Hindustan Construction Co - Rise in working capital impact earnings: Religare

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Hindustan Construction Co Ltd
Rise in working capital impact earnings
While HCC’s revenues and operating profit was higher than our estimates,
higher interest cost, loss in JV operations and lower other income led to 54%
lower earnings, which declined 73% YoY. Net debt rose ~Rs 6bn in H1FY11,
driven primarily by rise in working capital. Working capital (ex-cash) to FY11E
sales ratio was 65% at Sep ‘10 v/s 55% as at March ‘10. We have revised our
earnings estimates downward by 10% for FY11 and 8% for FY12 mainly to
factor higher interest expenses. We have rolled forward our target price to Sep
’11, which stands at Rs 73. Lavasa IPO and private equity placement in
infrastructure arm could be the key triggers as these subsidiaries will return
loans to parent company which will be utilized to reduce debt. Maintain Hold.
Q2FY11 result highlights:
􀂙 Revenue grew by 14% YoY to Rs 8.9bn, 6% higher than estimates. EBITDA
margin dipped 70bps YoY to 13.2%, which was 20bps above estimates.
􀂙 Earnings de-grew 73% YoY and were 54% below estimates, due to higher
interest cost (up 34% YoY, 16% QoQ), loss from JV operations (unapproved
bills in DMRC work), lower other income (Rs 1mn v/s Rs 77mn for Q2FY10).
Key concern:
􀂙 Working capital (ex-cash) to FY11E revenues ratio stood at 65% as at Sep
’10 v/s 55% as at end FY10. About Rs 7.5bn worth of claims are pending
with various government authorities (mainly AP, NHAI and MSRDC). As a
result, net debt rose to Rs 29bn at Sep ’10 v/s Rs 23bn at March ‘10.
Key triggers:
􀂙 Lavasa IPO: Management plans to launch Lavasa IPO in December, which
will be helpful in realizing o/s loans of ~Rs 4bn given to Lavasa Corp.
􀂙 Private equity deal in infra arm is expected in couple of months time.
Parent’s balance sheet remains stretched: HCC’s balance sheet remains
stretched due to high working capital levels and support to subsidiaries, resulting
in high debt levels, although order book remains healthy at 4.0x FY11E revenues.
TP rolled forward to Sep-11; maintained at Rs 73: We have revised our earnings
estimates downward by 10% each for FY11 and 8% for FY12 to factor higher
interest expenses. We have rolled forward our target price to Sep ’11, which
stands at Rs 73. Maintain hold.