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HIND DORR OLIVER
PRICE: RS.38 RECOMMENDATION: BUY
TARGET PRICE: RS.52 FY12E P/E: 8.4X
q HDO's Q1FY12 numbers are lower than our estimates on the revenue and
profit front. Subdued order backlog, delay in engineering/environment
clearances and cost pressures (material as well as financial) pull down
profits.
q Order intake of Rs 6.6 bn vs Rs 2.2 bn in Q1 FY11 was significantly higher
due to the Zambian order. Other noteworthy orders included NMDC order
worth Rs 1.3bn.
q Maintain BUY due to beaten down valuations but retain cautious stance
on the company in view of deteriorating cash generation and stagnant
order backlog. Prefer capital goods stocks with higher revenue visibility
and unleveraged balance sheets.
Subdued order backlog, delay in engineering/environment clearances
and cost pressures (material as well as financial) pull down
profits
n Revenue for the quarter declined 41% yoy due a combination of slow moving
orders and delay in getting engineering clearances for some large projects.
n The management highlighted that some of the large projects are still in the engineering
design phase. This is the initial phase of any project and once the design
is frozen the actual site/factory is mobilized. Hence during this phase the
revenue booking is low and picks up progressively.
n In terms of revenue mix, minerals, environmental, manufacturing and special
projects contributed 45%, 35%, 16% and 4% respectively.’
n At the beginning of the fiscal, the company had indicated that since order accretion
has not been robust, it might end up with flat revenues in FY12. However,
this target appears optimistic in light of subdued Q1 FY12 revenues, weakening
macroeconomic conditions and sluggish project execution marred by longer time
in statutory clearances (land and mining clearance). We have adjusted downwards
our revenue target for FY12.
n 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.
IVRCL has recently received a Rs 12 bn mining related order in which
Davy Markham's contribution is to the tune of Rs 1.2 bn. The management is
positive on Davy Markham (specializing in underground mining equipment) in
view of the greater thrust on underground mining to limit environmental damage.
n Operating margins stood at 10.8% down 100 bps yoy. Margin loss was mainly
attributed to cost pressures, sluggish execution and general increase in competitive
intensity. Unlike the Q4 FY11 quarter, the company had no one-time provisions
related to cost-overruns.
Project Segments
(%) Indicative Margins
Environmental Engineering projects 8-12
Mineral beneficiation 15-18%
Fertilisers 20
Manufacturing 20
Source: Company
Order intake boosted by a large overseas order but undercurrent
remains weak
n HDO's order backlog at the end of Q1 FY12 stood at Rs 15.5 bn, which has more
or less remained at the same level since the past eight quarters.
n The order backlog was boosted by a USD 85 mn order from Zambia's Konkola
copper mines (also a Vedanta group project). The order execution period is 18
months and first dispatch would commence in September 2011. The profitability
on this order is expected to be healthy as major scope of the work includes supply
of mechanical equipments. This order has also opened up similar opportunities
in Zambia.
n Order intake of Rs 6.6 bn vs Rs 2.2 bn in Q1 FY11 was significantly higher due to
the Zambian order. Other noteworthy orders included NMDC order worth Rs
1.3bn.
n The company is the only bidder for a repeat order from UCIL worth Rs 3.5 bn.
This order has been delayed for the last six months for requisite environment
clearances.
n Revenue visibility is adequate at 22 months of trailing four quarter revenues,
boosted by the large order wins in Q1FY12.
n Order mix is Water - 16%, Minerals - 50% and Manufacturing -16% and special
projects 17%.
Other Highlights
n Davy Markham (wholy owned sub) had ended the FY11 with a marginal loss but
the management expects the company to end the current fiscal with a profit of
close to GBP 1 mn. The company's order backlog has improved to GBP 32 mn
pounds aided by the IVRCL order win. Davy Markham has expanded its geographical
coverage and in consortium with HDO/IVRCL, is well positioned for coal
mining projects in Indian market.
n Debtors outstanding have remained at elevated levels mainly due to receivables
pertaining to the Vedanta's Lanjigarh Alumina Refinery project (where work has
been stopped due to non compliance of environmental norms). The management
clarified that bulk of receivables is mainly retention money amounting to Rs
700-800 mn, which it expects to get it released through presentation of bank
guarantee.
n Borrowings have shot up further to Rs 2.8 bn vs 2.0 bn in Q4 FY11 mainly due to
expansion in working capital.
n The company expects to spend Rs 300-400 mn towards normal capex. It is yet to
decide on greenfield manufacturing plant.
Earnings Revision
We have significantly reduced our earnings estimates for the company on account of
lower revenue booking and consequent margin loss. We have not consolidated the
contribution of Davy Markham awaiting greater clarity of numbers.
