In the engineering and construction business, technical expertise and size of the balance sheet play a key role in winning projects, but building a strong business depends on order execution and staying on top of the capital-intensive nature of the business.
Hindustan Construction Co. Ltd (HCC) is attempting to do just that, raising capital by selling some assets and tying up with firms to expand business size. It will help it derisk its portfolio, even as it steps up revenue growth.
The firm entered the road and transportation business in 2007, attracted by its potential chiefly owing to a shift in this sector to public-private partnerships and build-operate-transfer (BOT) mechanisms. HCC runs this business through its subsidiary, HCC Infrastructure Ltd (HIL), and has six BOT road projects worth Rs5,500 crore, while HCC’s overall order book is around Rs19,000 crore.
Graphic: Yogesh Kumar/Mint
The National Highways Authority of India is expected to invite bids to build 11,854km of roads and highways in the next 12 months. Instead of bidding for these projects alone, HIL has tied up with Egypt’s Orascom Construction Industries (OCI), which has a strong presence in emerging markets such as West Asia, Africa and Europe. A senior executive said the group aims to increase the HIL portfolio threefold in the next three years.
That would have normally required large amounts of capital. For example, HIL will have to cough up around Rs1,500 crore towards equity contributions in its existing orders. The OCI tie-up, therefore, derisks HIL’s funding exposure to these projects. It seems appropriate, given that its ability to leverage the group balance sheet is low. As on 31 March, HCC had outstanding loans of around Rs2,500 crore and its debt-equity ratio was around 1.7. Profit before interest, depreciation and tax was enough to cover only 2.2 times its annual interest payout.
HCC’s fund position will get some relief from its divestment of a 74% stake in a business park it is building. Of the total enterprise value of Rs775 crore, it will get net cash of around Rs293 crore, which will be used to repay loans. Around Rs1,000 crore in dues is stuck with various government organizations, weighing down HCC’s working capital cycle. Focus on receivables’ collections could trim this figure.
Analysts are concerned about HCC tapping capital markets. But HCC is proposing to raise capital through its subsidiaries. This will allow it to raise funds without diluting the parent firm’s equity capital and also unlock value for shareholders.
On Thursday, the stock rose by around 2% on the Bombay Stock Exchange to Rs113. An Edelweiss Securities Ltd report has pegged the value of its BOT projects at Rs16 per share of the total business valuation of Rs146 per share. The share of these projects in HCC’s portfolio will increase as HIL’s revenues begin to ramp up. At the same time, efforts to contain debt will lead to better profitability.
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