Last Updated : Mar 29, 2018 07:59 AM IST | Source:

HCC: Is the risk attractively priced?

In our opinion, investors should look at HCC more as a standalone entity than as a whole, because even if the Lavasa issue is not resolved, the liability arising from it would be limited.

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HCC's hill city project Lavasa may have run aground but the market is probably overreacting to news of it filing for bankruptcy.

It is true that Lavasa is loss-making and that bankers and parent HCC are looking for a solution to meet its expenses and funding needs. But unlike other such projects headed for insolvency, Lavasa has a virtual treasure trove of assets, given its overall debt figure.

The special purpose vehicle responsible for the Lavasa project has a debt of around Rs 4,500 crore on its books and owns operating assets worth Rs 8,000 crore.


Even if HCC does not find a viable solution for Lavasa's financial situation, a sale of these assets would be more than enough to meet all its obligations, and will even allow the company to recover some of the money it burned on the project.

No matter the outcome, HCC will become profitable on a consolidated basis, and the debt on its books will come down drastically if the Lavasa issue is resolved.

The positives of reducing debt   

Lavasa has been the Achilles' heel of HCC's quest to report a profit in its consolidated accounts. Despite HCC as a standalone entity reporting a profit of Rs 60 crore in FY17, the burden from Lavasa dragged its bottom line into the red with a loss of Rs 983 crore.

On a consolidated level, HCC's finances don't make for a pleasant sight. The company is sitting on debt of Rs 9,258 crore and has a negative net worth of Rs 374 crore. However, the standalone entity's finances paint a completely different picture. As a standalone entity, HCC has loans worth Rs 4,397 crore to repay and a net worth of Rs 2,690 crore.

Thanks to the Lavasa issue, HCC now has a market value of Rs 2,400 crore, which is slightly less than its FY17 standalone net worth, and significantly lower than its estimated net worth of Rs 2,800 crore by end of FY18.

Low downside

In our opinion, investors should look at HCC more as a standalone entity than as a whole, because even if the Lavasa issue is not resolved, the liability arising from it would be limited.

"Bankers have some put option and we have given some bank guarantees which together may be around Rs 500 crore. So, theoretically, the parent company liability is limited to that much amount. But that is a theoretical answer as most banks who have exposure to Lavasa also have exposure to HCC," Praveen Sood, Group CFO at HCC, had told Moneycontrol in an earlier interaction.

Attractively priced

Most investors are apprehensive to ascribe zero value to Lavasa while valuing parent HCC because of the uncertainty involved.

“It seems market is fearing about the consolidated entity, which is not the right way to look at. Even if we put zero value to Lavasa the standalone business or the parent entity is attractively priced,” said Shravan Shah, who is tracks the company for Dolat Capital.

As a standalone entity, HCC is now sitting on an order book of close to Rs 20,000 crore, which is around 5.5 times its trailing revenue. Moreover, the company is focused on reducing its debt by sorting out working capital or cash flow issues by using arbitration awards from the government.

In FY19, HCC's standalone business is expected to report earnings per share of around Rs 2.5-3, which even at a price to earnings (P/E) ratio of 12 times gives a value of around Rs 30-36 per share.

Besides, its other assets like BOT (build-operate-transfer) road projects and investment in Steiner AG are worth Rs 7 per share, based on price to book value. All these investments put together have a value of around Rs 37-43 per share on a conservative basis, against a current market price of Rs 23.5 per share.

The plus side here is that the management is constantly trying to resolve the Lavasa issue to realise equity value. If resolved in favour of the company, it could mean an added one-time financial benefit.
First Published on Mar 29, 2018 07:59 am