HCC will pay a mere 35 million Swiss francs (Rs150 crore) in a cash transaction for getting 66% stake in the Swiss real estate entity, which has a turnover of around CHF700 million . The balance 34% equity will be transferred to HCC from its sole promoter Peter Steiner by 2014 at predetermined valuations. Although the details are not disclosed, KSAG’s valuation appears attractive for HCC.

Could the low valuation be due to KSAG’s low profit margins of 3-4% and fall in revenues from around CHF1.3 billion in 2008 to CHF700 million? Or could it be that the company wants to exit the business due to recession? In fact, in 2009, KSAG sold its French business operations, too. Reports state its staff strength is down from 546 in 2008 to 386 in 2009.

HCC’s strategy, it appears, is to use KSAG’s skills. As the second largest firm in the Swiss real estate market, it has constructed at least 1,000 residential complexes and 540 offices, besides several hotels and infrastructure projects. People familiar with the industry say KSAG’s business model of offering total services contracts from real estate development to consulting and renovation in a modular fashion is its strength.

HCC, which has just entered the real estate space, could use the expertise in the Indian realty market. Precision-driven engineering and green buildings with lower power consumption due to architectural efficiency are gaining significance.

Meanwhile, HCC’s entry into real estate has been through a subsidiary. It is constructing the landmark hill city Lavasa near Mumbai and an information technology park, too. “Even if Steiner can tap 50% of the construction and development opportunity in Lavasa alone, Steiner’s turnover would be around Rs1,500 crore per year," said Rajgopal Nogja, president of Lavasa and HCC Real Estate Ltd.

The moot question is whether the acquisition was so critical to HCC’s growth at this juncture. HCC has a healthy order book of around Rs16,000 crore, spread across water, irrigation, power and transport projects. But its balance sheet carries debt of around Rs2,300 crore, with a debt to equity ratio of 1.2.

Some analysts state that with the company needing funds for several infrastructure projects in the next 18 months, the KSAG acquisition might be a strain on HCC’s books. The company has already stated that the acquisition will be funded through debt and internal accruals. Any further borrowing would increase leverage and add pressure on margins due to the higher interest burden.

Lack of clarity on the deal and an anticipated increase in leverage despite management claims of an earnings accretion have weighed on HCC’s shares.

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