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Hindustan Construction’s (HCC) Q3FY12 numbers were disappointing at
the operating level with both revenue and EBIDTA coming in below our
estimates. However, lower‐than‐expected interest costs meant that loss
of INR249mn at the PBT level was lower than expected. However,
extraordinary expenses of INR1.6bn resulted in reported loss of INR1.3bn
which was much higher than our estimate. We maintain ‘HOLD’ with
SOTP‐based target price of INR25/share.
Execution continues to disappoint
HCC reported a loss of INR1.3bn in Q3FY12 (including extraordinary expenses of
INR1.6bn ) against a profit of INR80mn in Q3FY11, driven by slower execution, decline
in EBITDA margin and substantially higher interest costs. Revenue fell ~6% YoY to
INR9.5bn (against our expectation of INR10.5bn). EBITDA margin also declined 140bps
YoY due to operating de‐leverage. While interest costs shot up ~39% YoY to INR1bn,
they were still below our INR1.3bn estimate; this meant that loss at PBT level of
INR249mn was better than our expectation of INR 396 mn
Phase I of Lavasa gets environment clearance; work resumes
The Ministry of Environment has given environment clearance to phase I of Lavasa.
Post this, HCC has resumed work and is in the process of getting the site mobilised.
However, we believe the company’s tight financial condition means that progress on
the project will continue to be slow.
Outlook and valuations: Weak performance; maintain ‘HOLD’
We have calibrated our estimates for FY12 considering the performance in the first
three quarters of the year. We are introducing FY14 estimates. We have revised down
our SOTP‐based target price to INR25/share (INR30 earlier) taking into account the
performance of the EPC business which is expected to make a loss at the net level in
FY12 and in FY13 at the standalone level. We expect the medium term outlook to
remain challenging due to the stretched balance sheet and high interest rates. We
maintain ‘HOLD’ recommendation on the stock.
Reports extraordinary loss of INR1.6bn
During Q3FY12, HCC has made provision for extraordinary items of INR1.6bn. Details are as
follows:
• INR520mn provision for losses in two recently awarded projects.
• INR650mn for substantial delays in approval of claims, increase in cost etc., in few
projects.
• INR160mn for expected loss on sale of assets.
• INR270mn for performance guarantee wrongfully encashed by client, which is under
dispute.
• INR66mn provision made against dues from a sub contractor.
Order book remains flat QoQ
HCC’s order book at Q3FY12 end stood at INR162bn, flat sequentially. The order intake
during 9mFY12 has remained muted at ~ INR20bn. The company is L1 in INR16bn worth of
projects.
Company Description
HCC is a leading civil engineering and construction company, engaged primarily in the
construction of hydel and power projects, irrigation, water supply, urban infrastructure and
transportation projects. It is developing Lavasa, an ambitious project aimed at creating a hill
city near Mumbai and Pune. Apart from this, it is also involved in some other real estate
development projects. HCC is also making inroads in the asset ownership space with entry
into the roads space and has plans to build its BOT portfolio significantly going ahead.
Investment Theme
HCC with more than eight decades of experience in the engineering and construction (E&C)
space, is amongst the most respected infrastructure majors in India. Its unmatched
technical skills are evident in several marquee projects it has executed over the years. With
a robust order book, the company is likely to chart a strong growth trajectory going ahead.
With PPP projects gaining currency, HCC has drawn ambitious plans to leverage its E&C
strength as far as the asset ownership space is concerned. Its current ~ USD 1.2 bn portfolio
consists of six road BOT projects. The company plans to build a sizeable portfolio in the
transportation (roads, metro rail, railways and airports) and energy (hydro, nuclear and
thermal power) space.
HCC, through its 100% owned subsidiary, HCC Real Estate (HREL), is developing Lavasa, free
India’s first hill city. We believe Lavasa has reached an inflexion point and is likely to
redefine the company’s profile. Lavasa has already surpassed HCC in terms of profitability
and is likely to grow exponentially, thus emerging as a game changer for the company. It is
on its way to emerge as a breakthrough project, changing the contours of domestic urban
infrastructure development along with significant value enhancement for HCC.
Key Risks
HCC has ventured into real estate and BOT segments, both of which entail upfront
investments with returns generally being back‐ended. In this context, fund raising in Lavasa
has emerged as a key monitorable for the company. Notwithstanding this, there will be
demands on the company’s balance sheet since the core contracting business also requires
funds. Also, working capital management has become a key issue for the company which
has stretched its working capital cycle.
