Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Construction Company (HCNS.BO)
Neutral Equity Research
Meaningful upside only on full clearance for Lavasa; retain Neutral
What's changed
India’s environment ministry has accepted the recommendations of the
Expert Appraisal Committee on the Lavasa project and is likely to give
partial clearance subject to certain pre-conditions and monitoring of a few
concurrent conditions. The case is to be heard in the Mumbai high court
July 12, when Phase I may get clearance.
Implications
We believe that resumption of work at the project is a positive, as
it is likely to restart the revenue stream from the sale of property.
In addition, it should result in the completion of 200+ buildings
where work was halted post the court notice in Dec 2010.
It may also be easier for HCC to raise more capital for funding its
Lavasa-related capex.
However, if the penalty imposed by MoEF and the state is
substantial, its balance sheet may be stretched further.
In addition to this, a highly levered balance sheet (5.6X net debt to
equity [FY11] - consolidated) and high working capital in the E&C
business (290 days as of FY11) continue to be concerns.
Valuation
We reduce our EPS estimates for FY12-14E by 0-16% to incorporate slower
execution on the base business. We increase the value of HCC’s BOT
business based on equity invested, and trim our SOTP-based 12-m TP
from Rs 41 to Rs 40. We make no change to our valuation of Lavasa. In our
view, either full clearance for Lavasa or a significant improvement in the
base business is key to a rerating of the stock. Neutral rating maintained.
Key risks
Upside: increased order inflows and full clearance for Lavasa. Downside:
increased working capital; lower than expected order inflow.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
Improvement in the base business or full clearance for Lavasa a
must for any re-rating; maintain Neutral
In its affidavit filed in the Mumbai high court, India’s Ministry of Environment and
Forests (MoEF) has accepted the recommendations of the Expert Appraisal
Committee (EAC) to grant environmental clearance to the Lavasa project (65%
owned by HCC).
The case is due to be heard July 12, when we expect a decision on the issue.
This clearance is expected to be based on certain pre-conditions, and only applies
to the partial project.
We expect that the development plan for the project may undergo change in
order to satisfy the conditions of the MoEF.
We think any clearance is beneficial to the company, as:
Resumption of work should help HCC restart property sales at the project
site, and fund the fixed costs being incurred (Rs20 mn per day,
according to company estimates).
This should also help HCC raise capital for funding the future
development of the project.
Although we believe partial clearance would be a move in the right direction,
we expect no meaningful upside based on this.
We think there are concerns around the business which need to be addressed for
the stock to offer a favourable risk-reward profile.
HCC’s consolidated net debt to equity at 5.6X for FY11E would need to
fall, as all the EBITDA generated is used to service interest.
HCC’s working capital at 290 days in FY11 is one of the highest of its
peers (NCC Limited at 203 days and IVRCL Infrastructure & Projects at
169 days). The company has outstanding claims of close to Rs 7bn,
whose conversion to cash would help reduce working capital and hence
leverage.
HCC, like other industry participants, has experienced subdued order
inflow (Rs 10bn order inflow reported to the Mumbai exchange in
Q1FY12) vs. our FY12 full year estimate of Rs 55bn. In addition, the
company has had execution issues in the past (burn rate dropping from
30% in 2004-2007 to close to 22% in FY11).
Hence, in our view full clearance on the project or meaningful improvement
on the base business will be key to any significant upside on the stock.
We continue to value Lavasa based on the assumption that there is a 2:1
probability of the full project being cleared, ie, assigning 66% value to the project
in our SOTP-based valuation of HCC.
Given the subdued order inflow, we reduce our FY12-14E HCC EPS estimates by
0-16%. We increase our estimate of the value of the BOT business based on
additional equity invested. Consequently, we reduce our SOTP-based 12-month
target price to Rs 40 (from Rs 41).
