Credit Analysis Of Hcc

Credit Analysis of Hindustan Construction Company Limited By, Shishir Trivedi (1028) Srivathsa N Chakravarthy (1029) Subrata Chakraborty (1030)

Indian Institute of Capital Markets, Navi Mumbai (http://www.utiicm.com) 1

Introduction • Hindustan Construction Company Limited (HCC) is into engineering construction, both in India and the rest of the world. • Seth Walchand Hirachand founded the company and it was incorporated in January 27th of the year 1926. • HCC has been entrusted with the construction of high value projects across segments like transportation, power, marine projects, oil and gas pipeline constructions, irrigation and water supply, utilities and urban infrastructure. • In Power Generation, HCC have constructed Hydroelectric, Nuclear, Thermal Gas and Diesel based Power Projects. In the field of Water Supply and Irrigation, also constructed major dams, barrages, aqueducts and tunnels. • In Transportation, the company concentrates road and rail bridges, expressways & roads and marine construction. 2

Introduction (Contd.) • Past projects include the construction of 175 road bridges which have a combined length of around 46,000 km • Bandra-Worli Sea Link - 4.7 km stretch is the country’s first sea link, has four lanes cuts travel time to 10 minutes from at least 45 minutes earlier. • Lavasa is free India's first hill city being developed by HCC. HCC holds 60% stake in the Subsidiary Lavasa Pvt. Ltd. 3

Verticals

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Sales & Order Booking

As on September 30th 2009 Orderbook of Rs. 15,542 Crores 5

Revenue Generation

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Current Orderbook Position • L1 in Projects worth Rs. 963 Crores. • Bids under active evaluation worth Rs. 15000 Crores. • Major Projects in Pipeline worth over Rs. 9000 Crores.

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Latest Results

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Latest Results of Lavasa

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Profitability Ratios Ratios

March'07

March'08

March'09

Operating Profit Margin (OPM) (%)

10.84%

13.03%

13.93%

Return on Capital Employed (ROCE) (%)

8.32%

11.87%

12.39%

Return on Net Worth (ROE) (%)

4.07%

10.83%

12.47%

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Leverage & Coverage Ratios Ratios

March'07

March'08

March'09

Total debt/equity

1.810238

1.950232

2.423217

Asset Turnover Ratio

0.747429

0.832118

0.757932

Asset Coverage Ratio

0.578591

0.553213

0.505909

Interest Coverage Ratio

4.187833

2.654681

2.329074

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Liquidity Ratios Ratios

March'07

March'08

March'09

Current Ratio

1.720113

1.688414

1.564461

Quick Ratio

0.164089

0.168701

0.073269

Cash Ratio

0.155414

0.164695

0.069425 12

Details of Public Funding • During FY06E, the company had made a combined offering of Global Depository Shares (GDS) & Foreign Currency Convertible Bonds (FCCB) for an Aggregate sum of $200 Million. • As on March 31st 2009, there are 1,40,146 GDS outstanding & represented an equal number of underlying equity shares. • During the year the company allotted 1000 11.10% Secured Redeemable Non-Convertible Debentures of Rs. 10 Lakh each aggregating to Rs. 100 Crore to LIC of India on Private Placement Basis. 13

Debentures Security Type

Rate of Interest

Issued Date

Tenure

Redemption Date

Credit Rating

NCD

10.00%

25-Oct-2002

7 Years

25-Oct-2009

CARE AACRISIL AAA

NCD

7.50%

28-Sep-2004

10 Years

28-Sep-2014

CARE AA

NCD

11.10%

11-Aug-2008

7 Years

11-Aug-2015

CARE AA

NCD

1st Year – 9.00% p.a. 2nd – 5th Year – G-sec + 175bps annual reset

20-Nov-2006

5 years

Redemption in 3 annual equal instalments on 07.09.2009, 07.09.2010, 07.09.2011

CARE AA+

NCD

9.50%

20-Nov-2006

5 Years

20-Nov-2011

CARE AA+

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Z Score • The Z-Score was developed in 1968 by Dr. Edward I. Altman, Ph.D., a financial economist and professor at New York University's Stern School of Business. • The Z-Score formula for Predicting Bankruptcy of Edward Altman is a multivariate formula for a measurement of the financial health of a company and a powerful diagnostic tool that forecasts the probability of a company entering bankruptcy within a 2 year period. • Studies measuring the effectiveness of the Z-Score have shown the model is often accurate in predicting bankruptcy (72%-80% reliability). • The Z-Score bankruptcy predictor combines five common business ratios, using a weighting system calculated by Altman to determine the likelihood of a company going bankrupt. • It was derived based on data from manufacturing firms, but has since proven to be effective as well (with some modifications) in determining the risk a service firm will go bankrupt.

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Five Business Ratios • • • •

Z1 = Working Capital / Total Assets Z2 = Retained Earnings / Total Assets Z3 = EBIT / Total Assets Z4 = Market Value of Equity / Book Value of Total Liabilities • Z5 = Net Sales / Total Assets • Z = (1.2*Z1)+(1.4*Z2)+(3.3*Z3)+ (0.6*Z4)+(0.999*Z5)

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Z-Score March'07

March'08

March'09

Working Capital Total Assets Z1

2,306.22 3,203.65 0.719873

2,710.05 3,730.65 0.726428

3,467.38 4,642.00 0.746958

Retained Earnings Total Assets Z2

111.51 3,203.65 0.034807

207.95 3,730.65 0.055741

279.90 4,642.00 0.060297

EBIT Total Assets Z3

179.86 3,203.65 0.056142

308.41 3,730.65 0.082669

375.05 4,642.00 0.080795

Market Value of Equities Book Value of Total Liabilities Z4

3300

3500

3900

2,442.67

2,908.84

3,889.48

1.350981

1.203229

1.002705

Sales Total Assets Z5

2,394.50 3,203.65 0.747429

3,104.34 3,730.65 0.832118

3,518.32 4,642.00 0.757932

Z-Score

2.655116

2.775783

2.606186

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Interpretations Score Z-Score Above 3.00

Z-Score between 2.70 to 2.99 Z-Score Between 1.80 to 2.69 Z-Score Below 1.80

Interpretation The company is safe based on these financial figures only. On Alert. This zone is an area where one should exercise caution. Good chances of the company going bankrupt within 2 years of operations from the date of financial figures given. Probability of Financial embarrassment is very high.

*Higher Z-Score is Desirable. 18

Conclusion • Seeing the – The Z-Score value & the various ratios

We would not be Investing in the Bond Issue of HCC

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