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Phoenix Rises

Poised to reclaim last glory: 10-year slog improves financial health

Once the toast of India’s infrastructure space, Hindustan Construction Company (HCC IN) saw its fortunes wither away post FY11 due to the policy paralysis and delayed decision-making by the government, which also dealt a serious blow to the construction industry. After a decade and a slew of measures, including debt restructuring, dispute settlement and non-core asset monetization, the company is ready to flex its muscles, as India bulks up on large infra opportunity. HCC’s 10-decadeold experience of executing in-house complex & marquee projects, 26% of hydro power capacity and 60% share of India’s civil nuclear power capacity positions it to capture on INR 1.5tn nuclear opportunity.

Stars align for growth: debt burden starts to lessen

Peak consolidated debt including accrued interest was INR 122bn in FY15, which reduced by 71% to INR 35bn in FY24. Peak standalone debt of INR 62bn in FY22 fell by 45% to INR 34bn in FY24 and stabilized. Standalone finance cost declined to INR 5.4bn in FY24 vs INR 9.5bn in FY22. We expect net worth to turn positive from FY26 (peak negative of INR 13bn in FY21). We are optimistic the company will move into a sustainable high growth phase thereafter. The Vivaad Se Vishwas Scheme to help in faster recovery of outstanding awards worth INR 23bn in favor of HCC. The historical average award to cash conversion time is four years with average collection at ~87% of claim amount.

Pipeline trends: INR 100bn inflows in FY25; rising 15% thereafter

Recent credit ratings upgrade and removal of restrictions on bank guarantee limits allow HCC to bid for new contracts. It is in L1 position on INR 45bn orders, bids under evaluation of INR 104bn, and pipeline of INR 464bn across power, hydro, roads, nuclear and transportation. We expect INR 90bn inflows in FY25E vs guidance of INR 100bn, increasing by 15% pa for the next two years. Partnerships with PE investors would help the firm bid for long-term PPP projects, leading to less strain on balance sheet. India | Infrastructure 10 June 2024 Initiating Coverage Hindustan Construction Rating: Buy Target Price: INR 63 Upside: 65% CMP: INR 38 (as on 7 June 2024) Key data Bloomberg /Reuters Code HCC IN/HCC BO Current /Dil Shares O/S (mn) 1,680/1,744 Mkt Cap (INR bn/USD mn) 64/772 Daily Volume (3M NSE Avg) 21,146,077 Face Value (INR) 1 1 USD = INR 83.4 Note: *as on 7 March 2024; Source: Bloomberg Price & Volume Source: Bloomberg Shareholding (%) Q1FY24 Q2FY24 Q3FY24 Q4FY24 Promoter 18.6 18.6 18.6 18.6 Institutional Investor 17.4 15.1 17.3 17.0 Other Investor 13.7 12.9 11.3 11.1 General Public 50.3 53.4 52.9 53.4 Source: BSE Price performance (%) 3M 6M 12M Nifty 3.5 11.4 24.4 HCC 13.2 38.2 130.3 NCC 25.5 85.7 164.8 Patel Engineering (5.3) (2.8) 109.0 ITD Cementation 27.8 56.3 164.2 Source: Bloomberg

Valuation

Given past experience and large opportunity landscape, we remain hopeful of turnaround in financials from FY25 and further strengthening from FY26. We expect a standalone revenue and EBITDA CAGR of 20% each during FY24-27E with an earnings CAGR at 50%, due to lower interest cost. We initiate on HCC with a Buy rating and a TP of INR 63, implying 65% upside. Our TP is based on an SOTP valuation; we assign INR 42 for core construction business at 13x avg FY26-27E P/E (at a 10% discount to peer average), value of wholly owned subsidiaries, HICL and Steiner AG, at INR 10 based on equity invested, awards in favor of HCC at current value of INR 9 and a 49% stake in PRPL at INR 2 based on third-party valuation. Senior management leadership team has been strengthened to drive the next leg of growth and promoter stake sustained at ~18.6% post rights issue (INR 3.5bn for growth capital).

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