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Hindustan Construction Co- Lavasa uncertainty looms…
Hindustan Construction Co’s (HCC) Q3FY11 net profit was down 6%
YoY due to higher interest cost. However, the company did not witness
any order inflow. Hence, the order book declined 6.2% sequentially to |
18,505 crore. During the quarter, the MoEF issued a show cause notice
to stop the construction work at Lavasa Corporation. MoEF has
maintained status quo even after the high court asked MoEF to reexamine its decision (though it indicated it may consider approval with
penalty and a separate fund). Given the lack of clarity over Lavasa, we
have kept our recommendation and price target under review.
ƒ Q3FY11 results marred by rising interest expenses
While there was a pick-up in the operating performance, HCC’s Q3FY11
adjusted net profit declined 6% YoY to | 12.2 crore due to mounting
interest expenses (| 74.8 crore in Q3FY11 vs. | 49.6 crore in Q3FY10).
While order book remained strong at | 18,505, order book to bill ratio
was 4.7x on TTM basis. HCC did not witness any order inflow during
the quarter. Though we expect a pick-up in the execution rate on the
back of a ramp up on the Kishanganga Hydro & NH 34 projects, we
lower our estimates due to lower than expected order inflow.
ƒ Uncertainty prevails over Lavasa on environment issue
In November, 2010, MoEF issued a show cause notice to Lavasa for
stoppage of work due to environment issues. Lavasa filed a writ petition
in the Bombay High Court. In December, 2010, the court asked MoEF to
visit Lavasa in January and come out with a revised decision. MoEF
recently passed an order directing to maintain status quo on the earlier
decision (though it indicated it may consider approval with a penalty
and separate fund). Further clarity on the issue is still awaited.
Valuation
Given the uncertainty prevailing over Lavasa, we have kept our
recommendation and price target under review for HCC. At the CMP,
the stock is trading at 27.4x FY12E earning estimates (not adjusted for
subsidiary of real estate and BOT projects).
Construction business
Q3FY11 results marred by higher interest expenses
ƒ HCC’s revenues grew 13.7% YoY to | 1009 crore on the back of a
pick-up in execution post monsoon. Going ahead, we expect the
execution to pick up further on the back of a ramp-up on the
Kishanganga Hydro and NH34 road projects
ƒ The EBITDA margin increased by 162 bps YoY and 28 bps QoQ to
13.1% in Q3FY11 on the back of a pick-up in execution
ƒ The company’s reported PAT declined 46.2% YoY to | 7.9 crore.
There was a forex gain of | 2.6 crore in Q3FY10 vs. forex loss of |
6.1 crore in Q3FY11. Additionally, there was a tax adjustment of |
2.6 crore pertaining to previous quarters. Adjusting for these items,
the net profit declined 6% YoY to | 12.2 crore
ƒ The decline in net profit was due to rising interest expenses (| 74.8
crore in Q3FY11 vs. | 49.6 crore in Q3FY10). The increase in interest
expenses was on account of rising debt level to fund its working
capital requirement
ƒ The debt has increased to ~| 3500 crore in Q3FY11 vs. | 2515 crore
while the net current assets (excluding cash) have increased to ~|
2,620 crore vs. | 2393 crore in FY10
ƒ The company has FCCBs outstanding of | 600 crore, which are
expected to be redeemed in March, 2011. To redeem that, the
company is looking to use cash of | 380 crore and cash credit of ~|
300 crore
Order book strong but did not witness order inflow in Q3FY11
ƒ While the order book remained strong at | 18,505 crore and the
order book to bill ratio was 4.7x on a TTM basis, the company did
not witness any order inflow during the quarter
ƒ During the quarter, the company cancelled the Lohari Nagpala order
of | 230 crore from its order book
Other highlights
ƒ The company received a claim of | 65 crore for the Naphtha Jhakri
JV. The company is looking to monetise | 200 crore in the next six
months against pending claims such as the Bandra Worli Sea Link,
Ennore Port, NHAI, Allahabad Bypass and Godavari Lift Irrigation
projects
The pending uncertainty over Lavasa continues to exist with the Ministry
of Environment and Forest’s (MoEF) recent notice maintaining status quo
over its earlier order on Lavasa Corporation to freeze all activity.
