

More

Get the Indian Stock Market's
Most Profitable Ideas

How To Beat Sensex Guide 2019
Get our special report, How to Beat Sensex Nearly 3X Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE REALTY


Apr 18, 2019 (Close)

S&P BSE REALTY 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS