HCC:Muted performance, in-line with expectations: JM Financial

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Muted performance, in-line with expectations
􀂄 Operationally in-line, rise in interest costs dents net profit: Hindustan
Construction (HCC) reported 2QFY11 revenues at `8.8bn and EBITDA at
`1.1bn, in-line with JMFe of `8.9bn and `1.1bn. However, adjusted net profit
declined 27.5% YoY (vs JMFe of 4.1% growth) to `1.2bn due to spike in
interest cost, which according to management is due to base rate effect
resulting in increase in interest cost on short-term borrowings by c.300bps.


􀂄 Order book remains robust driven by private sector: HCC’s order book
stands at `178bn (c.4.0x FY11E revenues). This excludes the Sawalkot
hydropower project in J&K worth `19.4bn which the management expects to
be revived very soon. HCC received new orders worth `11.8bn in 2QFY11
while it is L-1 in another `15.4bn worth of projects. HCC witnessed increased
order inflow from private sector (accounting for 42% of orders including L-1 in
2QFY11). Meanwhile, government sector order inflow has slowed down
significantly due to lengthening of the government decision making process.
HCC is looking to increase its exposure to private sector projects which now
account for c.9% of the order book.

􀂄 Working capital situation improves slightly: Post 2QFY11 the net working
capital stands at 63% of revenues vs 71% in FY10. Management enumerated
the top accounts where payments are under dispute and guided for a
reduction of `7.5bn of debtors in 6-12months. However, there is still no
visibility in payment disputes relating to Bandra-Worli sea-link (c.`5bn) and
irrigation projects in AP (c.`3bn).

􀂄 Introducing FY13E, maintain BUY: We reduce our FY11/12E net profit
estimates by 9%/11% respectively due to rise in interest costs which are
structural in nature rather than one-off. We introduce FY13E revenue at `65bn
and EPS at `4.2. HCC’s 1HFY11 performance has been in-line with expectation
and we expect it to improve significantly in 2HFY11E driven by large projects
(including the in-house road projects) ramping up in execution. We maintain
our BUY rating given improving execution pace. We roll forward to Sept’11
with a TP of `81. Lavasa IPO remains a key trigger for the stock.