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In a seasonally weak 2Q, HCC recorded a large loss (Rs363m) with sales down 7% yoy. We
believe this is a short term trough and that the company will gradually recover amid macro
headwinds for the Infrastructure sector. A court decision on Lavasa in November could be a
positive trigger for the stock. Buy
Seasonally weak quarter surprises with larger loss than expected
The 2Q is seasonally weak due to the monsoons, but this quarter’s loss was exaggerated by a
sharp dip in sales (21.5% qoq and 6.6% yoy to Rs8.3bn). Weak sales impacted the EBITDA
margin, which fell 170bp yoy to 11.5%. A 15% qoq increase in interest expenses pushed HCC
into a net loss of Rs363m, vs our forecast Rs109m loss. Management has written off Rs300m of
doubtful receivables; adjusted for this, the results is in line with our forecast net loss. Among
HCC’s subsidiaries, Steiner AG turned around to profit (SFr4.2m) and recorded strong order
inflow. However, due to a work stoppage, Lavasa recorded a huge net loss (Rs710m). HCC’s net
debt rose 15% qoq to Rs40.3bn.
Core construction business hits rock bottom; we cut EPS as turnaround is gradual
Despite a large order book (Rs161.8bn), HCC’s sales traction has slipped with poor decision
making hitting day-to-day functions of its largest customer – the government. We trim our sales
and EBITDA forecasts 6-11%, which on a small profit base leads to a significant PAT impact. We
build in a gradual turnaround in the construction business from the low of 2Q.
Lavasa restart will be next big trigger to watch; other subsidiaries fare well
HCC’s core construction business is plagued by construction industry slowdown. However, its
subsidiaries have fared very well, except for Lavasa, which awaits a court hearing and
Environment Ministry approval. A court hearing in mid-November should help restart the Lavasa
project, but we remain cautious because of large losses in 2Q and reduce the per acre valuation
from Rs6m to Rs4m. We introduce a value for Steiner AG for its impressive turnaround and cash
surplus balance sheet at equity purchase consideration. For the core construction business, we
roll forward to FY13F at 8x PE, leading to a TP of Rs51.60. We maintain a Buy, as HCC attempts
to resolve its problems through a turnaround in its subsidiaries. With the interest rate expected to
peak, we believe the current high leverage (2.7 net D:E) and interest cost (13% of sales in 2Q)
should offer relief on profitability soon.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
In a seasonally weak 2Q, HCC recorded a large loss (Rs363m) with sales down 7% yoy. We
believe this is a short term trough and that the company will gradually recover amid macro
headwinds for the Infrastructure sector. A court decision on Lavasa in November could be a
positive trigger for the stock. Buy
Seasonally weak quarter surprises with larger loss than expected
The 2Q is seasonally weak due to the monsoons, but this quarter’s loss was exaggerated by a
sharp dip in sales (21.5% qoq and 6.6% yoy to Rs8.3bn). Weak sales impacted the EBITDA
margin, which fell 170bp yoy to 11.5%. A 15% qoq increase in interest expenses pushed HCC
into a net loss of Rs363m, vs our forecast Rs109m loss. Management has written off Rs300m of
doubtful receivables; adjusted for this, the results is in line with our forecast net loss. Among
HCC’s subsidiaries, Steiner AG turned around to profit (SFr4.2m) and recorded strong order
inflow. However, due to a work stoppage, Lavasa recorded a huge net loss (Rs710m). HCC’s net
debt rose 15% qoq to Rs40.3bn.
Core construction business hits rock bottom; we cut EPS as turnaround is gradual
Despite a large order book (Rs161.8bn), HCC’s sales traction has slipped with poor decision
making hitting day-to-day functions of its largest customer – the government. We trim our sales
and EBITDA forecasts 6-11%, which on a small profit base leads to a significant PAT impact. We
build in a gradual turnaround in the construction business from the low of 2Q.
Lavasa restart will be next big trigger to watch; other subsidiaries fare well
HCC’s core construction business is plagued by construction industry slowdown. However, its
subsidiaries have fared very well, except for Lavasa, which awaits a court hearing and
Environment Ministry approval. A court hearing in mid-November should help restart the Lavasa
project, but we remain cautious because of large losses in 2Q and reduce the per acre valuation
from Rs6m to Rs4m. We introduce a value for Steiner AG for its impressive turnaround and cash
surplus balance sheet at equity purchase consideration. For the core construction business, we
roll forward to FY13F at 8x PE, leading to a TP of Rs51.60. We maintain a Buy, as HCC attempts
to resolve its problems through a turnaround in its subsidiaries. With the interest rate expected to
peak, we believe the current high leverage (2.7 net D:E) and interest cost (13% of sales in 2Q)
should offer relief on profitability soon.
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