The company’s order book is geared towards hydel projects that are typically long gestation
and mostly in difficult terrains. There are inherent risks in execution of such a long duration
portfolio.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Construction’s (HCC) Q3FY12 numbers were disappointing at
the operating level with both revenue and EBIDTA coming in below our
estimates. However, lower‐than‐expected interest costs meant that loss
of INR249mn at the PBT level was lower than expected. However,
extraordinary expenses of INR1.6bn resulted in reported loss of INR1.3bn
which was much higher than our estimate. We maintain ‘HOLD’ with
SOTP‐based target price of INR25/share.
Execution continues to disappoint
HCC reported a loss of INR1.3bn in Q3FY12 (including extraordinary expenses of
INR1.6bn ) against a profit of INR80mn in Q3FY11, driven by slower execution, decline
in EBITDA margin and substantially higher interest costs. Revenue fell ~6% YoY to
INR9.5bn (against our expectation of INR10.5bn). EBITDA margin also declined 140bps
YoY due to operating de‐leverage. While interest costs shot up ~39% YoY to INR1bn,
they were still below our INR1.3bn estimate; this meant that loss at PBT level of
INR249mn was better than our expectation of INR 396 mn
Phase I of Lavasa gets environment clearance; work resumes
The Ministry of Environment has given environment clearance to phase I of Lavasa.
Post this, HCC has resumed work and is in the process of getting the site mobilised.
However, we believe the company’s tight financial condition means that progress on
the project will continue to be slow.
Outlook and valuations: Weak performance; maintain ‘HOLD’
We have calibrated our estimates for FY12 considering the performance in the first
three quarters of the year. We are introducing FY14 estimates. We have revised down
our SOTP‐based target price to INR25/share (INR30 earlier) taking into account the
performance of the EPC business which is expected to make a loss at the net level in
FY12 and in FY13 at the standalone level. We expect the medium term outlook to
remain challenging due to the stretched balance sheet and high interest rates. We
maintain ‘HOLD’ recommendation on the stock.
Reports extraordinary loss of INR1.6bn
During Q3FY12, HCC has made provision for extraordinary items of INR1.6bn. Details are as
follows:
• INR520mn provision for losses in two recently awarded projects.
• INR650mn for substantial delays in approval of claims, increase in cost etc., in few
projects.
• INR160mn for expected loss on sale of assets.
• INR270mn for performance guarantee wrongfully encashed by client, which is under
dispute.
• INR66mn provision made against dues from a sub contractor.
Order book remains flat QoQ
HCC’s order book at Q3FY12 end stood at INR162bn, flat sequentially. The order intake
during 9mFY12 has remained muted at ~ INR20bn. The company is L1 in INR16bn worth of
projects.
Company Description
HCC is a leading civil engineering and construction company, engaged primarily in the
construction of hydel and power projects, irrigation, water supply, urban infrastructure and
transportation projects. It is developing Lavasa, an ambitious project aimed at creating a hill
city near Mumbai and Pune. Apart from this, it is also involved in some other real estate
development projects. HCC is also making inroads in the asset ownership space with entry
into the roads space and has plans to build its BOT portfolio significantly going ahead.
Investment Theme
HCC with more than eight decades of experience in the engineering and construction (E&C)
space, is amongst the most respected infrastructure majors in India. Its unmatched
technical skills are evident in several marquee projects it has executed over the years. With
a robust order book, the company is likely to chart a strong growth trajectory going ahead.
With PPP projects gaining currency, HCC has drawn ambitious plans to leverage its E&C
strength as far as the asset ownership space is concerned. Its current ~ USD 1.2 bn portfolio
consists of six road BOT projects. The company plans to build a sizeable portfolio in the
transportation (roads, metro rail, railways and airports) and energy (hydro, nuclear and
thermal power) space.
HCC, through its 100% owned subsidiary, HCC Real Estate (HREL), is developing Lavasa, free
India’s first hill city. We believe Lavasa has reached an inflexion point and is likely to
redefine the company’s profile. Lavasa has already surpassed HCC in terms of profitability
and is likely to grow exponentially, thus emerging as a game changer for the company. It is
on its way to emerge as a breakthrough project, changing the contours of domestic urban
infrastructure development along with significant value enhancement for HCC.
Key Risks
HCC has ventured into real estate and BOT segments, both of which entail upfront
investments with returns generally being back‐ended. In this context, fund raising in Lavasa
has emerged as a key monitorable for the company. Notwithstanding this, there will be
demands on the company’s balance sheet since the core contracting business also requires
funds. Also, working capital management has become a key issue for the company which
has stretched its working capital cycle.
The company’s order book is geared towards hydel projects that are typically long gestation
and mostly in difficult terrains. There are inherent risks in execution of such a long duration
portfolio.
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