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Hindustan Construction’s (HCC) in-line 3QFY2011 results disappointed on the
bottom-line front. Going ahead, we expect HCC’s interest cost to remain high on
the back of higher debt to meet its working capital requirements and cash
outflows on account of Lavasa and FCCB redemption. Therefore, we have
revised downwards our FY2011 and FY2012 earnings estimates by 21% and 12%
to factor in the same. Owing to concerns on the Lavasa front and estimated lower
earnings growth, we have reduced our target P/E multiple from 12x to 10x.
Hence, we downgrade the stock from Buy to Neutral.
Results in line with estimates: HCC reported moderate top-line growth of 11.1%
to `1,002.5cr (`902.6cr) almost matching our estimate of `994cr. OPM came in
exactly as per our estimates and marginally lower at 12.6% (13%) yoy. PAT
de-grew by 46.2% yoy to `7.9cr (`14.8cr) as against our estimate of `17.6cr.
Poor performance on the bottom-line was due to the forex loss of `6.1cr, higher
tax rate (40.7%) and swell in interest cost (~50% jump on yoy basis) owing to the
increase in debt and hardening of interest rates.
Outlook and valuation: We expect HCC’s cash flows to be strained in the short to
medium term owing to the Lavasa issue, impending FCCB redemption and
spiraling interest costs due to rising debt levels. On the valuation front, at current
levels, the stock trades at a PE of 24.9x and P/BV of 1.6x on FY2012E basis
(standalone). We have valued HCC on SOTP methodology. Owing to the
concerns on the Lavasa front and to reflect the downward revision in earnings, we
have downgraded our target PE multiple from 12x to 10x on FY2012 estimates on
standalone basis. We have valued the real estate venture on NAV basis, which
has also been further discounted due to the uncertainties surrounding the Lavasa
project. HCC’s BOT assets have been valued on DCF basis. Our fair value works
out to `50, implying an upside of 25% from current levels. However, owing to the
above-mentioned concerns and as we expect the stock to be an underperformer
going ahead, we have downgraded the stock from a Buy to Neutral.
Operating margin came exactly in line with our estimate and marginally lower at
12.6% (13.0%) yoy. PAT de-grew by 46.2% yoy to `7.9cr (`14.8cr) as against our
estimate of `17.6cr. Poor performance on the bottom-line was due to the foreign
exchange loss of `6.1cr, higher tax rate of 40.7% and swell in interest cost (~50%
jump on yoy basis) on account of the increase in debt levels and hardening of
interest rates.
Order book analysis
HCC’s order book, as of 3QFY2011, stood at `16,565cr (4.5x FY2011E revenues
and excluding the disputed order). The company did not bag any orders during the
quarter. The `230cr Loharinag Pala project was also cancelled. The company’s
order book comprises the hydro power (44%), water solutions (19%),
transportation (23%) and nuclear and special projects (14%). The company is L1
for contracts worth `1,531cr. Going ahead, HCC has given guidance of adding
`3,000-4,000cr of road BOT projects every year. It also proposes to enter the new
segments of thermal and hydrocarbon.
Revision in estimates
Going ahead, we expect HCC’s interest cost to remain high on the back of higher
debt to meet its working capital requirements and cash outflows on account of
Lavasa and FCCB redemption. Therefore, we have revised downwards our
FY2011 and FY2012 earnings estimates by 21% and 12% to factor in the same.
Outlook and Valuation
We expect cash flows of HCC and Lavasa to be strained in the short to medium
term on account of the following: a) Lavasa has debt of `1,950cr, and with
construction coming to a standstill, its cash flows have stalled without clarity about
restoration of the same in the near future; b) The proposed IPO to fund the Lavasa
project has been delayed indefinitely along with investor confidence getting
affected; c) We do not expect conversion of HCC’s FCCB of US $96.5mn, which
would get redeemed in April 2011 leading to cash outflow. However, we believe
HCC would be able to fund the same through its current cash balance (`381cr)
and existing credit lines. Nonetheless, if the MoEF penalty is substantial, HCC’s
balance sheet and cash position would get stretched to that extent.
At current levels, the stock trades at a PE of 24.9x and P/BV of 1.6x on FY2012E
basis (standalone). We have valued HCC on SOTP methodology. Owing to the
concerns on the Lavasa front and to reflect the downward revision in earnings, we
have downgraded our target PE multiple from 12x to 10x on FY2012 estimates on
standalone basis. We have valued the real estate venture on NAV basis, which has
also been further discounted due to the uncertainties surrounding the Lavasa
project. HCC’s BOT assets have been valued on DCF basis. Our fair value works
out to `50, implying an upside of 25% from current levels. However, owing to the
above-mentioned concerns and as we expect the stock to be an underperformer
going ahead, we have downgraded the stock to Neutral from Buy. Further, in the
infrastructure space we believe that there are better bets like L&T, NCC, IVRCL and
ITNL, and the recent correction provides investors an excellent opportunity to switch
from HCC to these stocks.
Investment Argument
HCC is well-positioned to leverage on the growing opportunities in the hydropower
and nuclear segments. Moreover, the company’s leadership position in the
hydro space and complexity of projects result in overall high operating margins
(~13%). HCC’s BOT portfolio of `5,500cr consisting of six road projects will
provide sustainable revenues going ahead. Its outstanding order book of `16,565
(4.5x FY2011E revenue) also enhances revenue visibility.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
HCC – 3QFY2011 Result Update
Angel Broking downgrades HCC from Buy to Neutral.
Hindustan Construction’s (HCC) in-line 3QFY2011 results disappointed on the
bottom-line front. Going ahead, we expect HCC’s interest cost to remain high on
the back of higher debt to meet its working capital requirements and cash
outflows on account of Lavasa and FCCB redemption. Therefore, we have
revised downwards our FY2011 and FY2012 earnings estimates by 21% and 12%
to factor in the same. Owing to concerns on the Lavasa front and estimated lower
earnings growth, we have reduced our target P/E multiple from 12x to 10x.
