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For 2QFY2011, HCC’s results were higher than our estimates primarily because
of the better-than-expected top-line and EBITDA margin growth leading to higher
bottom-line. We believe HCC’s stock performance depends on the Lavasa IPO,
which is expected to hit the markets in December this year, and is more of a realestate
play rather a construction story. This is also visible from the performance of
its parent, which has been registering flattish performance since the last 3-4
years. Further, we believe that management is too optimistic in its valuation for
Lavasa. Hence, we remain Neutral on the stock.
Results better than estimates: HCC’s top line grew 13.2% to `884.6cr v/s our
estimate of `823cr. OPM stood at 12.8% (11.3%). Bottom-line grew 120.1% yoy
to `12.1cr. The robust bottom-line growth was mainly driven by better top-line
growth and margins, and aided by a low base.
Outlook and valuation: Lavasa has filed the DRHP to raise `2,000cr towards the
year end (diluting 10% stake), implying valuation of `20,000cr, which we believe
is too optimistic. Moreover, Lavasa has still to receive the environment clearance
along with land acquisition problems. Lavasa is in poor comparison to its other
large real estate pan-India peers, which are trading at a discount to their NAVs
and market caps, and are only factoring in near-term earnings. Also, with too
much paper supply (there are at least five large real estate companies, which
have filed their DRHP), we believe that investor interest in the sector would wane.
We have valued HCC on SOTP basis and assigned 14x FY2012E earnings
(standalone). The real estate venture has been valued on NAV basis and the BOT
assets on P/BV basis. We have arrived at a Fair Value of `63, which provides
limited upside from current levels. Hence, we maintain our Neutral view on the
stock.
Top-line and bottom-line marginally higher than our estimates
HCC’s reported top-line yoy growth of 13.2% to `884.6cr marginally above our
estimate of `823cr. The lower revenue realisation was primarily due to the loss
incurred in the Delhi Metro project. We expect the company to post a better
performance in 2HFY2011 due to revenue inflow from the Delhi-Faridabad
expressway (expected to be operational from November 2010) and EPC revenues
from the NH-34 project, which has achieved financial closure.
Operating margin improved 12.8% during the quarter as against our estimate of
12.1% mainly because of reduction in other expenses, as a percentage of sales.
Bottom-line surged 120.1% yoy to `12.1cr (`5.5) mainly driven by better top-line
growth and margins, and aided by a low base.
Order book analysis
HCC’s order book, as of 2QFY2011, stood at `17,795cr (4.8x FY2011E revenue)
(excluding the disputed order) with the company bagging orders worth `1,178cr
this quarter. The company’s order book comprises the hydro power (43%), water
solutions (20%), transportation (24%) and nuclear and special projects (13%). The
company is L1 for contracts worth `1,537cr. Going ahead, the company has given
guidance of adding `3,000-4,000cr of road BOT projects every year and also
indicated to enter the new segments of metal and mining, which should further
ramp up its order book.
Outlook and Valuation
Lavasa has filed the DRHP to raise `2,000cr towards the year end (diluting 10%
stake), implying valuation of `20,000cr, which we believe is too optimistic.
Moreover, Lavasa has still to receive the environment clearance along with land
acquisition problems. Lavasa is in poor comparison to its other large real estate
pan-India peers, which are trading at a discount to their NAVs and market caps,
and are only factoring in near-term earnings. Also, with too much paper supply
(there are at least five large real estate companies, which have filed their DRHP),
we believe that investor interest in the sector would wane.
We have valued HCC on SOTP basis and assigned 14x FY2012E earnings
(standalone). The real estate venture has been valued on NAV basis and the BOT
assets on P/BV basis. We have arrived at a Fair Value of `63, which provides
limited upside from current levels. Hence, we maintain our Neutral view on the
stock.
Investment Argument
Fairly valued
HCC registered modest top-line growth of 13.2% for 2QFY2011, despite high
order book-to-sales ratio, primarily because of its relatively long-gestation
projects’ skewed order book (hydro power and transportation segments). On
the valuation front, we believe that at current levels of 33.3x PE and 2.3x P/BV
on FY2012E basis, the stock price factors in all upsides from its construction
arm and real estate venture. Hence, we remain Neutral on the stock.
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