Hindustan Construction (HCNS.BO, Neutral) Core business shows no sign of recovering::Goldman Sachs,

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Hindustan Construction (HCNS.BO, Neutral)
Core business shows no sign of recovering while the Lavasa overhang continues – high debt is our
main reason for concern; we maintain our Neutral rating on Hindustan Construction (HCC)
 Despite having specialized knowledge and exposure to Hydro (40% of its order book), Nuclear power (16% of
its order book), and to complex infrastructure projects, order inflow over the past 12 months is a revenue
growth concern. Order inflow for FY11 was Rs33bn (vs. Rs57bn for FY10, and Rs89bn for FY09). We forecast
revenue to grow at a CAGR of 10% over FY11-FY13, on the back of the past 12 months’ order inflow.
 Working capital management concerns (290 days for FY11) for its core business together with high leverage
(5.4X for FY11 – consolidated) continue to exert pressure on HCC’s profitability and cash flow generation.
 Obtaining environmental clearance on Lavasa (65% stake) remains an overhang. The project is awaiting
clearance from the environment ministry (MOEF) and is accumulating a potential loss of up to Rs2cr per day
while construction lays idle – the stock has corrected 50% since the MOEF raised concerns over the
environment impact of the project.
Catalyst
 The company has been making an effort to settle disputes relating to past projects totaling about Rs7.5bn
where claims have been made and are being contested. Any monies recovered will help improve the
company’s working capital situation.
 Any positive news on Lavasa on the commencement of work and obtaining environmental clearance will be
instrumental in supporting the company’s balance sheet.
Valuation
 We lower our 12-month SOTP-based target price on HCC to Rs34 (from Rs40) as we now value the
construction business at 6X EV/EBITDA to the average of FY12E-FY13E EBITDA (down from 10X P/E earlier, in
line with construction sector peers, which now trade at lower multiples).
 We revise down our FY12-FY14 EPS estimates by 8% on the back of higher debt and consequently higher
interest costs.
 HCC trades on FY12E P/B of 1.1X (parent basis) vs. a 5-year historical median of 2.5X.
Key risks
 Upside: Strong order inflows translating to higher billings and improved working capital management.
 Downside: Increase in commodity and construction material prices.

Read about other companies in sector recommended by Goldman Sachs and top picks in link below:

Goldman Sachs:: Slowdown in capex continues: Sector at trough valuations