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HINDUSTAN DORR OLIVER LTD (HDO)
PRICE: RS.33 RECOMMENDATION: REDUCE
TARGET PRICE: RS.35 FY13E P/E: 9.4X
q HDO's Q2FY12 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) pulled down
profits. The balance sheet appears to have deteriorated significantly
thereby resulting in higher interest costs. We are revising our earnings
downwards in view of the rising interest burden on the company.
q Order intake was weak for the quarter though the company is L1 in
Rs.6.0 worth of orders.
q Downgrade to REDUCE on deteriorating balance sheet quality, poor nearterm
earnings and unfavourable environment for project development.
Result Highlights
n 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 39% yoy due a combination of slow moving
orders and subdued order backlog since several quarters.
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 unrealistic in light of subdued H1 FY12 revenues, weakening
macroeconomic conditions and sluggish project execution. We have adjusted
downwards our revenue forecast for FY12.
Order intake remains weak
n HDO's order backlog at the end of Q2 FY12 stood at Rs 13.8 bn (excluding L1
orders of Rs 6.1 bn), which has more or less remained at the same level since
the past two fiscals.
n Order intake of Rs 1.0 bn vs Rs 2.2 bn in Q2 FY11 was significantly weak reflecting
the unfavourable environment for the project activity.
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 but the company expects it to get finalized by end of Q3 FY12.
n Revenue visibility is adequate at 22 months of trailing four quarter revenues,
boosted by the large order wins (Konkola Mine Order in Zambia) in Q1FY12.
n Order mix is Water - 16%, Minerals - 50% and Manufacturing -16% and special
projects 18%.
Stressed balance sheet
n Gross borrowings at the end of Q2 FY12 rose to Rs 3.4 bn vs Rs 1.95 bn in Q2
FY11.
n The increase in borrowings has been driven by higher working capital and loans
and advances to Davy Markham.
n Debtors stand at Rs 2.5 bn (122 days of sales). The debtors includes Rs 770 mn
from Vedanta Group pertaining to Lanjigarh expansion project. This amount has
been outstanding for over a year.
n “Other current assets” has moved up significantly to Rs 4.9 bn vs Rs 3.9 bn. The
other current assets include mainly "unbilled revenues" and "retention money".
Downgrade to Reduce on
n Weak near-term earnings on higher interest burden. Balance sheet quality is at
its weakest in past several years.
n Subdued order intake due to unfavourable business environment.
n Post effecting an earnings cut, the stock is trading at 11.2x and 9.4x FY12 and
FY13 earnings respectively. We note that in the previous downcycle, the company
has traded as low as 5x forward earnings.
n We downgrade stock to REDUCE with a target price of Rs 35 per share (Rs 52
earlier). Our implied exit multiple based on FY13 earnings works out to 10x in
line with our earlier target price.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HINDUSTAN DORR OLIVER LTD (HDO)
PRICE: RS.33 RECOMMENDATION: REDUCE
TARGET PRICE: RS.35 FY13E P/E: 9.4X
q HDO's Q2FY12 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) pulled down
profits. The balance sheet appears to have deteriorated significantly
thereby resulting in higher interest costs. We are revising our earnings
downwards in view of the rising interest burden on the company.
q Order intake was weak for the quarter though the company is L1 in
Rs.6.0 worth of orders.
q Downgrade to REDUCE on deteriorating balance sheet quality, poor nearterm
earnings and unfavourable environment for project development.
Result Highlights
n 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 39% yoy due a combination of slow moving
orders and subdued order backlog since several quarters.
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 unrealistic in light of subdued H1 FY12 revenues, weakening
macroeconomic conditions and sluggish project execution. We have adjusted
downwards our revenue forecast for FY12.
Order intake remains weak
n HDO's order backlog at the end of Q2 FY12 stood at Rs 13.8 bn (excluding L1
orders of Rs 6.1 bn), which has more or less remained at the same level since
the past two fiscals.
n Order intake of Rs 1.0 bn vs Rs 2.2 bn in Q2 FY11 was significantly weak reflecting
the unfavourable environment for the project activity.
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 but the company expects it to get finalized by end of Q3 FY12.
n Revenue visibility is adequate at 22 months of trailing four quarter revenues,
boosted by the large order wins (Konkola Mine Order in Zambia) in Q1FY12.
n Order mix is Water - 16%, Minerals - 50% and Manufacturing -16% and special
projects 18%.
Stressed balance sheet
n Gross borrowings at the end of Q2 FY12 rose to Rs 3.4 bn vs Rs 1.95 bn in Q2
FY11.
n The increase in borrowings has been driven by higher working capital and loans
and advances to Davy Markham.
n Debtors stand at Rs 2.5 bn (122 days of sales). The debtors includes Rs 770 mn
from Vedanta Group pertaining to Lanjigarh expansion project. This amount has
been outstanding for over a year.
n “Other current assets” has moved up significantly to Rs 4.9 bn vs Rs 3.9 bn. The
other current assets include mainly "unbilled revenues" and "retention money".
Downgrade to Reduce on
n Weak near-term earnings on higher interest burden. Balance sheet quality is at
its weakest in past several years.
n Subdued order intake due to unfavourable business environment.
n Post effecting an earnings cut, the stock is trading at 11.2x and 9.4x FY12 and
FY13 earnings respectively. We note that in the previous downcycle, the company
has traded as low as 5x forward earnings.
n We downgrade stock to REDUCE with a target price of Rs 35 per share (Rs 52
earlier). Our implied exit multiple based on FY13 earnings works out to 10x in
line with our earlier target price.
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