The move to diversify into building construction through acquisition of Karl Steiner AG-KSAG is positive for the stock.
Hindustan Construction Company’s (HCC’s) move to diversify into building construction through acquisition of Swiss construction company Karl Steiner AG-KSAG is expected to be positive for the stock. The acquisition will help the company enter the high-growth integrated residential and commercial building development segment in India, pegged at Rs 70,000 crore per year, besides the Middle-East and European markets. These shorter gestation turnkey projects will also improve HCC’s revenue visibility. With Karl under its fold, HCC will now qualify to bid for high-rise buildings that use the latest technology, says an IDFC-SSKI report.
HCC will pay around Rs 150 crore for a 66 per cent stake in KSAG by way of fresh equity issuance, which should support latter’s growth. The balance stake will be acquired in 2014, based on the company’s performance in the interim. However, while the deal will be funded through internal accruals and debt, HCC’s debt to equity ratio appears to be on the higher side. It stood at 1.2 times, according to Motilal Oswal Securities’ estimates, with debt up 14 per cent sequentially at end-December 2009, despite raising Rs 480 crore from a qualified institutional placement in June 2009.
Meanwhile, KSAG has a turnover of about CHF 700 million (about Rs 3,000 crore) through its Swiss operations (excluding the recently-sold French subsidiary). Margins are relatively low at 3-4 per cent, but in line with peers, according to a JM Financial report. Going ahead, faster execution of hydro power projects it bagged in 2006-08 should boost HCC’s revenues, according to Motilal Oswal Securities, which estimates 24 per cent revenue growth in 2010-11. This is significantly higher than the single-digit revenue growth seen in 2009-10 so far. Margins, however, could be under pressure in the near term before stabilising as the shift in focus to higher-margin hydro power projects will see a rise in mobilisation expense.
At Rs 142.80, HCC’s stock trades at about 27 times 2010-11 consensus analyst earning per share estimates. Analysts expect the initial public offer of its subsidiary, Lavasa Corporation (likely in end 2010), to unlock value, considering its estimated valuation of Rs 10,000 crore. The $100-million FCCB (foreign currency convertible bond) conversion in March 2011 at Rs 248 a share and repayment of Rs 400 crore quasi-equity in Lavasa in June or October are the other key events to watch.
With contributions from Sunaina Vasudev and Dilip Kumar Jha
