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HINDUSTAN CONSTRUCTION 2QFY11: Below est; PAT down 57% YoY due to rising funding requirements and interest cost; Rating Under Review
2QFY11 below estimates; margins down 20bp YoY
- HCC (HCC IN, Mkt Cap US$0.8b, CMP Rs61) reported 2QFY11 revenue of Rs8.8b (+13.6% YoY), in-line with our estimates of Rs8.9b. EBITDA margins stood at 12.6% (up 15bp YoY), and was in line with our estimates of 12.5%. Adjusted net profit stood at Rs121m down -57% YoY, below our estimate of Rs219m.
- The main reason for below-estimate PAT was interest which was up 34% YoY at Rs670.7b, significantly than our estimates of Rs515b.
- Execution was impacted in 2QFY10 on account of various reasons including slow decision-making by Governments in states and centre on various infrastructure projects (for example Andhra Pradesh government had outlined series of infrastructure development projects in water and irrigation space, progress on which remain slow). In addition, heavy monsoon during the quarter also impacted execution.
- EBITDA margin at 12.6% (up 15bp YoY) was driven by higher proportion of hydropower in revenue mix at 45%. 1HFY11 revenue growth is muted as ~45% of the projects are geared for delivery during 2HFY11.
- Interest was high due to intake of a few high value orders (NH-34 road package Rs28b, Kishanganga HEP Rs25.7b, etc) which resulted in increased advances attached with high interest rates. Debt has also increased from Rs25b as of Mar-10 to Rs33.7b as on Sep-10. We expect with improvement in execution, impact of higher interest rate will subside in coming quarters.
- HCC during the quarter filed DRHP with SEBI to raise Rs20b in Lavasa. Management stated that the IPO should hit the market by the first week of December subject to approvals.
Order backlog at Rs197b, L1 orders at Rs15b
- HCC derives ~90% of its order book from state/central government. Order book stood at Rs197b (up 27% YoY, +2% QoQ), book to bill ratio at 5.1x TTM. We believe the current order book should drive revenue CAGR of 19.6% during FY10-13E.
- Order intake during the quarter stood at Rs11b. Major orders received during the quarter are i) Rs2.9b from Hindalco (Aditya Aluminium project at Sambalpur, Orissa) ii) Alaknanda HEP (LOT I & II), Uttaranchal Rs6.6b.(iii) Assam Railway tunnel - North Front Railways for Rs1.8b. The management has guided for FY11 inflows of Rs80-100b which would translate into inflow growth of 40-70% YoY.
- 247 Park Deal (Phase II): HCC is planning to launch Phase II of 247 park in Vikhroli Mumbai, with total area of 2msft and saleable area of 0.9msft. As on date, 70% of the project approvals have been received and balance 30% is expected to be received in 3QFY11. Accordingly, construction work is expected to start in 4QFY11. The construction work is expected to complete by FY13.
- DRHP filed for proposed Lavasa IPO: HCC’s board has filed Lavasa DRHP with SEBI in Seo-2010, and is planning to launch the IPO by December 2010. The issue size is likely to be ~Rs20b, and the funds will mainly be utilized to retire debt of ~Rs8b and also fast track construction work of the second and third township.
- BOT Portfolio to have equity commitment of Rs5.4b by FY12 end: HCC has BOT road portfolio of six NHAI projects totaling Rs55b. HCC intends to grow the portfolio to Rs200b in the next 2-3 years. The equity invested till date is at Rs5b while the balance will be invested in the next 9-12 months. The total equity commitment of the overall BOT portfolio stands at Rs10.4b.
- Karl Steiner AG recorded a profit of CHF0.6m in 2QFY11: During the quarter company bagged 2 new orders worth CHF200m, order book as on 30thSep 2010 stood at CHF 789mn. Since acquisition company is concentrating on consolidating its operations in Swiss and entering the Indian markets as a Total Services Contractor (TCS) in building construction.
- Highbar Technologies LLC Dubai subsidiary: Highbar Technologies took its first SAP project for HCC. Since then, it has added 34 domestic customers and has incorporated Highbar Technologies LLC Dubai subsidiary to expand SAP operations in overseas market. Some of its other key domestic clients are Tulip, Pratibha Industries, D-Mart, JSW, etc.
Valuation and view
- We have downgraded HCC’s earnings estimates for FY11 and FY12 by 27% each year. Our current EPS for FY11 is Rs1.6 (Rs2.2 earlier) and for FY12 Rs2.3 (Rs3.2 earlier).
- Key reason for earnings downgrade is steep rise in interest cost without commensurate increase in sales.
- Our rating on the stock is Under Review.
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