HCC: Uphill task

Foray into the airport business is seen as a positive, but concerns stem from the environment-related news about Lavasa project.

The stock of Hindustan Construction Company (HCC) has fallen almost 10 per cent over the past week, even after news of its foray into airport building. The concerns stem from the recent environment-related news about its Lavasa project.

HCC’s wholly-owned subsidiary, HCC Infrastructure (HCC Infra), is evaluating three smaller domestic airports, and planning to move abroad after gaining experience (with the help of recently acquired Karl Steiner). While the opportunity in the domestic airport space is huge, with estimated investments of about $9 billion till 2013-14, around $7 billion is expected to come from private players under the public-private partnership model.

However, the presence of existing players like GMR Infrastructure and GVK Power and Infrastructure, and competition from new players like Reliance Infrastructure and IRB Infrastructure, may not allow HCC to corner a big share of this opportunity. Moreover, HCC, unlike its rich experience in roads and power, is a new player in the field.

On the flip side, India’s first-of-its kind hill station, Lavasa (to be spread across 25,000 acres), has come under the environment ministry’s scanner for violating norms, which could delay its implementation. Lavasa will be built in four phases, finishing in 2021. The first phase will comprise three towns covering 28 million square feet and will be completed by 2011-12. HCC Infra’s financial performance has been good so far. Net profit rose 87 per cent year-on-year to Rs 49 crore in the June quarter (double HCC’s standalone net profit).

Analysts ascribe an average value of Rs 75 to HCC based on the sum-of-parts valuation, of which, Lavasa contributes Rs 23. HCC, which holds 65 per cent in Lavasa Corporation, intends to tap the primary market. It plans to raise roughly Rs 2,000 crore by diluting 10 per cent, which translates into a value of Rs 20,000 crore. This will unlock huge value for HCC shareholders, as its own market cap is just one-fifth at Rs 4,000 crore. Analysts say the development on this front (project execution and fund raising) needs to be watched and will be a key trigger for the stock.