HCC - Event Update - Elara Capital

• HCC
• Rating : Buy
• Target Price : INR85
• Upside : 52%
• CMP : INR56 (as on 31 August 2010)

Destination Lavasa – '412112'

Lavasa Corporation Ltd (LCL) has come out with a communiqué against the recent allegations of flouting environmental norms, illegal acquisition of land and diversion of water (from the Warasgaon dam) to its marquee township project 'Lavasa', near Pune. The company has asserted all such allegations to be based on inadequate knowledge of facts and speculative in nature.

Lavasa is part of the 23,000 acres of land, declared as a `hill station' by the Maharashtra government, built along the 20 km-long Warasgaon Lake. LCL is developing the project as an integrated township spread over 12,500 acres - based on a model, wherein, the development of the hill station begins from a densely populated town center and gets sparser as it goes uphill.

LCL presently owns 9,370 acres at Lavasa through several private negotiations entered into over the past 8 years, which is fully paid for. It is in the process of buying out the remaining chunk of ~3,100 acres which is expected to be closed shortly. In reference to the allegations that LCL has purchased 1,504 acres of Class II land (agricultural land) in breach of the conditions, it has clarified purchase of only 865 acres of Class II land paying 2% premium to State government in accordance with provisions of Bombay Tenancy & Agricultural Lands Act, 1948. It also claims not buying even a single acre of land under the 36A category from the local tribal community. Phase I of the project (~5,000 acres) comprising of 'Dasve' and 'Mugaon' had received all clearances from the State Environment Department in Mar'04; LCL had applied for environmental clearance for the remaining 7,500 acres a year back and is awaiting response on the same.

HCC is planning a potential listing of Lavasa by Nov-Dec'10. The company presently holds a 65% stake in the entity via its wholly owned subsidiary, HCC Real Estate Ltd (HREL). Avantha Group (16.3%), Venkateshwara Hatcheries (12.8%) and Vinay Vithal Maniar (5.9%) hold the remaining equity. Additionally, nine banks and financial institutions hold ~10.6% (at an EV of INR100bn) in the company via convertible instruments.

Maintain Buy, rate 'Sector Outperformer' with a TP of INR85.

Despite a paltry FY10, HCC's E&C business has shows signs of revival with an improved operational performance over the past couple of quarters. With a host of positives events (divestment in 247 Park, acquisition of Karl Steiner AG, MoU with Orascom Construction and launch of Highbar Technologies) already being announced and couple of major ones on the cards (divestment in HCC Infra and Lavasa IPO), we strongly believe the company is in for good times ahead. We are of the opinion that despite a sharp dip in the stock price over the past couple of weeks, the re-rating story of HCC has just begun and expect it to outperform its peers over the next 12-15 months. Maintain BUY with a price target of INR85.

Source : Equity Bulls

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