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Hindustan Construction – Improving P&L and Balance Sheet

September 23, 2009

HCC’s order backlog as at September 1, 2009 is at Rs163bn implying Rs8bn of order inflows in F2Q10. The company has shifted its strategic focus to the high margin hydropower and water solutions segments and expects an improvement in its margins to 12-13%. The recent QIP raising of Rs4.8bn has helped the company improve its debt/equity ratio. Management indicated that it also expects its working capital cycle to compress.

HCC is developing the 12,500-acre Lavasa project, phased over 13 years (2008-21). Planned for a permanent population of 200,000 and a tourist inflow envisaged at two million p.a., Lavasa presently has about 6msf under development (12-13msf sold) with its first town, Dasve, scheduled to be operational by 2010. At present, Lavasa Corporation Ltd (LCL) has equity of Rs3.5bn and debt of Rs5.5bn. Financial Investors/ Private Investors have recently invested about Rs5.8bn through CCDs/warrants. LCL, as at June 2009, had sold land worth Rs278m and build-up space worth Rs663m.

Management has strong conviction in Lavasa and proposes to take LCL public in a year. Per management, Lavasa has witnessed good residential volumes (about 60k overseas enquiries to date) with a majority (~ 80%) from second-time homebuyers. Management however believes the true potential of Lavasa lies in developing its indigenous economy through commercial / institutional development in the next 2-3 years, that would create a strong (and sustainable) residential market of first-time homebuyers.

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