Hindustan Dorr Oliver:First signs of slackening?: Elara

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First signs of slackening?


Disappointing quarter after a great run

HDOL registered a moderate 20.1% YoY growth in revenues at
INR2.4bn (vs our expectation of ~INR2.7bn). Operating margins were
compressed heavily by 338bps YoY to 9.1% (vs our expectation of
12.4%), leading to a 12.4% YoY fall in operating profits to INR222mn,
primarily due to higher execution across relatively lower margin water
cycle projects (~55% of revenues). Consequently, adjusted net profits
for the period too declined by 10% YoY to INR140mn (vs our
expectation of INR180mn), despite interest and depreciation charges
remaining in check. Reported net profits though were higher by 32%
YoY at INR206mn owing to a one time profit of INR99mn booked on
the sale of an immovable property.


Order book visibility concerns loom large, no major orders in Q2
HDOL’s fresh order inflows have dried up alarmingly in H1FY11
(INR3.1bn) after peaking to INR9.8bn in FY10. Though the company’s
water division has recently bagged new jobs worth INR1.1bn in Oct-
Nov’10, we are concerned on the visibility extended by the present
order backlog at ~INR13bn. While metals and mineral beneficiation
accounts for ~45% of the total order backlog, environmental
management, special projects and manufacturing orders score 34%,
6% and 15% respectively.

Toning down estimates, maintain Accumulate at INR150
Owing to lingering concerns over its fresh order inflows as well as an
alarming revenue to bill ratio of 1.1x, we tone down our revenue and
earnings estimates for FY12 by 4.3% and 7.4% respectively.
Nevertheless, we remain positive on HDOL to clock revenue and net
profits CAGR of 31.6% and ~29% respectively over FY11-13E. We value
its core business at 11x FY12 earnings (~20% discount since the
acquisition by IVRCL). Our SOTP valuation pegs the company’s fair
value per share at INR150, maintain ‘Accumulate’.