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HINDUSTAN DORR-OLIVER LTD (HDO)
RECOMMENDATION: BUY
TARGET PRICE: RS.145
FY12E P/E: 8.3X
q HDO's 3Q numbers are in line with expectations. Revenue growth was
strong despite continuing softness in order booking. EBITDA margins recovered
on a sequential basis however higher interest charges pulled
down profit growth.
q The management expects revenues to grow 20% plus in FY12, which we
believe is contingent upon the company winning large orders in current
quarter. The management is optimistic of winning close to Rs 7-8 bn orders
in Q4 FY11 as against an average of Rs 2-2.5 bn per quarter in 9M
FY11. Any disappointment on order intake may reduce our comfort level
on the company's profit growth in FY12.
q Increase in manufacturing sector orders in the order book is a positive
which should have a positive rub-off on the margins in FY12.
q Order backlog has remained stagnant since past several quarters at
around Rs 13-14 bn levels resulting in significant reduction in revenue
visibility. We remain concerned on this front.
q The stock has underperformed the market in the past three months primarily
due to the soft order intake. However, at current levels, valuations
are attractive, we maintain BUY with an unchanged DCF-based target
price of Rs.145.
Momentum in execution continues in Q3 FY11
n Revenue growth for the quarter stood at 21% yoy mainly driven by the continued
momentum in order execution by the company.
n The company looks well positioned to meet its guidance of Rs 11 bn in revenues
for FY11. This is without the consolidation of Davy Markham Ltd (Heavy equipment
manufacturing subsidiary in UK) in the quarter, which it will do at a later
date.
n Davy Markham is expected to report revenues of GBP 15 mn for CY10 and may
end the year with a marginal loss. HDO has started to bid for mining projects
with Davy Markham and the company has indicated that significant success has
been achieved in identifying opportunities.
Margin decline on higher share of lower-yielding projects
n Operating margins stood at 11.6% down 100 bps yoy. However, on a sequential
basis, margins rebounded strongly by 250 bps.
n Softer margins were partly due to higher share of water-related business (included
in environmental engineering) which had comparatively lower margins.
n Employee costs were up on account of provision for ESOPS in the quarter as
against the earlier practice of providing in the fourth quarter for the entire year.
Also, the company paid out increments to the employees in the Q1FY11.
Project Segments
(%) Indicative Margins
Environmental Engineering projects 8-12
Mineral beneficiation 15-18
Fertilisers 20
Manufacturing 20
Source: Company
Revenue visibility on a decline as order book replenishment
slows down. Management optimistic of winning significant orders
in Q4.
n HDO's order backlog at the end of Q3 FY11 stood at Rs 13.0 bn, which has declined
on a yoy as well as qoq basis. The company indicated that certain large
orders which were to be finalized in H1 FY11 had got delayed (major among
them was for Vedanta Alumina Refinery expansion).
n Revenue visibility remains healthy at 15 months of trailing 4 quarters revenue but
this metric has been on a decline as revenue growth has outpaced order intake.
n The company booked orders worth Rs 2.3 bn and Rs 7.9 bn in Q3 FY11 and 9M
FY11 respectively. The company expects to bag several large orders in the current
fiscal which can substantially boost the order backlog including for UCIL and
other process industries.
n Order mix is Water - 32%, Minerals - 40%, Manufacturing -16.5% and remaining
from other segments. The company has bagged several important orders in
the manufacturing sector including Rs 1.6 bn orders for heat exchangers. The
company has also bagged orders from the Nuclear Power business.
n Average execution period is 14-18 months.
n The company plans to end the fiscal with an order backlog of Rs 15 bn. The
company is expecting significant orders from iron ore and uranium beneficiation
segment in H2 FY11. However, we note that there is a likelihood of orders getting
delayed which impact the closing order book of the company.
HDO aims to increase share of manufacturing revenues
HDO currently manufactures heat exchangers, pressure vessels, reactors, storage
tanks, evaporators, bleach washers and various types of filters used for effluent water
and effluent purification. The strategy is to focus on manufacturing is to extend
its engineering capabilities and generate a relatively stable source of cash flow. The
company also aims to cater to global multinationals apart from Indian customers.
IVRCL Selling out of HDO?
Responding to media reports of a possible exit by the IVRCL group from HDO, the
IVRCL management clarified that they are currently not in any negotiations for a
stake sale but remain open to it if the offer is attractive. Till such time, the management
remains committed to growing this company.
Recommendation Rationale -Reiterate BUY
n HDO has indicated that it aims to grow between 20-25% in FY12. However, this
in our view will be contingent upon the company substantially improving its order
intake in Q4 FY11. We have built in a Rs 5.5 bn in order intake in the current
quarter.
n The HDO stock has underperformed in the past two quarters as order intake has
been sluggish. If the company succeeds in winning close to Rs 7-8 bn orders in
Q4 FY11, it would substantially assuage concerns on slowdown in profit growth
in FY12.
n If the order intake in Q4 FY11, is below Rs 5.0 bn, then it may negatively impact
our profit estimates for FY12.
n At the current price, the stock offers an upside of 71% to our DCF based target
price of Rs 145.
n We reiterate BUY on the stock.
