Hindustan Dorr Oliver:Low margin order execution plays spoilsport: ICICI Sec

Visit http://indiaer.blogspot.com/ for complete details �� ��


Low margin order execution plays spoilsport…
Hindustan Dorr Oliver reported a muted set of results in Q2FY11. The
company’s revenues grew 20% YoY to | 243 crore, which was below
our expectations (I-direct estimate: | 263 crore). EBITDA margins
declined 270 bps QoQ to 9.1% mainly due to execution of low margin
environment sector orders and higher raw material expenses (~80% of
sales IN Q2FY11 vs. 81.2% in Q2FY11). PAT was above expectations on
the back of extraordinary other income booked to the tune of | 9.9
crore. PAT for Q2FY11 stood at | 20.6 crore (including extraordinary
income).


􀂃 EPC dominates order book but H2 crucial for order inflows
In Q2FY11, EPC orders in the mineral and environment segment
constituted ~95% of the company’s revenues. This was mainly led by the
environment segment revenues, which comprised 60% of the total
revenues. Similarly, EPC orders continued to dominate HDO’s | 1,333-
crore order book in Q2FY11 (including L1 orders). Order inflows for
Q2FY11 stood at | 220 crore.

Going ahead, the management expects to
clock in order inflows to the tune of | 1000 crore in H2FY11 as finalisation
of various orders from key clients has got delayed and is likely to be
awarded in H2FY11. For the Sheffield-based subsidiary DavyMarkham,
the company currently has an order book of £17 million, with the
management expecting to close the revenues for its subsidiary at £20
million in the current fiscal.

􀂃 Higher execution of low margin orders leads to lower margins
EBITDA margins declined 270 bps QoQ on the back of higher execution in
the environment sector, which is generally a low margin segment for the
company. Also, higher input costs had an impact on the margins (raw
material to sales ratio for Q2FY11 at 81.2% vs. 77% in Q2FY10). Going
ahead, we have pruned down our margin estimates for FY11E and FY12E
to build in higher input costs.

Valuation
We believe the recent underperformance of the stock has more than built
in the negatives. Also, rumours relating to the parent divesting the stake
in the company have been a key overhang on it, thereby undermining the
fundamentals and positive outlook for the company. We continue to
maintain out BUY rating on the stock with a target price of | 152.