HCC trades at 12-m forward P/B of 1.3X, which is a 50% discount to the historical
average. We retain our Neutral rating on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Construction Company (HCNS.BO)
Neutral Equity Research
Meaningful upside only on full clearance for Lavasa; retain Neutral
What's changed
India’s environment ministry has accepted the recommendations of the
Expert Appraisal Committee on the Lavasa project and is likely to give
partial clearance subject to certain pre-conditions and monitoring of a few
concurrent conditions. The case is to be heard in the Mumbai high court
July 12, when Phase I may get clearance.
Implications
We believe that resumption of work at the project is a positive, as
it is likely to restart the revenue stream from the sale of property.
In addition, it should result in the completion of 200+ buildings
where work was halted post the court notice in Dec 2010.
It may also be easier for HCC to raise more capital for funding its
Lavasa-related capex.
However, if the penalty imposed by MoEF and the state is
substantial, its balance sheet may be stretched further.
In addition to this, a highly levered balance sheet (5.6X net debt to
equity [FY11] - consolidated) and high working capital in the E&C
business (290 days as of FY11) continue to be concerns.
Valuation
We reduce our EPS estimates for FY12-14E by 0-16% to incorporate slower
execution on the base business. We increase the value of HCC’s BOT
business based on equity invested, and trim our SOTP-based 12-m TP
from Rs 41 to Rs 40. We make no change to our valuation of Lavasa. In our
view, either full clearance for Lavasa or a significant improvement in the
base business is key to a rerating of the stock. Neutral rating maintained.
Key risks
Upside: increased order inflows and full clearance for Lavasa. Downside:
increased working capital; lower than expected order inflow.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
Improvement in the base business or full clearance for Lavasa a
must for any re-rating; maintain Neutral
In its affidavit filed in the Mumbai high court, India’s Ministry of Environment and
Forests (MoEF) has accepted the recommendations of the Expert Appraisal
Committee (EAC) to grant environmental clearance to the Lavasa project (65%
owned by HCC).
The case is due to be heard July 12, when we expect a decision on the issue.
This clearance is expected to be based on certain pre-conditions, and only applies
to the partial project.
We expect that the development plan for the project may undergo change in
order to satisfy the conditions of the MoEF.
We think any clearance is beneficial to the company, as:
Resumption of work should help HCC restart property sales at the project
site, and fund the fixed costs being incurred (Rs20 mn per day,
according to company estimates).
This should also help HCC raise capital for funding the future
development of the project.
Although we believe partial clearance would be a move in the right direction,
we expect no meaningful upside based on this.
We think there are concerns around the business which need to be addressed for
the stock to offer a favourable risk-reward profile.
HCC’s consolidated net debt to equity at 5.6X for FY11E would need to
fall, as all the EBITDA generated is used to service interest.
HCC’s working capital at 290 days in FY11 is one of the highest of its
peers (NCC Limited at 203 days and IVRCL Infrastructure & Projects at
169 days). The company has outstanding claims of close to Rs 7bn,
whose conversion to cash would help reduce working capital and hence
leverage.
HCC, like other industry participants, has experienced subdued order
inflow (Rs 10bn order inflow reported to the Mumbai exchange in
Q1FY12) vs. our FY12 full year estimate of Rs 55bn. In addition, the
company has had execution issues in the past (burn rate dropping from
30% in 2004-2007 to close to 22% in FY11).
Hence, in our view full clearance on the project or meaningful improvement
on the base business will be key to any significant upside on the stock.
We continue to value Lavasa based on the assumption that there is a 2:1
probability of the full project being cleared, ie, assigning 66% value to the project
in our SOTP-based valuation of HCC.
Given the subdued order inflow, we reduce our FY12-14E HCC EPS estimates by
0-16%. We increase our estimate of the value of the BOT business based on
additional equity invested. Consequently, we reduce our SOTP-based 12-month
target price to Rs 40 (from Rs 41).
HCC trades at 12-m forward P/B of 1.3X, which is a 50% discount to the historical
average. We retain our Neutral rating on the stock.
No comments:
Post a Comment