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.
Soft quarter; interest expenses increase
HCC’s revenue, at INR 8.8 bn, in the current quarter grew 13% Y-o-Y but was down 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 expenses increased sharply to INR 671 mn compared to INR 577 mn
and INR 499 mn in Q1FY11 and Q2FY10, respectively. As a result, PAT at INR 121 mn
(against our expectation of INR 192 mn) was higher 120% Y-o-Y but dipped 57%
sequentially. PAT margins at 1.4% increased 70bps Y-o-Y but slipped 140bps Q-o-Q.
The increase in interest charges is due to a couple of reasons.
• First, HCC’s working capital cycle has remained stretched; net working capital
increased to ~INR 33 bn (against ~ INR 30 bn at Q1FY11 end and INR 26 bn at FY10
end). Net working capital (excluding cash) as a proportion of TTM (trailing 12
months) revenues currently stands at 74%; the same was 76% in Q1FY11, 66% in
FY10 end, and 53% in FY09 end.
• Second, the company earlier used to borrow funds (of ~ INR 5 bn) through
commercial papers (CP), the interest rate for which was ~5-6%. However, post
introduction of the base rate, the interest rate has shot up ~300bps. This has led to
increase in interest charges.
• Also, during the current quarter, HCC has taken mobilisation advances from clients
(which usually have higher interest rates). This further led to higher interest costs.
With a steady build-up in its order book, the company expects revenue growth to pick up
in H2FY11 and FY12 as many projects are in advanced stages of mobilisation. Also, it is
focusing on bringing its working capital cycle down by settling payment issues with
certain clients. It expects to realise INR 7.5 bn over the next 12 months on this front.
Order book at INR 197 bn; L1 in projects worth INR 15 bn
HCC’s order book increased to INR 197 bn against INR 193 bn at Q1FY11 end and INR
188 bn at FY10 end. In addition, the company is L1 in INR 15 bn worth of projects. HCC
bagged INR 11.5 bn projects during the current quarter. Out of this, 40% projects came
from the private sector.
HCC continues to maintain a calibrated approach towards Andhra projects. It has aligned
its execution schedule after consultation with government authorities with regards to the
likely progress of these projects and the concomitant payments on the same. Currently,
19% of its order backlog accrues from Andhra projects.
The company has tried to increase its exposure to private sector projects which have
better payment terms and margins compared to public sector projects. Private sector
projects contributed 42% of its order inflow in H1FY11. Also, of its current order book,
private sector projects amount to 9% (apart from the 18% contributed by captive BOT
projects).
Other real estate ventures
HCC is in advance stages of launching phase II of 247 park in Vikhroli. More than 70% of
the approvals are in place and balance are expected in the next three months. The
project has a total saleable area of 0.9 mn sq ft.
The company is going ahead with the slum rehabilitation project at Vikhroli (E), for which
approvals for the first phase (14 acres) are at an advanced stage. Rehabilitation area for
the project is 1.3 mn sq ft, with a saleable area of 1.5 mn sq ft.
HCC had also completed the acquisition of 66% stake in Karl Steiner AG (KSAG) for CHF
35 mn during the previous quarter. During the quarter, KSAG has bagged two new
projects worth CHF 200 mn. Its order book at Q2FY11 end stood at CHF 789 mn. During
the quarter, KSAG posted a turnover of CHF 171.3 mn with a PAT of CHF 0.6 mn.
HCC Infrastructure projects proceeding at a fair pace
HCC’s asset ownership arm, HCC Infrastructure, is seeing a fair degree of progress on
projects. The company expects the Badarpur project to become operational by November
2010, ahead of schedule. It has achieved financial closure on the three West Bengal road
BOT projects won in February. The interest rate is an attractive 10.5% which will be
fixed during the construction period. Mobilisation is complete and work has started at
project site.
The current BOT portfolio includes six road projects with a total size of INR 55 bn. The
company plans to scale this up to INR 200 bn over the next 4-5 years. In the roads
space, it has entered into strategic partnership with reputed overseas partners like
Orascom & Vinci, to bid for select large NHAI projects, including mega projects.
Company Description
HCC is a leading civil engineering and construction company, engaged primarily in the
construction of hydel and power projects, irrigation, water supply, urban infrastructure
and transportation projects. It is developing Lavasa, an ambitious project aimed at
creating a hill city near Mumbai and Pune. Apart from this, it is also involved in some
other real estate development projects. HCC is also making inroads in the asset
ownership space with entry into the roads space and has plans to build its BOT portfolio
significantly going ahead.
Most of its customers are central government bodies/public sector units like NHAI, NHPC,
NPCIL and state governments like Andhra Pradesh, Gujarat, and Maharashtra. It has also
worked on hydel power projects in other counties like Bhutan.
Investment Theme
HCC with more than eight decades of experience in the engineering and construction
(E&C) space, is amongst the most respected infrastructure majors in India. Its
unmatched technical skills are evident in several marquee projects it has executed over
the years. With a robust order book, the company is likely to chart a strong growth
trajectory going ahead.
With PPP projects gaining currency, HCC has drawn ambitious plans to leverage its E&C
strength as far as the asset ownership space is concerned. Its current ~ USD 1.2 bn
portfolio consists of six road BOT projects, of which one is operational, two are under
development, and execution on three is yet to begin. The company plans to build a
sizeable portfolio in the transportation (roads, metro rail, railways and airports) and
energy (hydro, nuclear and thermal power) space.
HCC, through its 100% owned subsidiary, HCC Real Estate (HREL), is developing Lavasa,
free India’s first hill city. We believe Lavasa has reached an inflexion point and is likely to
redefine the company’s profile. Lavasa has already surpassed HCC in terms of
profitability and is likely to grow exponentially, thus emerging as a game changer for the
company. It is on its way to emerge as a breakthrough project, changing the contours of
domestic urban infrastructure development along with significant value enhancement for
HCC.
Key Risks
HCC has ventured into real estate and BOT segments, both of which entail upfront
investments with returns generally being back-ended. In this context, fund raising in
Lavasa has emerged as a key monitorable for the company. Notwithstanding this, there
will be demands on the company’s balance sheet since the core contracting business also
requires funds. Also, working capital management has become a key issue for the
company which has stretched its working capital cycle.
The company’s order book is geared towards hydel projects that are typically long
gestation and mostly in difficult terrains. There are inherent risks in execution of such a
long duration portfolio.
'
Andhra Pradesh had been a major source of orders for most companies during the past
four-five years, particularly in the irrigation segment due to the Jalayagnam project.
However, most companies have faced delays in payments during the past seven-eight
months due to the state government’s stressed financial condition (exacerbated by the
Telangana statehood issue). As a result, most companies have slowed down execution
on projects in the state till clarity emerges on the situation.
No comments:
Post a Comment