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EBITDA for the Dec 10 quarter came in at Rs.1.26bn, 12% below our forecast and up 7% both
yoy and qoq. Normalised PAT for the quarter was Rs168m (down 40% yoy but up 174% qoq), vs
our forecast of Rs250m. Management said the Lavasa issue may be resolved in the next two
months. We recommend Hold.
EBITDA disappoints on lower order execution and higher construction expenses
�� HCC reported Dec quarter normalised standalone net profit of Rs168m, down 40% yoy but up
174% qoq (RBS estimate Rs250m) on net sales of Rs10.0bn, up 11% yoy and 12% qoq but
5% below our forecast. Reported PAT also declined 46% yoy and 35% qoq to Rs79m due to
a Rs61m forex loss and Rs28m tax expenses related to the previous quarter. During the
analyst meeting the company has also said a sum of Rs650m related to a claim received for
Nathpa Jhakari JV was also passed through the P&L. If we remove this from the JV income, it
would result in a loss of around Rs482m for the quarter, however, we would seek further
clarity from the management to find out about any related expense, also booked against this
claim during the quarter. Standalone EBITDA for the quarter came in at Rs1.26bn, up 7% on
both yoy and qoq basis. However, EBITDA margins for the quarter declined 43bp yoy and
66bp qoq to 12.6% (RBS estimates 13.7%) mainly on account of higher raw material
expenses to sales. The interest expenses as a % of net sales remained high at 7.5% vs 5.5%
last year. However, its negative impact on EBITDA was partially offset by lower income tax
expenses (down 71% yoy and 39% qoq) and profit from JVs (Rs.61m vs Rs.42m loss in
2QFY11). Normalised EPS for the quarter came in at Rs0.3.
�� Specifically, according to the management, the social unrest at J&K and political instability at
Andhara Pradesh along with some environmental related delays have resulted in lower than
guided revenue growth during the quarter.
�� The order book has also declined to Rs.185bn from Rs.197bn last quarter as (according to
the management) the order inflow was impacted due to delay in project orders by various
government departments and private firms on account of land acquisitions and other issues.
�� Normalised PAT for 9MFY11 declined 31% yoy to Rs.542m on net sales of Rs.28.8bn (up
13%). The decline in EBITDA margins (down 70bp yoy) to Rs.12.7% and higher net interest
expenses (up 24% yoy to Rs.2.0bn) were the main reasons for this PAT decrease. However,
reported profit for 9M was up 26% to Rs484m. Normalised EPS for the 9M was Rs0.9.
Lower execution and margins worries ahead in core business
�� In the analyst meet, the focus was mainly on Lavasa and how the environmental issues were
affecting even the parent businesses. Management said the problems in getting
environmental clearance has resulted in project delays and decision making at various
agencies, and private players have come to a standstill for the time being. It also said there
was no order inflow during the quarter and an NTPC order worth Rs2.3bn got cancelled due
to environmental concerns raised by Ministry of Environment and Forest (MoEF). It also
revised down its closing order book guidance to ~Rs.200bn from ~Rs.240bn earlier for FY11.
Further, it also expects revenue growth to be moderated in seasonally strong 4QFY11.
However, it said that with the reshuffling of central cabinet, the process of decision making in
government departments may gather the pace again.
�� On Lavasa, the management said it would be working with MoEF to get the issues solved by
complying their conditions without prejudicing its right to challenge the original order. It also
said costs at Lavasa after stoppage are moving towards around Rs20m/day. However, it
remained confident that the resolution of the issue should not take more than two months and
IPO plan would be executed as soon as the problems regarding final clearance from MoEF
are over. It also said its current top priority is to start work again at Lavasa.
�� We believe the lower orderbook growth phenomenon will impact the industry as a whole as
MoEF takes an aggressive stance on environmental concerns. For HCC, we believe 4QFY11
growth could be lower than our implied numbers post a disappointing 3Q. Also, margins are
expected to remain under pressure even during the seasonally strong 4Q.
Valuation
�� We believe HCC's revenue and order book growth will continue to face challenges in the
coming months. Further, the core business is continuing to battle with high interest costs due
to high net debt (net debt as at the end of 3QFY11 was ~Rs.32bn), which is eating away at
the comparatively high EBITDA margins. We have Hold recommendation on the stock.
Other highlights of analyst meeting
�� The company was able to recover Rs650m from Nathpa Jhakrai project (under JV). It also
expects to recover around Rs2bn in the next six months through various claims.
�� Order book break up: J Andhra Pradesh 18%; West Bengal 17%; Maharashtra 8%; Others
30%. Out of the total, 73% of orders are from government, 18% from HCC Infra and the rest
from other private players.
�� Revenue growth in 4QFY11 would be driven by Kishanganga Hydro project and NH34 road
projects in West Bengal.
�� Working capital as at the end of 3QFY11 was around Rs3000cr.
�� Would be redeeming the outstanding FCCBs (due in April 2011) with the help of cash in book
and an outstanding credit limit from the banks. May result in further liquidity crunch for the
company.
�� FY12 equity requirements at BOT subsidiary would be around Rs.4bn.
