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HINDUSTAN CONSTRUCTION CO.
Interest charges and forex loss dent profitability
Revenues and PAT below expectations
Hindustan Construction Company’s (HCC) Q3FY11 revenue and PAT came in
below our expectations. Top line, at INR 10 bn, grew 14%, both Y-o-Y and Q-o-
Q. EBITDA margins came in at a healthy 13.1%, up 30bps Q-o-Q and 160bps Yo-
Y. However, interest charges jumped sharply to INR 748 mn, up 51% Y-o-Y
and 11% Q-o-Q. During the quarter, the company also booked forex loss of INR
61 mn compared to a gain of INR 26 mn in the corresponding quarter last year.
Tax rate for the quarter was also high at 41% with INR 28 mn on account of tax
for previous quarters. As a result, PAT, at INR 80 mn (against our expectation of
INR 194 mn), dipped 46% Y-o-Y and 34% sequentially. PAT margins, at 0.8%,
slipped 90bps Y-o-Y and 60bps Q-o-Q.
Order book at INR 185 bn; L1 in projects worth INR 15 bn
During the quarter, HCC did not book any new order. The company’s order book
dipped to INR 185 bn against INR 197 bn at Q2FY11 end and INR 188 bn at
FY10 end. In addition, it is L1 in INR 15 bn worth of projects.
Outlook and valuations: Lavasa the key; downgrade to ‘HOLD’
HCC’s contracting business has been dented by slowdown in project awards,
stretched working capital cycle, and increasing interest rates which have hurt
profitability. Environmental issues over Lavasa mean that its potential listing has
been delayed. Also, work at Lavasa has been currently stopped; the company
hopes for an early resolution of the case so that execution can restart. However,
we believe investor concerns with regards to environmental issues are unlikely to
go away in the near term. The uncertainty over any potential penalty on Lavasa,
delays in start of work, and changes in project scope and design is likely to
linger till the time all outstanding issues are finalised.
We have recaliberated our estimates for FY11 and FY12 keeping in mind the
9mFY11 performance. We also introduce FY13 estimates. We now value Lavasa
for the 2,000 hectares for which environmental clearance has been bagged. Our
sum-of-the-parts-based target price for the stock is INR 44—EPC business
contributes INR 11/share, BOT projects INR 14/share, and Lavasa INR 16/share,
with the balance coming from the realty business. Hence, we downgrade our
recommendation on the stock to ‘HOLD’ from ‘BUY’ and rate it ‘Sector
performer’. An early resolution of the Lavasa conflict remains key for the stock.
Moderate revenue growth
HCC’s revenue growth remained moderate because of overall slowdown in project award
activity as well as execution delays (unfavorable working conditions in J&K and political
instability in Andhra Pradesh). Also, an INR 2.3 bn project in the hydel space (Lohari
Nagpala) was cancelled, which impacted execution. The company also faced delays in
commencement of some previously cleared projects due to environmental issues, which
hurt top line growth.
Order book at INR 185 bn; L1 in projects worth INR 15 bn
During the quarter the company did not receive any fresh order. Its order book dipped to
INR 185 bn against INR 197 bn at Q2FY11 end and INR 188 bn at FY10 end. In addition,
it is L1 in INR 15 bn worth of projects. It has won INR 26.4 bn worth of projects in FY11
till date (INR 18.6 bn previous year).
HCC continues to maintain a calibrated approach towards Andhra projects. It has aligned
its execution schedule after consultation with government authorities with regards to the
likely progress of these projects and the concomitant payments on the same. Currently,
18% of its order backlog accrues from Andhra projects.
The company has tried to increase its exposure to private sector projects which have
better payment terms and margins compared to public sector projects. Private sector
projects contributed 42% of its order inflow YTD in FY11. Also, of its current order book,
private sector projects amount to 9% (apart from the 18% contributed by captive BOT
projects) while government projects provide the balance.
HCC Infrastructure projects witnessing steady progress
HCC’s asset ownership arm, HCC Infrastructure, is making a fair degree of progress on
projects. The company has started toll collection on its Badarpur project in November
2010, ahead of schedule. It has also started construction on the three BOT road projects
in West Bengal on NH4. Mobilisation of equipment and man power is complete and work
has started at project site.
The company has invested INR 5.4 bn as equity in its BOT projects till date of which
~ INR 2 bn were invested in the current year. While it does not need to put any
additional equity over the next two quarters, its overall equity commitment for FY12
stands at INR 4 bn.
The current BOT portfolio includes six road projects with a total size of INR 55 bn. The
company plans to scale this up to INR 200 bn over the next 4-5 years. In the roads
space, it has entered into strategic partnerships with reputed overseas partners like
Orascom & Vinci, to bid for select large NHAI projects, including mega projects.
FCCB redemption
HCC had issued USD 100 mn worth of FCCBs in 2006, of which USD 96.6 mn were
outstanding at FY10 end. These are due for redemption by FY11 end. The company has
indicated that it will raise fresh debt to redeem the FCCBs.
