HINDUSTAN CONSTRUCTION COMPANY LIMITED

Transcription

1 HINDUSTAN CONSTRUCTION COMPANY LIMITED Ratings Facilities/ Instruments Amount (Rs. crore) Rating 1 * Remarks Long-term Facilities (Term Loans) 2, (reduced from 2,358.75) Short-term Facilities (enhanced from ) Long-term Facilities (Fund Based Limits) Long/Short-term Facilities (Nonfund Based Limits) Total Bank Facilities 8, CARE A+ CARE A1+ 1, CARE A+ 4, CARE A+/ A1+ [Single A Plus / A One Plus] CP/STD CARE A1+ CP/STD (carved out of the sanctioned working capital limits) NCD (reduced from ) CARE A1+ CARE A+ NCD (proposed) CARE A+ * - All Ratings continue to be under the credit watch Rating Rationale / A1+ [Double A Minus / A One Plus] The revision in the ratings follows the elongated working-capital cycle of Hindustan Construction Company Limited (HCC) leading to a deteriorated capital structure and a consequent high debt repayments obligations in the medium term. The ratings continue to derive strength from HCC s established position in the construction sector, long track record and efficient project execution capabilities demonstrated in the past and long-term revenue visibility emanating from a strong and diversified order-book position. The ratings continue to be constrained by the significant off-balance sheet exposures in the form of corporate guarantees and other tangible and intangible support provided/expected to be provided to its group companies, especially Lavasa Corporation Ltd. (LCL) in the backdrop of the liquidity constraints faced by LCL, declining the net profit margins and deteriorated interest coverage ratios. The ability of HCC to improve its profitability margins as well as its working capital cycle, realize overdues from various projects within a reasonable time period and take the timely measures to improve its capital structure are the key rating sensitivities. Further, the extent of support that HCC provides to its subsidiaries and performance of these subsidiaries, mainly LCL, remain the key rating sensitivities. The ratings continue to be under the credit-watch due to the developments concerning the LCL project and the likely impact on the credit profile of HCC. Background HCC was promoted by the late Mr Walchand Hirachand in 1926 and is presently spear-headed by Mr Ajit Gulabchand, chairman and managing director. HCC is one of the leading construction companies in India and is also engaged in the executing projects outside India in the countries like Saudi Arabia. 1 Complete definition of the ratings assigned are available at and other CARE publications 1

