HCC to acquire Karl Steiner AG : SOKHI FULL REPORT !

KARL Steiner is a leading Swiss buildings contractor: Karl Steiner AG (KSAG)
is the second largest total services contractor (TSC) for real estate
development in Switzerland. Over the last 10 yrs, it has developed 32msf of
state-of-the-art real estate worth CHF10bn across residential, office, hotels
and social infrastructure buildings. It undertakes complete development
including design, project management, engineering, construction and final
sale of properties to third parties. KSAG is a 95yr old company and is 100%
privately owned by Peter Steiner.

HCC to acquire 66% in KSAG for CHF35mn: Hindustan Construction (HCC)
has received Board approval to acquire 66% stake in KSAG for CHF35mn
(c.Rs1.5bn). The remaining 34% stake will be acquired in 2014 at a pre-agreed
valuation based on KSAG’s earnings performance during 2010-13. Peter
Steiner will remain invested till then and function as Vice Chairman to
facilitate integration of KSAG into HCC. The deal is expected to be
consummated in the next 2-3 months post receipt of approvals from Swiss
authorities and RBI (primarily related to real estate ownership in Switzerland
by foreign entities). It will be an all-cash deal funded through internal accruals
and debt at HCC. The investment will be in the company rather than HCC
buying out the promoter’s stake.

HCC to enter high-rise buildings market in India, Middle-East: Acquisition
of KSAG will help HCC get pre-qualified for TSC contracts for development of
high-rise state-of-the-art office and residential buildings in India and Middle-
East. According to the management, the current market opportunity in India
is around Rs650bn with premium high technology building development
segment comprising c.1/3rd of the total. HCC will also target iconic city
development projects in Qatar, Oman and other regions in Middle-East where
its presence has been marginal till date.

KSAG has a thin margin business, but in line with peers: KSAG is the
second largest player in the TSC segment in Switzerland. Implenia is the
largest. The management did not share details about KSAG’s financials but
indicated that margins are in line with peers in the region (see Exhibit 1).
According to the management of HCC, KSAG has revenues of c.CHF700mn
with an EBIT margin in the range of 3-4%.

At current price, HCC is trading at consensus P/E of 27.2x and 21.8x FY11E
and FY12E EPS respectively.