Company Name: HCC
Turning The Tide, Slowly But Surely
Company Name: HCC
CMP: Rs 16
Market cap: Rs 2,534 crore
Hindustan Construction Company (HCC) is a 96-year-old engineering and construction company that has executed some of the marquee projects in India, including the likes of the Bandra-Worli sea link in Mumbai, the Mumbai-Pune Expressway, the Rajasthan and Kudankulam nuclear power projects, the Kolkata Metro Rail project, several oil refineries, dams, etc.
Despite the stellar track record in executing several prestigious large-value projects, misallocation of capital in outsized investments in real estate and build-operate-transfer (BOT) projects and the pandemic-delayed payments from the governmental agencies brought the company to near-bankruptcy.
After Herculean efforts, the company is now at the cusp of a dramatic turnaround, having addressed all the issues that were holding back its performance.
A Restructured Company
The company has recently completed reorganisation of its debt with its lenders that has significantly deleveraged the balance sheet and addressed its asset-liability mismatch, thus enabling it to bring a measure of normalcy in running its business operations.
The debt reorganisation involved a carve-out of around Rs 4,000 crore of bank debt to a partly-owned special purpose vehicle (SPV), along with a transfer of the economic interest in arbitration awards and claims up to Rs 9,200 crore. The arrangement involves a cap on the return to the external majority owner of the SPV with the excess returns back to the company.
Moreover, the Hindustan Construction Company has completed conciliation proceedings relating to some of the contested receivables from the government agencies and exited some of its BOT assets, thus generating the much-required liquidity to meet its working capital requirements.
Consequently, on a standalone basis, the company has a cleaner balance sheet with a positive networth and serviceable debt levels.
Business Prospects
Given the company’s excellent competence on the engineering-procurement-construction (EPC) front, despite the financial constraints, it continues to win major high-value contracts in the hydro and urban infrastructure development space where it has an order backlog of nearly Rs 14,000 crore and much more at the bid submission and evaluation stages. These complex projects are under execution and should generate a sustained growth in topline, apart from cash flows and profits.
Turnaround And Valuation
In the September 2022 quarter, the company recorded consolidated sales of around Rs 2,500 crore with an Ebitda margin of 23 per cent and a net profit of Rs 319 crore. With around Rs 5,300 crore of awards and claims to be realised and the likely sale of BOT and other assets, as also reduced interest outgo due to debt restructuring, the company is set to achieve a remarkable turnaround in its fortunes.
This is, of course, not without the concomitant risks relating to delays in realisation of long-pending receivable claims, asset sales, and execution. On balance, however, given the significant efforts that have gone into pulling the company out of near-bankruptcy, the management is likely to strive hard to achieve normalcy in operations and generate sustained and profitable growth.
With a modest market cap of under Rs 3,000 crore, the stock could give significant returns, though it is meant for investors with an appetite for high-risk-high-return type of investment and commitment to long-term growth. The changing market dynamics, offering growth opportunities, and demand for sustainable projects requiring top engineering skills bode well for the company.