HCC: Success in big-ticket projects critical for order intake growth ::Motilal Oswal

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Success in big-ticket projects critical for order intake growth
Business environment remains challenging; maintain Neutral
 The management is targeting revenue of INR50b in FY12, a growth of 22%.
However, given the execution challenges, it is unlikely to achieve this.
 HCC has set up a strategic team to recover claims of INR10b outstanding
with various government agencies. This would help bring down debt.
 MoEF has accepted EAC's recommendations on the Lavasa project and is
likely to give partial clearance. The Mumbai High Court will hear the case
on 29 July 2011.
 We maintain Neutral rating on the stock with target price of INR40.
Business environment not conducive; success in big ticket projects could boost
order inflows in FY12: HCC's current order book stands at INR181b, with L1 orders
at INR20b and BTB at 4.4x FY11 revenue. The business environment remains
challenging, with little progress in key sectors like roads and hydropower. Lack of
leadership at key institutions has further impacted decision-making. HCC expects
order intake in FY12 to grow to INR70b, against FY11 intake of INR38b and our estimate
of INR42.6b. Faster implementation of stalled projects, particularly in the roads and
hydropower sectors, can boost order intake. The management is targeting revenue of
INR50b in FY12, a growth of 22%. However, we believe that given the execution
challenges, achievement of the FY12 revenue guidance is improbable.
Recovery of outstanding claims to help bring down debt: HCC's current outstanding
claims stand at INR10b - INR2.5b from the Andhra government, INR5b from National
Highways Authority of India (NHAI), and INR2.5b from the Maharashtra government for
the Bandra-Worli Sea Link. The management expects to recover INR4b in FY12, which
would help to bring down debt and interest burden. The debt-equity ratio was 2.2x in
FY11 v/s 1.5x in FY10. Interest outgo increased 41% in FY11 to INR2.9b.
Subcontracting to bring down working capital requirement: HCC's net working
capital (excluding cash and advances to subsidiaries) increased significantly from
53% in FY10 to 58% in FY11. Loans and advances to subsidiaries increased from 45
days in FY10 to 76 days in FY11. This is largely due to incremental investments in
BOT portfolio and real estate. HCC is trying to keep working capital under control and
is acquiring strategic partners to bring additional equity in BOT and real estate ventures.
MoEF to give final view on Lavasa; Mumbai High Court to hear case on 29
July: The Ministry of Environment and Forests (MoEF) has accepted the
recommendations of the Expert Appraisal Committee (EAC) on the Lavasa project
and is likely to give partial clearance, subject to certain pre-conditions. The Mumbai
High Court will hear the case on 29 July 2011.
Maintain Neutral; SOTP-based target price at INR40: We expect HCC to book an
EPS of INR0.8 in FY12 and INR0.9 in FY13. Our SOTP-based target price is INR40.
We value the core construction business at INR12/share (EV of 6x FY13E EBITDA),
Lavasa at INR15/share (35% discount to NPV), and the remaining assets at INR13/
share. We maintain our Neutral recommendation.