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Sunday, July 5, 2009

Hindustan Construction Company (HCC) - Good Infrastructure Stock To Buy

THE Bandra-Worli sea link has been among the most awaited projects in Mumbai city. The 4.7 km stretch, which not surprisingly is the countrys first sea link.Hindustan Construction Company (HCC) is the company that made this possible.

A LONG WAIT
In more than one way, the excitement among the citys residents comes on the back of an arduous decade long wait before the sea link was finally done. The delay was on account of a host of reasons with a slew of public interest litigations being one of them. While the Maharashtra State Road Development Corporation (MSRDC) awarded the contract in 2000 to HCC, work on the project started full swing only in January 2005 after the go-ahead from the Supreme Court came towards the end of 2004.


Demands from various quarters that included environmentalists and fishermen took a toll on the project. There were changes made in the design of the bridge which eventually made it look pretty different from the original design. Most importantly, the cost of the project quadrupled to Rs 1,600 crore from Rs 400 crore, which was the original value of the contract.

HCC overcame all this to eventually make sure the project was done and would, in some manner, ease the infrastructure nightmare that confronts Mumbai today. For the 83 year old company, past projects include the construction of 175 road bridges which have a combined length of around 46,000 km. HCC has constructed about 34 bridges in Iraq alone. The famed Farakkah Barrage, a dam on the Ganges in West Bengal, is a project that was executed by HCC.

WHAT NOW FOR HCC
For HCC, the Bandra-Worli sea link has had an impact on its balance sheet which the company chairman Ajit Gulabchand admits to. We lost more than Rs 400 crore on the bridge due to changes in its design and delay, he says candidly. While pointing out that the project was challenging, Mr.Gulabchand adds that it was not really easy dealing with the numerous delays and litigations.

Over the last few years, HCC has already written down over Rs 400 crore on the project. It has claimed Rs 140 crore from MMRDA as cost escalation following a delay in implementing the project , says Rohit Gala, Senior Analyst, India Capital markets . Analysts are not hugely concerned by this hit on the companys balance sheet. They point out that prudent financial management helped HCC write down these losses much before the sea link was completed. HCCs current debt-equity ratio is 2.2 and the company has Rs 180 crore of cash in the bank.

HCC is a core EPC (engineering, procurement and construction) contractor and its order book of about Rs 16,500 crore is spread across three years. This is broken up into 46% coming from hydro and nuclear power related projects, 35% from transportation related projects, 15% from water related projects and the rest coming from BOT( build, operate and transfer) projects.

Market Cap 2,790.56
EPS (TTM) 4.89
P/E 22.27
P/C 11.60
* Book Value 38.62
* Price/Book 2.82
Div(%) 80.00
Div Yield(%) 0.73
Market Lot 1.00
Face Value 1.00
Industry P/E 20.27

The company is also a key player in the area of construction of nuclear power plants. A report by Angel Broking says HCC has been involved in six out of 17 nuclear power plants constructed. In the hydro power segment, it is a specialist in the construction of vital components, including dams, head and tail race tunnels and power houses .

With the governments focus on infrastructure expected to continue in the time to come, things could look rather interesting for HCC in longer term. If they manage to get pie of infrastructure projects, the company could grow substantially. One can buy stocks in small chunks whenever stock markets correct in view of this probable growth.
Ref: Economic Times

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