Maintain BUY but prefer companies with higher revenue visibility
and unleveraged balance sheets
n At the current price, the stock offers an upside of 37% to our DCF based target
price of Rs 52 (Rs 61 earlier). At our target price, the stock would be valued at
11x FY12 earnings.
n We reiterate BUY on the stock but remain cautious in view of slowdown in order
inflow, increased competitive pressure and sustained cost pressures. An important
trigger for the stock could be award of UCIL order worth Rs 3.5 bn wherein
HDO is the only bidder.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HIND DORR OLIVER
PRICE: RS.38 RECOMMENDATION: BUY
TARGET PRICE: RS.52 FY12E P/E: 8.4X
q HDO's Q1FY12 numbers are lower than our estimates on the revenue and
profit front. Subdued order backlog, delay in engineering/environment
clearances and cost pressures (material as well as financial) pull down
profits.
q Order intake of Rs 6.6 bn vs Rs 2.2 bn in Q1 FY11 was significantly higher
due to the Zambian order. Other noteworthy orders included NMDC order
worth Rs 1.3bn.
q Maintain BUY due to beaten down valuations but retain cautious stance
on the company in view of deteriorating cash generation and stagnant
order backlog. Prefer capital goods stocks with higher revenue visibility
and unleveraged balance sheets.
Subdued order backlog, delay in engineering/environment clearances
and cost pressures (material as well as financial) pull down
profits
n Revenue for the quarter declined 41% yoy due a combination of slow moving
orders and delay in getting engineering clearances for some large projects.
n The management highlighted that some of the large projects are still in the engineering
design phase. This is the initial phase of any project and once the design
is frozen the actual site/factory is mobilized. Hence during this phase the
revenue booking is low and picks up progressively.
n In terms of revenue mix, minerals, environmental, manufacturing and special
projects contributed 45%, 35%, 16% and 4% respectively.’
n At the beginning of the fiscal, the company had indicated that since order accretion
has not been robust, it might end up with flat revenues in FY12. However,
this target appears optimistic in light of subdued Q1 FY12 revenues, weakening
macroeconomic conditions and sluggish project execution marred by longer time
in statutory clearances (land and mining clearance). We have adjusted downwards
our revenue target for FY12.
n 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.
IVRCL has recently received a Rs 12 bn mining related order in which
Davy Markham's contribution is to the tune of Rs 1.2 bn. The management is
positive on Davy Markham (specializing in underground mining equipment) in
view of the greater thrust on underground mining to limit environmental damage.
n Operating margins stood at 10.8% down 100 bps yoy. Margin loss was mainly
attributed to cost pressures, sluggish execution and general increase in competitive
intensity. Unlike the Q4 FY11 quarter, the company had no one-time provisions
related to cost-overruns.
Project Segments
(%) Indicative Margins
Environmental Engineering projects 8-12
Mineral beneficiation 15-18%
Fertilisers 20
Manufacturing 20
Source: Company
Order intake boosted by a large overseas order but undercurrent
remains weak
n HDO's order backlog at the end of Q1 FY12 stood at Rs 15.5 bn, which has more
or less remained at the same level since the past eight quarters.
n The order backlog was boosted by a USD 85 mn order from Zambia's Konkola
copper mines (also a Vedanta group project). The order execution period is 18
months and first dispatch would commence in September 2011. The profitability
on this order is expected to be healthy as major scope of the work includes supply
of mechanical equipments. This order has also opened up similar opportunities
in Zambia.
n Order intake of Rs 6.6 bn vs Rs 2.2 bn in Q1 FY11 was significantly higher due to
the Zambian order. Other noteworthy orders included NMDC order worth Rs
1.3bn.
n The company is the only bidder for a repeat order from UCIL worth Rs 3.5 bn.
This order has been delayed for the last six months for requisite environment
clearances.
n Revenue visibility is adequate at 22 months of trailing four quarter revenues,
boosted by the large order wins in Q1FY12.
n Order mix is Water - 16%, Minerals - 50% and Manufacturing -16% and special
projects 17%.
Other Highlights
n Davy Markham (wholy owned sub) had ended the FY11 with a marginal loss but
the management expects the company to end the current fiscal with a profit of
close to GBP 1 mn. The company's order backlog has improved to GBP 32 mn
pounds aided by the IVRCL order win. Davy Markham has expanded its geographical
coverage and in consortium with HDO/IVRCL, is well positioned for coal
mining projects in Indian market.
n Debtors outstanding have remained at elevated levels mainly due to receivables
pertaining to the Vedanta's Lanjigarh Alumina Refinery project (where work has
been stopped due to non compliance of environmental norms). The management
clarified that bulk of receivables is mainly retention money amounting to Rs
700-800 mn, which it expects to get it released through presentation of bank
guarantee.
n Borrowings have shot up further to Rs 2.8 bn vs 2.0 bn in Q4 FY11 mainly due to
expansion in working capital.
n The company expects to spend Rs 300-400 mn towards normal capex. It is yet to
decide on greenfield manufacturing plant.
Earnings Revision
We have significantly reduced our earnings estimates for the company on account of
lower revenue booking and consequent margin loss. We have not consolidated the
contribution of Davy Markham awaiting greater clarity of numbers.
Maintain BUY but prefer companies with higher revenue visibility
and unleveraged balance sheets
n At the current price, the stock offers an upside of 37% to our DCF based target
price of Rs 52 (Rs 61 earlier). At our target price, the stock would be valued at
11x FY12 earnings.
n We reiterate BUY on the stock but remain cautious in view of slowdown in order
inflow, increased competitive pressure and sustained cost pressures. An important
trigger for the stock could be award of UCIL order worth Rs 3.5 bn wherein
HDO is the only bidder.
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