Company Description
HCC is a leading civil engineering and construction company, engaged primarily in the
construction of hydel and power projects, irrigation, water supply, urban infrastructure
and transportation projects. It is developing Lavasa, an ambitious project aimed at
creating a hill city near Mumbai and Pune. Apart from this, it is also involved in some
other real estate development projects. HCC is also making inroads in the asset
ownership space with entry into the roads space and has plans to build its BOT portfolio
significantly going ahead.
Most of its customers are central government bodies/public sector units like NHAI, NHPC,
NPCIL and state governments like Andhra Pradesh, Gujarat, and Maharashtra. It has also
worked on hydel power projects in other counties like Bhutan.
Investment Theme
HCC with more than eight decades of experience in the engineering and construction
(E&C) space, is amongst the most respected infrastructure majors in India. Its
unmatched technical skills are evident in several marquee projects it has executed over
the years. With a robust order book, the company is likely to chart a strong growth
trajectory going ahead.
With PPP projects gaining currency, HCC has drawn ambitious plans to leverage its E&C
strength as far as the asset ownership space is concerned. Its current ~ USD 1.2 bn
portfolio consists of six road BOT projects, of which one is operational, two are under
development, and execution on three is yet to begin. The company plans to build a
sizeable portfolio in the transportation (roads, metro rail, railways and airports) and
energy (hydro, nuclear and thermal power) space.
HCC, through its 100% owned subsidiary, HCC Real Estate (HREL), is developing Lavasa,
free India’s first hill city. We believe Lavasa has reached an inflexion point and is likely to
redefine the company’s profile. Lavasa has already surpassed HCC in terms of
profitability and is likely to grow exponentially, thus emerging as a game changer for the
company. It is on its way to emerge as a breakthrough project, changing the contours of
domestic urban infrastructure development along with significant value enhancement for
HCC.
Key Risks
HCC has ventured into real estate and BOT segments, both of which entail upfront
investments with returns generally being back-ended. In this context, fund raising in
Lavasa has emerged as a key monitorable for the company. Notwithstanding this, there
will be demands on the company’s balance sheet since the core contracting business also
requires funds. Also, working capital management has become a key issue for the
company which has stretched its working capital cycle.
The company’s order book is geared towards hydel projects that are typically long
gestation and mostly in difficult terrains. There are inherent risks in execution of such a
long duration portfolio.
Andhra Pradesh had been a major source of orders for most companies during the past
four-five years, particularly in the irrigation segment due to the Jalayagnam project.
However, most companies have faced delays in payments during the past seven-eight
months due to the state government’s stressed financial condition (exacerbated by the
Telangana statehood issue). As a result, most companies have slowed down execution
on projects in the state till clarity emerges on the situation.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
HINDUSTAN CONSTRUCTION CO.
Interest charges and forex loss dent profitability
Revenues and PAT below expectations
Hindustan Construction Company’s (HCC) Q3FY11 revenue and PAT came in
below our expectations. Top line, at INR 10 bn, grew 14%, both Y-o-Y and Q-o-
Q. EBITDA margins came in at a healthy 13.1%, up 30bps Q-o-Q and 160bps Yo-
Y. However, interest charges jumped sharply to INR 748 mn, up 51% Y-o-Y
and 11% Q-o-Q. During the quarter, the company also booked forex loss of INR
61 mn compared to a gain of INR 26 mn in the corresponding quarter last year.
Tax rate for the quarter was also high at 41% with INR 28 mn on account of tax
for previous quarters. As a result, PAT, at INR 80 mn (against our expectation of
INR 194 mn), dipped 46% Y-o-Y and 34% sequentially. PAT margins, at 0.8%,
slipped 90bps Y-o-Y and 60bps Q-o-Q.
Order book at INR 185 bn; L1 in projects worth INR 15 bn
During the quarter, HCC did not book any new order. The company’s order book
dipped to INR 185 bn against INR 197 bn at Q2FY11 end and INR 188 bn at
FY10 end. In addition, it is L1 in INR 15 bn worth of projects.
Outlook and valuations: Lavasa the key; downgrade to ‘HOLD’
HCC’s contracting business has been dented by slowdown in project awards,
stretched working capital cycle, and increasing interest rates which have hurt
profitability. Environmental issues over Lavasa mean that its potential listing has
been delayed. Also, work at Lavasa has been currently stopped; the company
hopes for an early resolution of the case so that execution can restart. However,
we believe investor concerns with regards to environmental issues are unlikely to
go away in the near term. The uncertainty over any potential penalty on Lavasa,
delays in start of work, and changes in project scope and design is likely to
linger till the time all outstanding issues are finalised.
We have recaliberated our estimates for FY11 and FY12 keeping in mind the
9mFY11 performance. We also introduce FY13 estimates. We now value Lavasa
for the 2,000 hectares for which environmental clearance has been bagged. Our
sum-of-the-parts-based target price for the stock is INR 44—EPC business
contributes INR 11/share, BOT projects INR 14/share, and Lavasa INR 16/share,
with the balance coming from the realty business. Hence, we downgrade our
recommendation on the stock to ‘HOLD’ from ‘BUY’ and rate it ‘Sector
performer’. An early resolution of the Lavasa conflict remains key for the stock.
