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Balance Sheet Strain, Slower Project Execution
HCC reported a net loss for 4QFY12, for the third consecutive quarter, at
Rs542mn, which was above our/Bloomberg consensus estimates of a loss of
Rs154mn and Rs183mn, respectively, following a decline in net sales, subdued
performance at the operating level and surge in interest costs. We believe
project execution would continue to be slow because of higher debt, increased
working capital requirement and lack of order inflow, which will impact future
growth and profitability. However, the likely approval to the CDR (corporate debt
restructuring) package will ease the financial strain and the company may
improve its performance going ahead. We maintain our Sell rating on HCC with a
revised target price of Rs16 (from Rs17 earlier).
Change in earnings estimates: We have cut our earnings estimates for FY13 and
introduced FY14 estimates. We cut net sales estimate by 14% for FY13E to factor in
lower-than-expected revenue traction and expect 6.5% YoY growth in FY14E. We
have tweaked our EBITDA margin from 12.5% to 11.2% for FY13E and expect 11.6%
for FY14E because of negative operating leverage in the wake of slower growth.
Subsequently, we expect a net loss of Rs540mn for FY13E (from net profit estimate of
Rs47mn earlier) and a net profit of Rs317mn for FY14E.
Strain on the bottom-line continues: Net sales fell 3.9% to Rs11.56bn because of
sluggish project execution run-rate in the wake of higher leverage. EBITDA tumbled
by 47% to Rs881mn (34% lower than our estimate) and EBITDA margin got squeezed
by 630bps to 7.6% (lowest in the past six years) due to decline in revenue and also
some of the projects not crossing the threshold limit for booking revenue, but were
included in costs. Interest costs increased 67% YoY to Rs1.5bn due to higher debt
burden and rising interest rates (currently, average interest rate at 12.5%) as well as
the change in accounting methodology, which disallows net out of interest receipts for
computing interest costs. Other income rose 100% YoY to Rs269mn, driven by interest
income. Decline in revenue, lower performance at the operating level and high interest
costs led the company to report a net loss of Rs542mn for the quarter.
Valuation: HCC’s balance sheet would continue to be under strain because of higher
debt level, thereby restraining the growth of its core business, and the company would
report a net loss even in FY13. Meanwhile, the likely nod to its CDR package will ease
short-term cash flow, thereby improving project execution. However, we believe HCC
would take some time to come out of its problems. Following the earnings downgrade,
we have revised our TP from Rs17 to Rs16 and retained our Sell rating on HCC.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Balance Sheet Strain, Slower Project Execution
HCC reported a net loss for 4QFY12, for the third consecutive quarter, at
Rs542mn, which was above our/Bloomberg consensus estimates of a loss of
Rs154mn and Rs183mn, respectively, following a decline in net sales, subdued
performance at the operating level and surge in interest costs. We believe
project execution would continue to be slow because of higher debt, increased
working capital requirement and lack of order inflow, which will impact future
growth and profitability. However, the likely approval to the CDR (corporate debt
restructuring) package will ease the financial strain and the company may
improve its performance going ahead. We maintain our Sell rating on HCC with a
revised target price of Rs16 (from Rs17 earlier).
Change in earnings estimates: We have cut our earnings estimates for FY13 and
introduced FY14 estimates. We cut net sales estimate by 14% for FY13E to factor in
lower-than-expected revenue traction and expect 6.5% YoY growth in FY14E. We
have tweaked our EBITDA margin from 12.5% to 11.2% for FY13E and expect 11.6%
for FY14E because of negative operating leverage in the wake of slower growth.
Subsequently, we expect a net loss of Rs540mn for FY13E (from net profit estimate of
Rs47mn earlier) and a net profit of Rs317mn for FY14E.
Strain on the bottom-line continues: Net sales fell 3.9% to Rs11.56bn because of
sluggish project execution run-rate in the wake of higher leverage. EBITDA tumbled
by 47% to Rs881mn (34% lower than our estimate) and EBITDA margin got squeezed
by 630bps to 7.6% (lowest in the past six years) due to decline in revenue and also
some of the projects not crossing the threshold limit for booking revenue, but were
included in costs. Interest costs increased 67% YoY to Rs1.5bn due to higher debt
burden and rising interest rates (currently, average interest rate at 12.5%) as well as
the change in accounting methodology, which disallows net out of interest receipts for
computing interest costs. Other income rose 100% YoY to Rs269mn, driven by interest
income. Decline in revenue, lower performance at the operating level and high interest
costs led the company to report a net loss of Rs542mn for the quarter.
Valuation: HCC’s balance sheet would continue to be under strain because of higher
debt level, thereby restraining the growth of its core business, and the company would
report a net loss even in FY13. Meanwhile, the likely nod to its CDR package will ease
short-term cash flow, thereby improving project execution. However, we believe HCC
would take some time to come out of its problems. Following the earnings downgrade,
we have revised our TP from Rs17 to Rs16 and retained our Sell rating on HCC.
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