2 The HCC group of companies comprises mainly of HCC, HCC Infrastructure Company Ltd, HCC Real Estate Ltd (HREL), HCC Concessions Ltd and Lavasa Corporation Ltd. (LCL). The group specializes in technically complex, new-age infrastructure projects, as well as Engineering-Procurement-Construction (EPC), Build-Operate-Transfer (BOT), integrated projects and townships. In July 2011, HCC Infrastructure Company Ltd., a 100% subsidiary of HCC, entered into an agreement to dilute a 14.5% stake in HCC Concessions Ltd. to a US-based investment firm, the Xander Group, for Rs.240 crore at a valuation of Rs.1650 crore. Currently, the portfolio of HCC Concessions includes six National Highway Authority of India (NHAI) concession projects worth Rs.5,500 crore, of which one is an annuity project and five are toll roads. In May 2010, HCC purchased a controlling stake of 66% in Karl Steiner AG, Switzerland (KSAG) for a cash investment of CHF 35 million (equivalent to about Rs.150 crore at the time of acquisition). This acquisition is expected to help HCC to capture the local market opportunities in Switzerland and also provide a presence in the European countries. It will also allow HCC to undertake the development and construction of world-class residential and commercial spaces on a turnkey basis in India. Credit Risk Assessment Long track record and efficient project execution capabilities executed in the past HCC has a long track record in the construction industry spanning over eight decades. HCC has contributed immensely to the country s infrastructure by executing large number of projects in the hydro power and nuclear power generation, roads and expressways and complex tunneling in addition to the hundreds of bridges, dams and barrages. Few of the landmark projects executed by the company include the Bandra-Worli Sealink Project, Mumbai, Delhi-Faridabad Elevated Expressway, parts of the Mumbai-Pune Expressway, the Kolkata Metro Railway project etc. Long-term revenue visibility emanating from the strong and diversified order book position The order book of the company was Rs.18,127 crore as on March 31, 2011 (translating to 4.48 times the gross billing for FY11). HCC has a geographically diversified order book, with 18% each of its order book from Jammu and Kashmir and Andhra Pradesh, 16% from West Bengal, 7% from Maharashtra and the remaining 41% from the rest of India. The company also has a sectorally diversified order book with 42% comprising of hydro-power projects, 22% transport projects, 20% water supply and irrigation projects and the remaining 16% other projects including the nuclear plant projects. Decline in the Profitability Though PBILDT margin of the company improved in FY11, net profit margin has declined mainly due to high interest costs on the increased debt of the company. In Q1FY12, HCC reported PBILDT of Rs. 138 crore and PAT of Rs.3 crore on net sales of Rs.1,060 crore. Elongated working capital cycle The working-capital cycle of HCC increased from 252 days in FY10 to 297 days in FY11 mainly due to the unrecovered project dues of over Rs.3,600 crore from the various projects executed by the company. Deteriorated capital structure and consequent high debt repayments due in the medium term The overall gearing of the company deteriorated from 1.41x as on March 31, 2010 to 2.07x as on March 31, 2011 (consolidated the overall gearing from 2.92x to 4.44x, respectively) due to the additional debt taken for the repayment of Foreign Currency Convertible Bonds (FCCBs) which were due in April 2011, supporting the group companies (mainly LCL) and financing its ownworking capital requirements. The increased debt burden has resulted into significant debt repayment obligations in the mediumterm. Significant off-balance sheet exposure and tangible and intangible support provided/expected to be provided to the group companies, especially LCL Corporate guarantees issued by HCC to its subsidiaries and other group companies stood at Rs.831 crore as on March 31, 2011, out of which guarantees extended to LCL amounted to Rs. 607 crore. HCC, through its subsidiary and group companies, holds 65.01% stake in LCL. HCC has demonstrated its strong commitment towards LCL by providing a tangible support in the form of equity infusion and offering guarantees to the lenders of LCL. Furthermore, the investors in the Deep Discount Convertible Debentures/Non-convertible Debentures (DDCDs/NCDs) issued by LCL have a put option on HCC. 2

3 In November 2010, LCL was issued a show-cause notice by the Ministry of Environment and Forests (MoEF), alleging environmental violations by the company, resulting in stoppage of construction work at the site. As work on the project has not resumed and the case is still sub-judice, LCL may require further support from HCC, which may impact HCC s credit profile. Financial Performance (Rs. Cr) For the period ended / as at Mar.31, (12m, A) (12m, A) (12m, A) Working Results Net Sales Total Operating income PBILDT Interest and Finance Charges Depreciation Operating PBT PAT (after deferred tax) Gross Cash Accruals Financial Position Equity Capital Networth Total capital employed Key Ratios Growth Growth in Total income (%) Growth in PAT (after D.Tax) (%) Profitability PBILDT/Total Op. income (%) PAT (after deferred tax)/ Total income (%) ROCE (%) Average cost of borrowing (%) Solvency Long Term Debt Equity ratio (times) Overall gearing ratio(times) Interest coverage(times) Term debt/gross cash accruals(years) Liquidity Current ratio(times) Quick ratio(times) Turnover Average collection period (days) Average creditors (days) Average inventory (days) Operating cycle (days) Mr Y. H. Malegam, who is an independent director on the board of HCC, is one of the CARE s Rating Committee Members. To comply with the regulations, the member has not participated in the rating process and in the rating committee meeting. 3

4 DISCLAIMER CARE s ratings are opinions on credit quality and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE has based its ratings on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments. 4

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