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HINDUSTAN DORR-OLIVER LTD (HDO)
PRICE: RS.115 RECOMMENDATION: BUY
TARGET PRICE: RS.145 FY11E P/E: 13.1X
q After a significant lull in new orders, HDO has bagged three orders totaling Rs.1.35 bn from various industry segments.
q Highlight anemic order intake for the company in the past quarters and
in our view acceleration in order intake remains critical for maintaining
growth trajectory in FY12. Stock performance has also been impacted
due to reducing revenue visibility.
q Reiterate BUY post the stock correction with an unchanged price target
of Rs.145
Signs of uptick in order intake
n After lackluster newsflow on the order intake front in the first half of FY11, order
intake has shown signs of uptick in 3QFY11. The company has announced three
orders totaling Rs 1.35 bn from various industry segment including Heavy Water
Board (GOI), ONGC and Balco. These orders come on the back of a Rs 1.0 bn
order from refinery sector that the company announced in October 2010. The
Balco order is a repeat job from the Vedanta group, which has been a major
client for HDO in the past.
n HDO has also refurbished its manufacturing facility to make products for the
Nuclear sector. It currently is well positioned for orders worth Rs.520 mn for supply of heat exchangers and pressure vessels for the Nuclear Power Corp of India
n Following deceleration in order intake in FY10, the revenue visibility has also
slipped to 16 months currently from a high of 30 months in Q4FY09.
n The company's order backlog stands at Rs 13.5 bn and business worth Rs 45 bn
is expected to come up for bidding. In H1 the company has won orders worth Rs
4.5-5.0 bn and expects orders worth Rs 15 bn in H2. HDO is currently pursuing
business worth Rs 45 bn. Important among them is a Rs 3.3 bn expansion project
order from Uranium Corporation of India (UCIL) which is expected to get finalized by March 2011.
n The company expects to end the fiscal with an order backlog of Rs 15-20 bn
which will provide adequate visibility for future growth.
n As per the company, the outlook for orders is positive however, mineral
beneficiation projects have taken a setback due to greater scrutiny in environmental clearance.
Target to reach Rs 11 bn plus in revenues in FY11
HDO's target is to reach Rs 11 bn in FY11 from Rs 8.6 bn in FY10. Given that the
revenue visibility is of over 12 months, the company is in a strong position to meet
its target. In H1FY11, the company reported revenues of Rs.4.9 bn, a growth of 29%
yoy.
Q2 FY11 numbers marred by lower margins
During the Q2 FY11, operating profit declined 12% on account of margin reduction
of 240 bps to 9.1%. The management clarified that margins were impacted due to
project mix changes resulting from a higher share water treatment business where
the margins are the lowest. This is due to higher share of construction work in water
treatment projects which is primarily outsourced to subcontractors.
Bullish on engineering services business
The company sees a huge opportunity in engineering services. The company has set
up engineering design centres across the country to leverage its in-house expertise to
service external customers. Availability of skilled engineers coupled with India's preeminence as an services outsourcing destination has made it the preferred location
for most global EPC contractors.
A report by Nasscom and Booz Allen Hamilton estimates the global engineering services market to reach USD 1100 bn by 2020. Out of this, the outsourced component
would be USD 200 bn far higher compared to the current level of global outsourcing
of USD 15 bn. India has a 12% market share of the global engineering outsourcing
market.
HDO Technologies Ltd - reports substantial progress in ramping
up operations
HDO Technologies, subsidiary of HDO is driving the parent's foray into engineering
services business. This company has set up centres in 5 locations across the country
with a total engineering strength of 350 engineers and designers.
During FY10, the company opened a KPO centre at Bengaluru with over 100 engineers. These engineers are working on projects in the metals and fertilizer industries.
For FY10, revenues grew to Rs 167.6 mn from Rs 111.9 mn and PAT has increased
to Rs 23.2 mn from Rs 9.6 mn. HDO Technologies contributed 4% to the parent's
PAT.
The company expects to ramp up its Delhi branch in the current fiscal. Going forward, the management sees HDO Tech contributing to around 20% of the parent's
revenues over a period of three years.
Recommendation Rationale - Reiterate BUY
n The HDO stock has underperformed in the recent past as order intake has been
sluggish. At the current price, the stock offers an upside of 25% to our target
price of Rs 145.
n We reiterate BUY on the stock.
n Improvement in economic scenario may likely spur demand for core products
thus prompting corporates to invest in capacity building, which should drive order
book for the company.
n The company is targeting new business verticals (Nuclear and Oil and Gas),
which should maintain the growth momentum in the medium term.
n The company is a subsidiary of IVRCL Infrastructure, which is a pan-national
player in the construction business.
n HDO remains one of our favoured picks within the small cap engineering sector
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