HCC: Soft quarter; higher interest costs impact profitability:: Edelweiss

Visit http://indiaer.blogspot.com/ for complete details �� ��


􀂃 Revenue and PAT below expectation
Hindustan Construction’s (HCC) Q2FY11 revenues were below our expectations;
top line, at INR 8.8 bn, grew 13% Y-o-Y but dipped 11% Q-o-Q. EBITDA margin
came in at a healthy 12.8%, up 20bps Q-o-Q and 150bps Y-o-Y. However,
interest charges increased sharply to INR 671 mn, up 34% Y-o-Y and 16% Q-o-
Q. As a result, PAT, at INR 121 mn (against our expectation of INR 192 mn),
jumped 120% Y-o-Y but dipped 57% sequentially. PAT margins, at 1.4%,
increased 70bps Y-o-Y but slipped 140bps Q-o-Q.
􀂃 Order book at INR 197 bn; L1 in projects worth INR 15 bn
The company’s order book increased to INR 197 bn against INR 193 bn at
Q1FY11 end and INR 188 bn at FY10 end. In addition, it is L1 in INR 15 bn worth
of projects. HCC bagged INR 11.5 bn projects during the current quarter.
􀂃 DRHP filed for Lavasa
During the current quarter, Lavasa Corporation has filed its DRHP with SEBI for
an IPO. It plans to raise ~ INR 20 bn through a 100% book building process.
􀂄 Outlook and valuations: Value unlocking likely; maintain ‘BUY’
The company’s robust order book and strong execution capabilities lead us to
believe that revenue growth will pick up going ahead (especially in FY12).
However, working capital cycle has remained stretched, thereby negating the
benefit from improvement in operating margins. HCC’s ability to contain interest
costs will be the key determinant of its profitability. Its asset ownership business
is doing well and we believe its growth prospects are bright.
We have revised our estimates down keeping in mind the H1FY11 performance.
We believe that improved visibility on the Lavasa IPO is likely to keep the stock
buzzing. Also, its BOT project portfolio has achieved a critical mass and any
possible value unlocking therein will provide an upside trigger for the stock. Our
sum-of-the-parts-based target price for the stock is INR 77—EPC business
contributes INR 28/share, BOT projects INR 8/share, and Lavasa INR 36/share,
with the balance coming from the realty business. We maintain ‘BUY/Sector
Outperformer’ recommendation/rating on the stock.