Moderate revenue growth
HCC’s revenue growth remained moderate because of overall slowdown in project award
activity as well as execution delays (unfavorable working conditions in J&K and political
instability in Andhra Pradesh). Also, an INR 2.3 bn project in the hydel space (Lohari
Nagpala) was cancelled, which impacted execution. The company also faced delays in
commencement of some previously cleared projects due to environmental issues, which
hurt top line growth.
Order book at INR 185 bn; L1 in projects worth INR 15 bn
During the quarter the company did not receive any fresh order. Its order book dipped to
INR 185 bn against INR 197 bn at Q2FY11 end and INR 188 bn at FY10 end. In addition,
it is L1 in INR 15 bn worth of projects. It has won INR 26.4 bn worth of projects in FY11
till date (INR 18.6 bn previous year).
HCC continues to maintain a calibrated approach towards Andhra projects. It has aligned
its execution schedule after consultation with government authorities with regards to the
likely progress of these projects and the concomitant payments on the same. Currently,
18% of its order backlog accrues from Andhra projects.
The company has tried to increase its exposure to private sector projects which have
better payment terms and margins compared to public sector projects. Private sector
projects contributed 42% of its order inflow YTD in FY11. Also, of its current order book,
private sector projects amount to 9% (apart from the 18% contributed by captive BOT
projects) while government projects provide the balance.
HCC Infrastructure projects witnessing steady progress
HCC’s asset ownership arm, HCC Infrastructure, is making a fair degree of progress on
projects. The company has started toll collection on its Badarpur project in November
2010, ahead of schedule. It has also started construction on the three BOT road projects
in West Bengal on NH4. Mobilisation of equipment and man power is complete and work
has started at project site.
The company has invested INR 5.4 bn as equity in its BOT projects till date of which
~ INR 2 bn were invested in the current year. While it does not need to put any
additional equity over the next two quarters, its overall equity commitment for FY12
stands at INR 4 bn.
The current BOT portfolio includes six road projects with a total size of INR 55 bn. The
company plans to scale this up to INR 200 bn over the next 4-5 years. In the roads
space, it has entered into strategic partnerships with reputed overseas partners like
Orascom & Vinci, to bid for select large NHAI projects, including mega projects.
FCCB redemption
HCC had issued USD 100 mn worth of FCCBs in 2006, of which USD 96.6 mn were
outstanding at FY10 end. These are due for redemption by FY11 end. The company has
indicated that it will raise fresh debt to redeem the FCCBs.
Company Description
HCC is a leading civil engineering and construction company, engaged primarily in the
construction of hydel and power projects, irrigation, water supply, urban infrastructure
and transportation projects. It is developing Lavasa, an ambitious project aimed at
creating a hill city near Mumbai and Pune. Apart from this, it is also involved in some
other real estate development projects. HCC is also making inroads in the asset
ownership space with entry into the roads space and has plans to build its BOT portfolio
significantly going ahead.
Most of its customers are central government bodies/public sector units like NHAI, NHPC,
NPCIL and state governments like Andhra Pradesh, Gujarat, and Maharashtra. It has also
worked on hydel power projects in other counties like Bhutan.
Investment Theme
HCC with more than eight decades of experience in the engineering and construction
(E&C) space, is amongst the most respected infrastructure majors in India. Its
unmatched technical skills are evident in several marquee projects it has executed over
the years. With a robust order book, the company is likely to chart a strong growth
trajectory going ahead.
With PPP projects gaining currency, HCC has drawn ambitious plans to leverage its E&C
strength as far as the asset ownership space is concerned. Its current ~ USD 1.2 bn
portfolio consists of six road BOT projects, of which one is operational, two are under
development, and execution on three is yet to begin. The company plans to build a
sizeable portfolio in the transportation (roads, metro rail, railways and airports) and
energy (hydro, nuclear and thermal power) space.
HCC, through its 100% owned subsidiary, HCC Real Estate (HREL), is developing Lavasa,
free India’s first hill city. We believe Lavasa has reached an inflexion point and is likely to
redefine the company’s profile. Lavasa has already surpassed HCC in terms of
profitability and is likely to grow exponentially, thus emerging as a game changer for the
company. It is on its way to emerge as a breakthrough project, changing the contours of
domestic urban infrastructure development along with significant value enhancement for
HCC.
Key Risks
HCC has ventured into real estate and BOT segments, both of which entail upfront
investments with returns generally being back-ended. In this context, fund raising in
Lavasa has emerged as a key monitorable for the company. Notwithstanding this, there
will be demands on the company’s balance sheet since the core contracting business also
requires funds. Also, working capital management has become a key issue for the
company which has stretched its working capital cycle.
The company’s order book is geared towards hydel projects that are typically long
gestation and mostly in difficult terrains. There are inherent risks in execution of such a
long duration portfolio.
Andhra Pradesh had been a major source of orders for most companies during the past
four-five years, particularly in the irrigation segment due to the Jalayagnam project.
However, most companies have faced delays in payments during the past seven-eight
months due to the state government’s stressed financial condition (exacerbated by the
Telangana statehood issue). As a result, most companies have slowed down execution
on projects in the state till clarity emerges on the situation.
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