HCC gained 31% in June so far, up 162% in last one year; is it a good time to buy the stock?

After a 31 percent jump in the stock just in June so far, brokerage house Elara Capital sees another 30 percent upside in PSU construction firm Hindustan Construction Company (HCC). The brokerage initiated coverage on the stock with a target price of ₹63.

"HCC’s 10-decade-old experience of executing in-house complex and marquee projects, 26 percent of hydropower capacity and 60 percent share of India’s civil nuclear power capacity positions it to capture on ₹1.5 lakh crore nuclear opportunity," said the brokerage.

Once a prominent player in India's infrastructure sector, HCC faced a downturn after FY11 due to policy paralysis and delayed government decision-making, which severely impacted the entire construction industry. However, after a decade of challenges, including debt restructuring, dispute resolutions, and monetisation of non-core assets, the company is poised for a resurgence, noted Elara. It added that with India gearing up for significant infrastructure projects, HCC is preparing to leverage new opportunities in the sector.

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The brokerage also pointed out that with its in-house execution capabilities and a century-long track record of successfully delivering complex and prestigious projects, HCC holds a competitive advantage over its peers. The company has successfully completed debt restructuring initiatives, leading to a substantial reduction in consolidated debt and improving its ability to compete for new project bids. Furthermore, HCC is strategically positioned to capitalise on significant market opportunities in critical sectors such as nuclear power, hydroelectric power, and transportation, underscoring its potential for future growth and expansion in the infrastructure space, it explained.

Stock Price Trend

The stock has given multibagger returns in the last one year, surging 162 percent and jumping 70 percent in 2024 YTD. It has given positive returns in 3 of the 6 months so far. As mentioned, the stock has rallied 31 percent in June after a 2 percent fall in May. Meanwhile, it rose 20 percent in April but had lost 21 percent and 8.6 percent in March and February, respectively. In January, the stock surged 53.5 percent.

The stock hit its 52-week high of ₹51.13 in the previous session, June 12. Currently trading at ₹48.4, it has now advanced 184 percent from its 52-week low of ₹17.05, hit on June 20, 2023.

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Investment Rationale

Debt: The brokerage pointed out that HCC has made significant strides in debt reduction, with consolidated debt, including accrued interest, declining sharply from ₹12,200 crore in FY15 to ₹3,500 crore by FY24 — a reduction of 71 percent. Standalone debt also decreased by 45 percent, from ₹6,200 crore in FY22 to ₹3,400 crore in FY24, where it has stabilised. Optimistically, HCC expects its net worth to turn positive by FY26, following a peak negative of ₹1,300 crore in FY21. The Vivaad Se Vishwas Scheme is anticipated to expedite the recovery of outstanding awards totaling ₹2,300 crore in favor of HCC. Historically, the company has achieved an average conversion time of four years for awards to cash, with an average collection rate of approximately 87 percent of the claimed amount, it added.

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Pipeline Trends: Elara noted that HCC has recently benefited from credit rating upgrades and lifting restrictions on bank guarantee limits, enabling it to pursue new contract bids actively. The company currently holds the lowest bid (L1) position for contracts worth ₹4,500 crore, with bids totaling ₹10,400 crore under evaluation and a robust pipeline of ₹46,400 crore across sectors like power, hydro, roads, nuclear, and transportation. The brokerage expects inflows for FY25E to be at ₹9,000 crore, slightly below the guidance of ₹10,000 crore, with a targeted annual increase of 15 percent over the next two years. Collaborations with private equity investors are expected to facilitate HCC's participation in long-term PPP projects, thereby easing the strain on its balance sheet, it added.

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Estimates

Given past experience and the large opportunity landscape, the brokerage remains hopeful of a turnaround in financials from FY25 and further strengthening from FY26. It expects a standalone revenue and EBITDA CAGR of 20 percent each during FY24-27E with an earnings CAGR of 50 percent, due to lower interest costs. It also estimates the EBITDA margin will expand by 14 percent from FY26E once new projects hit the execution threshold.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.