�� Toll collection at the recently opened Badarpur tollways is higher than expected in first month
of the operation
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
EBITDA for the Dec 10 quarter came in at Rs.1.26bn, 12% below our forecast and up 7% both
yoy and qoq. Normalised PAT for the quarter was Rs168m (down 40% yoy but up 174% qoq), vs
our forecast of Rs250m. Management said the Lavasa issue may be resolved in the next two
months. We recommend Hold.
EBITDA disappoints on lower order execution and higher construction expenses
�� HCC reported Dec quarter normalised standalone net profit of Rs168m, down 40% yoy but up
174% qoq (RBS estimate Rs250m) on net sales of Rs10.0bn, up 11% yoy and 12% qoq but
5% below our forecast. Reported PAT also declined 46% yoy and 35% qoq to Rs79m due to
a Rs61m forex loss and Rs28m tax expenses related to the previous quarter. During the
analyst meeting the company has also said a sum of Rs650m related to a claim received for
Nathpa Jhakari JV was also passed through the P&L. If we remove this from the JV income, it
would result in a loss of around Rs482m for the quarter, however, we would seek further
clarity from the management to find out about any related expense, also booked against this
claim during the quarter. Standalone EBITDA for the quarter came in at Rs1.26bn, up 7% on
both yoy and qoq basis. However, EBITDA margins for the quarter declined 43bp yoy and
66bp qoq to 12.6% (RBS estimates 13.7%) mainly on account of higher raw material
expenses to sales. The interest expenses as a % of net sales remained high at 7.5% vs 5.5%
last year. However, its negative impact on EBITDA was partially offset by lower income tax
expenses (down 71% yoy and 39% qoq) and profit from JVs (Rs.61m vs Rs.42m loss in
2QFY11). Normalised EPS for the quarter came in at Rs0.3.
�� Specifically, according to the management, the social unrest at J&K and political instability at
Andhara Pradesh along with some environmental related delays have resulted in lower than
guided revenue growth during the quarter.
�� The order book has also declined to Rs.185bn from Rs.197bn last quarter as (according to
the management) the order inflow was impacted due to delay in project orders by various
government departments and private firms on account of land acquisitions and other issues.
�� Normalised PAT for 9MFY11 declined 31% yoy to Rs.542m on net sales of Rs.28.8bn (up
13%). The decline in EBITDA margins (down 70bp yoy) to Rs.12.7% and higher net interest
expenses (up 24% yoy to Rs.2.0bn) were the main reasons for this PAT decrease. However,
reported profit for 9M was up 26% to Rs484m. Normalised EPS for the 9M was Rs0.9.
Lower execution and margins worries ahead in core business
�� In the analyst meet, the focus was mainly on Lavasa and how the environmental issues were
affecting even the parent businesses. Management said the problems in getting
environmental clearance has resulted in project delays and decision making at various
agencies, and private players have come to a standstill for the time being. It also said there
was no order inflow during the quarter and an NTPC order worth Rs2.3bn got cancelled due
to environmental concerns raised by Ministry of Environment and Forest (MoEF). It also
revised down its closing order book guidance to ~Rs.200bn from ~Rs.240bn earlier for FY11.
Further, it also expects revenue growth to be moderated in seasonally strong 4QFY11.
However, it said that with the reshuffling of central cabinet, the process of decision making in
government departments may gather the pace again.
�� On Lavasa, the management said it would be working with MoEF to get the issues solved by
complying their conditions without prejudicing its right to challenge the original order. It also
said costs at Lavasa after stoppage are moving towards around Rs20m/day. However, it
remained confident that the resolution of the issue should not take more than two months and
IPO plan would be executed as soon as the problems regarding final clearance from MoEF
are over. It also said its current top priority is to start work again at Lavasa.
�� We believe the lower orderbook growth phenomenon will impact the industry as a whole as
MoEF takes an aggressive stance on environmental concerns. For HCC, we believe 4QFY11
growth could be lower than our implied numbers post a disappointing 3Q. Also, margins are
expected to remain under pressure even during the seasonally strong 4Q.
Valuation
�� We believe HCC's revenue and order book growth will continue to face challenges in the
coming months. Further, the core business is continuing to battle with high interest costs due
to high net debt (net debt as at the end of 3QFY11 was ~Rs.32bn), which is eating away at
the comparatively high EBITDA margins. We have Hold recommendation on the stock.
Other highlights of analyst meeting
�� The company was able to recover Rs650m from Nathpa Jhakrai project (under JV). It also
expects to recover around Rs2bn in the next six months through various claims.
�� Order book break up: J Andhra Pradesh 18%; West Bengal 17%; Maharashtra 8%; Others
30%. Out of the total, 73% of orders are from government, 18% from HCC Infra and the rest
from other private players.
�� Revenue growth in 4QFY11 would be driven by Kishanganga Hydro project and NH34 road
projects in West Bengal.
�� Working capital as at the end of 3QFY11 was around Rs3000cr.
�� Would be redeeming the outstanding FCCBs (due in April 2011) with the help of cash in book
and an outstanding credit limit from the banks. May result in further liquidity crunch for the
company.
�� FY12 equity requirements at BOT subsidiary would be around Rs.4bn.
�� Toll collection at the recently opened Badarpur tollways is higher than expected in first month
of the operation
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