The Buy Stocks recommendation is based on strong positive catalyst of the company.
Investors with mid term investment horizon may consider Hindustan Construction Company (HCC) as a stock to buy with one year target price of Rs.140. The stock trades at current market price of Rs.116.
It seems that the balance sheet of the company has improved considerably as it does not require additional equity issue to finance its infrastructure subsidiaries. The infrastructure subsidiaries have been made independent in terms of funding their capital requirement and the company has been looking for financial partners including private firms in order to finance HCC’s BOT (Build, Operate , Transfer) subsidiaries. Such infrastructure subsidiaries require Rs.780 crore for the next three years.
HCC’s working capital position also is expected to improve considerably as it is expected to get receivables worth Rs.1000 is expected to recover in FY11. Working capital to revenue ratio is expected to fall to 56% in FY11, as against 66% in FY10. Consequently, the debt / equity ratio would come down to 1.3 multiple from 1.5 multiple in FY10.
The company is expected to unlock value from its investments in Lavasa project and this would be constituted as a separate company and the shares would be listed. Though the listing of Lavasa may take time as the current equity market conditions are not favorable, any news on this issue may act as a positive catalyst.
Company’s order book is strong with Rs.16900 crore worth of orders, which is 3.9 times of FY11 expected revenue. However, our revenue growth expectations are only at 19% CAGR between FY10 and FY 12 because of long gestation period for some big orders. Operating profit margin growth is expected at 13% CAGR for the said period.
