credit analysis of hcc

Credit Analysis of Hindustan Construction Company Limited

By,Shishir Trivedi (1028)

Srivathsa N Chakravarthy (1029)Subrata Chakraborty (1030)

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

Introduction

• Hindustan Construction Company Limited (HCC) is intoengineering construction, both in India and the rest of theworld.

• Seth Walchand Hirachand founded the company and it wasincorporated in January 27th of the year 1926.

• HCC has been entrusted with the construction of high valueprojects across segments like transportation, power, marineprojects, oil and gas pipeline constructions, irrigation andwater supply, utilities and urban infrastructure.

• In Power Generation, HCC have constructed Hydroelectric,Nuclear, Thermal Gas and Diesel based Power Projects. Inthe field of Water Supply and Irrigation, also constructedmajor dams, barrages, aqueducts and tunnels.

• In Transportation, the company concentrates road and railbridges, expressways & roads and marine construction.

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Introduction (Contd.)

• Past projects include the construction of 175road bridges which have a combined length ofaround 46,000 km

• Bandra-Worli Sea Link - 4.7 km stretch is thecountry’s first sea link, has four lanes cutstravel time to 10 minutes from at least 45minutes earlier.

• Lavasa is free India's first hill city beingdeveloped by HCC. HCC holds 60% stake in theSubsidiary Lavasa Pvt. Ltd.

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Verticals

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Sales & Order Booking

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

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 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


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


Current Ratio 1.720113 1.688414 1.564461

Quick Ratio 0.164089 0.168701 0.073269

Cash Ratio 0.155414 0.164695 0.069425

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Details of Public Funding

• During FY06E, the company had made acombined 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 GDSoutstanding & represented an equal number ofunderlying equity shares.

• During the year the company allotted 100011.10% Secured Redeemable Non-ConvertibleDebentures of Rs. 10 Lakh each aggregating to Rs.100 Crore to LIC of India on Private PlacementBasis.

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DebenturesSecurity

TypeRate of Interest Issued Date Tenure

RedemptionDate

Credit Rating

NCD 10.00% 25-Oct-2002 7 Years 25-Oct-2009CARE AA-

CRISIL 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 SternSchool of Business.

• The Z-Score formula for Predicting Bankruptcy of Edward Altman isa multivariate formula for a measurement of the financial health ofa company and a powerful diagnostic tool that forecasts theprobability of a company entering bankruptcy within a 2 year period.

• Studies measuring the effectiveness of the Z-Score have shown themodel is often accurate in predicting bankruptcy (72%-80%reliability).

• The Z-Score bankruptcy predictor combines five common businessratios, using a weighting system calculated by Altman to determinethe likelihood of a company going bankrupt.

• It was derived based on data from manufacturing firms, but hassince proven to be effective as well (with some modifications) indetermining 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-ScoreMarch'07 March'08 March'09

Working Capital 2,306.22 2,710.05 3,467.38

Total Assets 3,203.65 3,730.65 4,642.00

Z1 0.719873 0.726428 0.746958

Retained Earnings 111.51 207.95 279.90Total Assets 3,203.65 3,730.65 4,642.00

Z2 0.034807 0.055741 0.060297

EBIT 179.86 308.41 375.05

Total Assets 3,203.65 3,730.65 4,642.00Z3 0.056142 0.082669 0.080795

Market Value of Equities 3300 3500 3900

Book Value of Total Liabilities

2,442.67 2,908.84 3,889.48

Z4 1.350981 1.203229 1.002705

Sales 2,394.50 3,104.34 3,518.32Total Assets 3,203.65 3,730.65 4,642.00

Z5 0.747429 0.832118 0.757932

Z-Score 2.655116 2.775783 2.606186 17

InterpretationsScore Interpretation

Z-Score Above 3.00

The company is safe based on these financial figures only.

Z-Score between 2.70 to 2.99

On Alert. This zone is an area where one should exercise caution.

Z-Score Between 1.80 to 2.69

Good chances of the company going bankrupt within 2 years of operations from the date of financial figures given.

Z-Score Below 1.80

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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credit analysis of hcc

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