Embedded value analysis out with bull market

 EMBEDDED value, the value of unlisted subsidiaries of a firm, is another idea that seems to have gone out of the window with the bull market. News of a private equity deal in a subsidiary would have been enough to drive stock prices of a firm last year, but not any longer. Mumbai-based Hindustan Construction announced a Rs 150-crore investment by Bank of India in a subsidiary, valuing it at Rs 10,000 crore. At these levels, the 65% stake that HCC owns in Lavasa would translate to Rs 254 per HCC share — almost five times the current market value! Lavasa is a 12,500-acre hill station being developed close to Mumbai. The announcement didn't excite the markets and HCC closed at Rs 46.4, down 11%. Some other investors have also put money in the firm at similar levels. However, these investments are in the form of convertible bonds, so that investors have an exit in case the projected valuation doesn't materialise.
    Other stocks in the construction space have also seen a similar trend in asset values. In March this year, ICICI Bank picked up a 1% stake in Jaypee Infratech, which is developing the Taj Expressway in Uttar Pradesh, for Rs 250 crore. At this level, the remaining stake with Jaiprakash Associates — the parent firm — was worth Rs 24,740 crore, or Rs 210.7 per share. This was just a tad below JAL's closing price of Rs 233 that day. The current stock price of the firm is Rs 72.7, just about a third of the value accorded to the subsidiary a few short months ago. The trend is mirrored across other construction stocks, which were trading at 25-30 times earnings not so long ago are now down to single digits. Over the past few years, construction companies have diversified into related segments, such as real estate and developing infrastructure projects. Mumbai-based Gammon India came out with the public offering of Gammon Infrastructure Projects (GIPL) in February this year. GIPL is the holding company for all infrastructure projects being developed by Gammon. Hyderabad based IVRCL Infrastructure entered the real estate business and took its subsidiary, IVR Prime Urban, public in 2007. Other players in the sector, such as Patel Engineering and Nagarjuna Construction also have subsidiaries in the realty business.