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.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HINDUSTAN DORR-OLIVER LTD (HDO)
RECOMMENDATION: BUY
TARGET PRICE: RS.145
FY12E P/E: 8.3X
q HDO's 3Q numbers are in line with expectations. Revenue growth was
strong despite continuing softness in order booking. EBITDA margins recovered
on a sequential basis however higher interest charges pulled
down profit growth.
q The management expects revenues to grow 20% plus in FY12, which we
believe is contingent upon the company winning large orders in current
quarter. The management is optimistic of winning close to Rs 7-8 bn orders
in Q4 FY11 as against an average of Rs 2-2.5 bn per quarter in 9M
FY11. Any disappointment on order intake may reduce our comfort level
on the company's profit growth in FY12.
q Increase in manufacturing sector orders in the order book is a positive
which should have a positive rub-off on the margins in FY12.
q Order backlog has remained stagnant since past several quarters at
around Rs 13-14 bn levels resulting in significant reduction in revenue
visibility. We remain concerned on this front.
q The stock has underperformed the market in the past three months primarily
due to the soft order intake. However, at current levels, valuations
are attractive, we maintain BUY with an unchanged DCF-based target
price of Rs.145.
Momentum in execution continues in Q3 FY11
n Revenue growth for the quarter stood at 21% yoy mainly driven by the continued
momentum in order execution by the company.
n The company looks well positioned to meet its guidance of Rs 11 bn in revenues
for FY11. This is without the consolidation of Davy Markham Ltd (Heavy equipment
manufacturing subsidiary in UK) in the quarter, which it will do at a later
date.
n Davy Markham is expected to report revenues of GBP 15 mn for CY10 and may
end the year with a marginal loss. HDO has started to bid for mining projects
with Davy Markham and the company has indicated that significant success has
been achieved in identifying opportunities.
Margin decline on higher share of lower-yielding projects
n Operating margins stood at 11.6% down 100 bps yoy. However, on a sequential
basis, margins rebounded strongly by 250 bps.
n Softer margins were partly due to higher share of water-related business (included
in environmental engineering) which had comparatively lower margins.
n Employee costs were up on account of provision for ESOPS in the quarter as
against the earlier practice of providing in the fourth quarter for the entire year.
Also, the company paid out increments to the employees in the Q1FY11.
Project Segments
(%) Indicative Margins
Environmental Engineering projects 8-12
Mineral beneficiation 15-18
Fertilisers 20
Manufacturing 20
Source: Company
Revenue visibility on a decline as order book replenishment
slows down. Management optimistic of winning significant orders
in Q4.
n HDO's order backlog at the end of Q3 FY11 stood at Rs 13.0 bn, which has declined
on a yoy as well as qoq basis. The company indicated that certain large
orders which were to be finalized in H1 FY11 had got delayed (major among
them was for Vedanta Alumina Refinery expansion).
n Revenue visibility remains healthy at 15 months of trailing 4 quarters revenue but
this metric has been on a decline as revenue growth has outpaced order intake.
n The company booked orders worth Rs 2.3 bn and Rs 7.9 bn in Q3 FY11 and 9M
FY11 respectively. The company expects to bag several large orders in the current
fiscal which can substantially boost the order backlog including for UCIL and
other process industries.
n Order mix is Water - 32%, Minerals - 40%, Manufacturing -16.5% and remaining
from other segments. The company has bagged several important orders in
the manufacturing sector including Rs 1.6 bn orders for heat exchangers. The
company has also bagged orders from the Nuclear Power business.
n Average execution period is 14-18 months.
n The company plans to end the fiscal with an order backlog of Rs 15 bn. The
company is expecting significant orders from iron ore and uranium beneficiation
segment in H2 FY11. However, we note that there is a likelihood of orders getting
delayed which impact the closing order book of the company.
HDO aims to increase share of manufacturing revenues
HDO currently manufactures heat exchangers, pressure vessels, reactors, storage
tanks, evaporators, bleach washers and various types of filters used for effluent water
and effluent purification. The strategy is to focus on manufacturing is to extend
its engineering capabilities and generate a relatively stable source of cash flow. The
company also aims to cater to global multinationals apart from Indian customers.
IVRCL Selling out of HDO?
Responding to media reports of a possible exit by the IVRCL group from HDO, the
IVRCL management clarified that they are currently not in any negotiations for a
stake sale but remain open to it if the offer is attractive. Till such time, the management
remains committed to growing this company.
Recommendation Rationale -Reiterate BUY
n HDO has indicated that it aims to grow between 20-25% in FY12. However, this
in our view will be contingent upon the company substantially improving its order
intake in Q4 FY11. We have built in a Rs 5.5 bn in order intake in the current
quarter.
n The HDO stock has underperformed in the past two quarters as order intake has
been sluggish. If the company succeeds in winning close to Rs 7-8 bn orders in
Q4 FY11, it would substantially assuage concerns on slowdown in profit growth
in FY12.
n If the order intake in Q4 FY11, is below Rs 5.0 bn, then it may negatively impact
our profit estimates for FY12.
n At the current price, the stock offers an upside of 71% to our DCF based target
price of Rs 145.
n We reiterate BUY on the stock.
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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