HCC: 2Q disappoints; high debt levels a worry:: IIFL

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2Q disappoints; high debt levels a worry
• HCC’s 2QFY11 revenue growth remained sluggish at 13.6% YoY.
Margins surprised positively, expanding 180bps YoY. Consequently,
EBITDA growth was strong at 31.3% YoY.
• Management guided towards a pick-up in revenue growth, as
execution for large new projects ramp up. Financial closure of the
captive road BOT projects in West Bengal should result in
execution ramp-up in 2H.




• Sharp increase in borrowings, up 34% in 1H vs end-FY10 levels, is
a key concern. This was driven by Rs4.57bn increase in operating
cycle vs incremental sales of only Rs2.2bn. Management admitted
that liquidation of high receivables is the top-most priority.
• We remain concerned on the performance of the core construction
business weighed down by sluggish growth, coupled with
consistent increase in interest burden. FCCBs due end-FY11 would
further increase interest outgo.
Sluggish revenue growth in 2Q; 2H likely to be strong
• HCC’s 2Q revenues grew 13.6% YoY, lower than our estimates of 18%
growth. Post a 14% YoY revenue growth in 1H, management guided
towards a strong 2H, as execution ramps up for large new projects.
• EBITDA margin expanded 180bps YoY to 13.2%, higher than our
estimates. As a result, EBITDA was in line with our estimates.
• PAT increased 120% YoY to Rs121m, against our estimate of Rs222m,
as lower tax rate (26% in 2QFY11 vs 42% in 2QFY10) more than offset
the impact of 34% YoY (16% QoQ) increase in interest costs.
Sharp increase in borrowings as operating cycle lengthens
• 2Q interest costs at Rs671m were up 34% YoY and 16% QoQ. While
higher interest rates did hurt, the key concern is the Rs8.62bn (34%
increase) in debt levels in 1HFY11. Standalone net D:E of 1.9x
continues to remain high, despite the recent fund raising.
• Bulk of the increase was consumed by higher working-capital, up by
Rs4.57bn in 1HFY10. Debtors have increased by Rs6bn in 1HFY10 vs
incremental sales of Rs2.2bn during the period.


Improvement in performance of Karl Steiner
• For the quarter ended Sept-2010, Karl Steiner reported net profit of
CHF0.6m on total revenue of CHF171.3m. In contrast for the first two
months (5 May – 30 June), the company made losses at the net level.
• The company’s current order book stands at CHF789m. During the
quarter, Karl Steiner won two new projects worth CHF200m.
• HCC plans to utilise Karl Steiner’s expertise in the Indian building
construction market as a total services contractor.
Update on the real-estate portfolio in Vikhroli (Mumbai)
• Leasing for the phase-I of the 247 park (26% stake held by HCC) is
over, with 99.6% space leased out at an average rental of Rs70-71 psf.
• The company plans to start construction for phase-II over the next 3-4
months. Phase-II on completion would have a leasable area of 0.9m sqf.
• The company is in the process of obtaining approvals for the SRA
project in Vikhroli (E), with a saleable area of 1.5m sqf.