Hence, we downgrade the stock from Buy to Neutral.
Results in line with estimates: HCC reported moderate top-line growth of 11.1%
to `1,002.5cr (`902.6cr) almost matching our estimate of `994cr. OPM came in
exactly as per our estimates and marginally lower at 12.6% (13%) yoy. PAT
de-grew by 46.2% yoy to `7.9cr (`14.8cr) as against our estimate of `17.6cr.
Poor performance on the bottom-line was due to the forex loss of `6.1cr, higher
tax rate (40.7%) and swell in interest cost (~50% jump on yoy basis) owing to the
increase in debt and hardening of interest rates.
Outlook and valuation: We expect HCC’s cash flows to be strained in the short to
medium term owing to the Lavasa issue, impending FCCB redemption and
spiraling interest costs due to rising debt levels. On the valuation front, at current
levels, the stock trades at a PE of 24.9x and P/BV of 1.6x on FY2012E basis
(standalone). We have valued HCC on SOTP methodology. Owing to the
concerns on the Lavasa front and to reflect the downward revision in earnings, we
have downgraded our target PE multiple from 12x to 10x on FY2012 estimates on
standalone basis. We have valued the real estate venture on NAV basis, which
has also been further discounted due to the uncertainties surrounding the Lavasa
project. HCC’s BOT assets have been valued on DCF basis. Our fair value works
out to `50, implying an upside of 25% from current levels. However, owing to the
above-mentioned concerns and as we expect the stock to be an underperformer
going ahead, we have downgraded the stock from a Buy to Neutral.
In-line revenues
HCC reported moderate performance on the top-line front with yoy growth of
11.1% to `1,002cr (`902.6cr) in line with our estimate of `994cr. Revenues came
in lower primarily due to the sluggish performance on the execution front as ~100
days were lost in J&K due to the unrest and slow-moving orders in Andhra Pradesh
(AP). The pending environment clearances and slow-down in overall awarding of
projects further impacted the performance during the quarter. However, post
October 2010 the situation in J&K has been improving and the Kishanganga
project is progressing as per schedule. Going ahead, we expect the Kishanganga
HEP and NH-34 road project in West Bengal to ramp up overall execution
Operating margin came exactly in line with our estimate and marginally lower at
12.6% (13.0%) yoy. PAT de-grew by 46.2% yoy to `7.9cr (`14.8cr) as against our
estimate of `17.6cr. Poor performance on the bottom-line was due to the foreign
exchange loss of `6.1cr, higher tax rate of 40.7% and swell in interest cost (~50%
jump on yoy basis) on account of the increase in debt levels and hardening of
interest rates.
Order book analysis
HCC’s order book, as of 3QFY2011, stood at `16,565cr (4.5x FY2011E revenues
and excluding the disputed order). The company did not bag any orders during the
quarter. The `230cr Loharinag Pala project was also cancelled. The company’s
order book comprises the hydro power (44%), water solutions (19%),
transportation (23%) and nuclear and special projects (14%). The company is L1
for contracts worth `1,531cr. Going ahead, HCC has given guidance of adding
`3,000-4,000cr of road BOT projects every year. It also proposes to enter the new
segments of thermal and hydrocarbon.
Revision in estimates
Going ahead, we expect HCC’s interest cost to remain high on the back of higher
debt to meet its working capital requirements and cash outflows on account of
Lavasa and FCCB redemption. Therefore, we have revised downwards our
FY2011 and FY2012 earnings estimates by 21% and 12% to factor in the same.
Outlook and Valuation
We expect cash flows of HCC and Lavasa to be strained in the short to medium
term on account of the following: a) Lavasa has debt of `1,950cr, and with
construction coming to a standstill, its cash flows have stalled without clarity about
restoration of the same in the near future; b) The proposed IPO to fund the Lavasa
project has been delayed indefinitely along with investor confidence getting
affected; c) We do not expect conversion of HCC’s FCCB of US $96.5mn, which
would get redeemed in April 2011 leading to cash outflow. However, we believe
HCC would be able to fund the same through its current cash balance (`381cr)
and existing credit lines. Nonetheless, if the MoEF penalty is substantial, HCC’s
balance sheet and cash position would get stretched to that extent.
At current levels, the stock trades at a PE of 24.9x and P/BV of 1.6x on FY2012E
basis (standalone). We have valued HCC on SOTP methodology. Owing to the
concerns on the Lavasa front and to reflect the downward revision in earnings, we
have downgraded our target PE multiple from 12x to 10x on FY2012 estimates on
standalone basis. We have valued the real estate venture on NAV basis, which has
also been further discounted due to the uncertainties surrounding the Lavasa
project. HCC’s BOT assets have been valued on DCF basis. Our fair value works
out to `50, implying an upside of 25% from current levels. However, owing to the
above-mentioned concerns and as we expect the stock to be an underperformer
going ahead, we have downgraded the stock to Neutral from Buy. Further, in the
infrastructure space we believe that there are better bets like L&T, NCC, IVRCL and
ITNL, and the recent correction provides investors an excellent opportunity to switch
from HCC to these stocks.
Investment Argument
HCC is well-positioned to leverage on the growing opportunities in the hydropower
and nuclear segments. Moreover, the company’s leadership position in the
hydro space and complexity of projects result in overall high operating margins
(~13%). HCC’s BOT portfolio of `5,500cr consisting of six road projects will
provide sustainable revenues going ahead. Its outstanding order book of `16,565
(4.5x FY2011E revenue) also enhances revenue visibility.
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