Arbitration norm could be a game changer for HCC

Stock has gained over 50% since arbitration claim process streamlined

Until recently, very few factors were working in Hindustan Construction Company's (HCC)'s favour. The entity is one of India's well-known infrastructure companies, with huge debt on its books.

But things have changed in the past few months. First, HCC opted for new debt rejig plan, S4A (scheme for sustainable structuring of stressed assets), to reduce its debts. The bigger change happened on August 31. As the government approved certain initiatives to revive the construction sector, HCC's stock price rose over 20 per cent that day. Since then, it is up over 50 per cent.

HCC, which has Rs 3,200 crore stuck in arbitration awards, is expected to be a major beneficiary of new norms which order government agencies (such as National Highways Authority of India) to deposit 75 per cent of the arbitral award in an escrow (separate) account, which may be used to meet working capital needs or retire debt. This is seen as a game changer for companies like HCC.

  Ajit Gulabchand, chairman and managing director of HCC, said he expected 75 per cent of this sum to be received by the company immediately. Claims of Rs 5,000 crore are also stuck in legal action, which, according to HCC, may be sorted in 12 months. But would this be adequate for HCC's success in debt restructuring?

HCC's standalone net debt as on August 31 is estimated at Rs 4,900 crore. On a consolidated basis (including its flagship Lavasa project, road projects, and Steiner AG — its real estate business headquartered in Switzerland), net debt was Rs 10,166 crore as on March 31.

Therefore, inflows through arbitration and litigation would address the company's debt burden. Analysts say if this is taken care of, then HCC may not be too far from a convincing recovery, with operations turning around.

Vijay Goel, analyst at Karvy Stock Broking, says HCC’s order book at Rs 17,460 crore as on June 30 provides earnings (profit) visibility for five years. Speedy inflow of settlement claims will give HCC flexibility to fund its share of equity in these orders.

As a result, it should improve outlook for its core construction business. Goel has increased earnings per share target for HCC by 15 and 86 per cent, respectively, for FY17 and FY18, after the August 31 development. "Assuming a bulk of the arbitration award will be received in 6-12 months, reduction in interest costs will propel profitability for HCC," he says.

The new arbitration mechanism would also benefit Patel Engineering, C&C Constructions, IVRCL, and Punj Lloyd, among other construction companies. These stocks have surged 15 to 45 per cent since August 31.