Credit analysis of Indian company - Hindustan Construction Company

1. 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)
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2. 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.
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3. 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.
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4. Verticals
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5. Sales & Order Booking
As on September 30th 2009 Orderbook of Rs. 15,542 Crores
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6. Revenue Generation
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7. 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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8. Latest Results
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9. Latest Results of Lavasa
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10. Profitability Ratios
Ratios March'07 March'08 March'09
Operating Profit
10.84% 13.03% 13.93%
Margin (OPM) (%)
Return on Capital
8.32% 11.87% 12.39%
Employed (ROCE) (%)
Return on Net Worth
4.07% 10.83% 12.47%
(ROE) (%)
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11. 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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12. 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
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13. 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.
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14. Debentures
Security Redemption
Rate of Interest Issued Date Tenure Credit Rating
Type Date
CARE AA-
NCD 10.00% 25-Oct-2002 7 Years 25-Oct-2009
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
Redemption in
1st Year – 9.00%
3 annual equal
p.a.
instalments on
NCD 2nd – 5th Year – 20-Nov-2006 5 years CARE AA+
07.09.2009,
G-sec + 175bps
07.09.2010,
annual reset
07.09.2011
NCD 9.50% 20-Nov-2006 5 Years 20-Nov-2011 CARE AA+
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15. 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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16. 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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17. Z-Score
March'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 111.51 207.95 279.90
Total 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 4,642.00
Z3 0.056142 0.082669 0.080795
Market Value of Equities 3300 3500 3900
Book Value of Total
2,442.67 2,908.84 3,889.48
Liabilities
Z4 1.350981 1.203229 1.002705
Sales 2,394.50 3,104.34 3,518.32
Total 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

18. Interpretations
Score Interpretation
Z-Score Above The company is safe based on these financial
3.00 figures only.
Z-Score
On Alert. This zone is an area where one
between 2.70
should exercise caution.
to 2.99
Z-Score Good chances of the company going bankrupt
Between 1.80 within 2 years of operations from the date of
to 2.69 financial figures given.
Z-Score Below
Probability of Financial embarrassment is very
1.80
high.
*Higher Z-Score is Desirable.
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19. 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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