Hindustan Construction Corp stock slips 25% as auditors red-flag Lavasa

The stock of Hindustan Construction Corporation (HCC) slipped 25 per cent, its biggest fall in a day, as auditors of its step-down subsidiary Lavasa Corporation raised doubts over the latter’s ability to continue as a going concern. Lavasa has defaulted on repayments to lenders as well as debenture holders.

Auditors Walker Chandiok & Co LLP said Lavasa posted a net loss of Rs 6.82 billion for the year ended March 2018. The current liabilities exceed its current assets by Rs 23.89 billion, according to a filing to the BSE. The HCC stock closed at Rs 17.55 a share, down 24.84 per cent over its previous close of Rs 23.55.

HCC owns 68.72 per cent in Lavasa through its wholly-owned subsidiary HCC Real Estate Limited (HREL) and Hincon Finance Ltd (HFL).

Auditors said the operations of Lavasa were dependent on the effectiveness of the projects undertaken along with other entities in the group.

The company is in process of submitting a resolution plan to lenders to revive business, restructure borrowings and recast terms of repayments on debentures. These factors indicate material uncertainty, which may cast significant doubt about the company’s ability to continue as a going concern.

HCC, however, in a statement to the stock exchanges, said it was working with lenders’ consortium for resolution. The Reserve Bank of India’s February 12 decision to scrap strategic debt restructuring (SDR) led the company to recast plans with lenders and potential investors.

On April 9, rating agency CARE Ratings placed ratings for loans and debentures of Lavasa Corporation into “issuer not cooperating” category.

The company has not paid surveillance fees for the rating exercise agreed to in its rating agreement. In line with the Sebi guidelines, rating on Lavasa’s bank facilities/instruments will now be denoted as CARE D/CARE C(SO); negative; issuer not cooperating. CARE advised users -- lenders, investors and the public at large -- to exercise caution while using the rating. The rating takes into account the continuing delays in debt servicing owing to stressed liquidity position. The rating assigned to the CCPS (cumulative convertible preference shares) issue of Lavasa Corporation takes into account the slow moving real estate projects of HCC Real Estate (HREL). The rating also factors in delay in compliance with the earlier envisaged structure and other terms in the sanction letter of CCPS issue, leading to stress on the cash flows and ability of Lavasa Corporation to meet the obligations.

The weak liquidity has constrained the company’s ability to service its debt in a timely manner and there have been continuing delays in servicing of debt obligations to the lenders.

HCC also announced its standalone results for the March quarter and the year ended March 2018 on Thursday. In 2017-18, total income increased to Rs 48.26 billion from Rs 44.58 billion in FY17, while net profit stood at Rs 659 million against Rs 809 million.

However, its standalone debt fell to Rs 37.25 billion from Rs 43.97 billion a year ago. It has Rs 16 billion worth of dues from customers on awards received in the company's favour. The company has also closed a non-fund based limits of Rs 30 billion. It has orders pending worth Rs 192 billion as on March 2018.

However, consolidated numbers were not available, which are a source of worry given that consolidated debt stood at Rs 92.58 billion in FY17, including Lavasa’s debt of Rs 32.30 billion, as per Capitaline data. Based on FY17 data, HCC's consolidated operating profit stood at Rs 7.27 billion. This was lower than the interest outgo of about Rs 15 billion. Consequently, the net loss came in at Rs 7.58 billion for FY17. Lavasa Corporation had a negative net worth of Rs 11.32 billion as of March 2017, and revenues of Rs 1.02 billion and a net loss of Rs 7.15 billion in FY17. HCC has non-current investments, loans and assets amounting to Rs 10.65 billion in its subsidiary HCC Real Estate, and Rs 1.97 billion in Lavasa Corporation, as on March 2018.

The company has reemphasised that while such entities have incurred losses in the initial years and consolidated net worth of both entities has been fully eroded, their underlying projects are in early stages of development and are expected to achieve adequate profitability on substantial completion and/or have current market values of certain properties which are in excess of their carrying values (liabilities).