Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 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.
HCC: Riding the infrastructure wave! - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • May 8, 2006

    HCC: Riding the infrastructure wave!

    The future of almost all sectors of the Indian economy hinges on the availability of good infrastructure roads, ports, telecommunication, airports, power, railways and water supply. Currently, on the back of rising demand and consumption, the existing infrastructure setup seems to be crumbling. Lack of decent infrastructure in India is the single largest bottleneck to economic growth. The government has, however, recognised the need for the better infrastructure and has taken positive policy measures in the past few years. More of private investment is being welcomed in the sector, which has attracted many players to be a part of infrastructure creation in the country. Hindustan Construction Company (HCC) is one of the larger players in this business. In this write-up, we shall analyse the past performance of the company, its current status and study where is the company headed into the future.

    About HCC
    HCC is one of the largest private sector construction companies in India and the foremost in infrastructure building. The company has been involved in the construction of diverse projects ranging from power dams, highways and bridges to marine structures, water supply, factories and waste treatment plant. Apart from the domestic presence, HCC has executed several projects overseas in countries like Iraq, Nepal and Tanzania. Towards this, the company has entered into a number of technical collaborations as well as joint ventures with overseas players, bringing the latest technical know-how into the execution of its projects. Further, the company has created a technical consultancy capability, which will be involved in the design and engineering aspects of construction. During the period between FY02 to FY06, HCC has grown its revenues and net profits at compounded rates of 50% and 31% respectively.

    Financial analysis
    Increased investment in infrastructure development and higher order inflows for the HCC has helped the company to grow strongly in the past few years. As seen from the table below, the company has been pretty consistent in growing its topline over the past few years. However, in line with the industry performance, operating profitability has taken a severe hit. From earning near 20% operating margins in FY02, HCC's margins declined to around 9% in FY06.

    Financial snapshot (Standalone)
    (Rs m) FY02 FY03 FY04 FY05 FY06
    Net Sales 3,948 6,772 10,579 14,873 19,870
    % Growth   71.6% 56.2% 40.6% 33.6%
    EBITDA 782 1155 1433 1542 1829
    EBITDA margins (%) 19.8% 17.1% 13.5% 10.4% 9.2%
    Other Income 78 59 (15) 56 61
    Depreciation 222 341 438 453 524
    EBIT 637 873 980 1,145 1,366
    EBIT margins (%) 16.1% 12.9% 9.3% 7.7% 6.9%
    Interest 257 421 376 395 414
    PBT 380 452 605 750 952
    Extraordinary interest 201 - - - 431
    Tax 154 166 248 10 135
    Net profit 427 287 357 740 1,248
    % Growth   -33.0% 24.5% 107.4% 68.6%
    Net profit margin (%) 10.8% 4.2% 3.4% 5.0% 6.3%
    Diluted earnings per share (Rs) 1.7 1.1 1.4 2.9 4.9

    The margin depletion should be understood considering the fact that the Indian construction industry has witnessed a tremendous influx of new players in the past few years, each trying to capture a chunk of the growing investment pie. This has led to severe depletion in profitability for existing players like HCC and IVRCL, who have seen sharp contraction in their margins over these years. With rising input costs (mainly cement and steel), the problems have only compounded for construction players. We believe that this situation (of contracting profitability levels) is likely to prevail in the future as well, unless companies develop competencies to execute higher end construction projects (like what L&T is doing).

    Depletion in operating margins has taken a toll on HCC's net profits as well, which have seen volatile growth during this period. As a matter of fact, the company's net margins stood at a mere 6.3% during FY06 (10.8% in FY02).

    In these times of high competition and reducing profitability, most of the construction companies in India are targeting the build-operate-transfer (BOT) model of infrastructure creation. This models also stands in good stead for the government, as it is an effective way to attract the much required private sector investment into the infrastructure development. HCC is no behind with respect to the BOT model. In fact, to finance its aggressive foray into taking up BOT projects (apart from for other investment purposes), the company, in 4QFY06, has raised US$ 100 m by way of Zero Coupon Convertible Bonds. This is in addition to the US$ 100 m that was raised by way of a GDS issue. While BOT is an effective way to improve profitability (as costs are generally of fixed nature and incremental toll revenues accrue directly to the bottomline), it has its negatives with respect to uncertainty of toll revenues as contracts are of very long nature (generally 20 to 30 years).

    What to expect?
    At the current price of Rs 168, the stock is trading at a price to earnings multiple of 34.5 times its standalone FY06 earnings. In being a participant to infrastructure creation in the country in the past, we believe that HCC has attained a critical mass in terms of resources, technology and manpower skill sets with excellent technical tie-ups and partnership with leaders in different infrastructure segments. The company is also eyeing other emerging markets and efforts made towards technology absorption, adaptation and innovation. While growth in order book and topline terms shall not pose any major problem, investors need to look out for quality of such growth (profitability). In the medium term, valuations are also an issue. We shall soon be initiating our coverage on HCC.



    Equitymaster requests your view! Post a comment on "HCC: Riding the infrastructure wave!". Click here!


    More Views on News

    Sorry! There are no related views on news for this company/sector.

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 18, 2017 (Close)


    • Track your investment in HIND. CONSTRUCTION with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
    • Add To MyStocks



    Detailed Quarterly Results With Charts