MoEF had, in November, sent a show cause notice to the company to
explain the charges of non clearance following which HCC challenged the
same in the high court. The court had maintained status quo over the
notice and asked MoEF to inspect the site and examine the state of affairs
and the company’s explanations before proceeding.
The MoEF team had visited the site in the first week of January and
recently came out with an order maintaining the status quo over stoppage
of work. The ministry, however, has also added that the company may be
condoned on paying up a fine, setting up an environment restoration fund
supervised by the MoEF and adhering to environment norms for further
construction.
With the recent developments giving no clear indication on the issue,
clarity will emerge on Lavasa only post the high court’s final decision.
Exhibit 7: Lavasa issue – chain of events
Date Event
25th November, 2010
MoEF issued showcause notice to Lavasa for environmental issues and
ordered stoppage of work at site
30th November, 2010 Lavasa filed a writ petition in high court challenging the order
7th December, 2010
High court directed MoEF to give a hearing to Lavasa and other parties
concerned with the issues raised
14th December, 2010
After the hearing, MoEF passed an order to maintain status quo till the final
hearding
22nd December, 2010
High court directed MoEF to visit Lavasa after being satisfied with the issues
raised by Lavasa
17th January, 2011
After the visit of officials in first week of January, MoEF passed an order to
maintain status quo and submit certain document to consider the plan
Source: Company, ICICIdirect.com Research
Valuations
Given the lower than expected order inflow, we have now revised our
FY12 earning estimates downward. Our FY12 revised EPS now stands at |
1.5 per share. With the uncertainty prevailing over Lavasa, we have kept
our recommendation and price target under review for HCC. At the CMP,
the stock is trading at 27.4x FY12E earning estimates (not adjusted for
subsidiary of real estate and BOT projects).
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Construction Co- Lavasa uncertainty looms…
Hindustan Construction Co’s (HCC) Q3FY11 net profit was down 6%
YoY due to higher interest cost. However, the company did not witness
any order inflow. Hence, the order book declined 6.2% sequentially to |
18,505 crore. During the quarter, the MoEF issued a show cause notice
to stop the construction work at Lavasa Corporation. MoEF has
maintained status quo even after the high court asked MoEF to reexamine its decision (though it indicated it may consider approval with
penalty and a separate fund). Given the lack of clarity over Lavasa, we
have kept our recommendation and price target under review.
ƒ Q3FY11 results marred by rising interest expenses
While there was a pick-up in the operating performance, HCC’s Q3FY11
adjusted net profit declined 6% YoY to | 12.2 crore due to mounting
interest expenses (| 74.8 crore in Q3FY11 vs. | 49.6 crore in Q3FY10).
While order book remained strong at | 18,505, order book to bill ratio
was 4.7x on TTM basis. HCC did not witness any order inflow during
the quarter. Though we expect a pick-up in the execution rate on the
back of a ramp up on the Kishanganga Hydro & NH 34 projects, we
lower our estimates due to lower than expected order inflow.
ƒ Uncertainty prevails over Lavasa on environment issue
In November, 2010, MoEF issued a show cause notice to Lavasa for
stoppage of work due to environment issues. Lavasa filed a writ petition
in the Bombay High Court. In December, 2010, the court asked MoEF to
visit Lavasa in January and come out with a revised decision. MoEF
recently passed an order directing to maintain status quo on the earlier
decision (though it indicated it may consider approval with a penalty
and separate fund). Further clarity on the issue is still awaited.
Valuation
Given the uncertainty prevailing over Lavasa, we have kept our
recommendation and price target under review for HCC. At the CMP,
the stock is trading at 27.4x FY12E earning estimates (not adjusted for
subsidiary of real estate and BOT projects).
Construction business
Q3FY11 results marred by higher interest expenses
ƒ HCC’s revenues grew 13.7% YoY to | 1009 crore on the back of a
pick-up in execution post monsoon. Going ahead, we expect the
execution to pick up further on the back of a ramp-up on the
Kishanganga Hydro and NH34 road projects
ƒ The EBITDA margin increased by 162 bps YoY and 28 bps QoQ to
13.1% in Q3FY11 on the back of a pick-up in execution
ƒ The company’s reported PAT declined 46.2% YoY to | 7.9 crore.
There was a forex gain of | 2.6 crore in Q3FY10 vs. forex loss of |
6.1 crore in Q3FY11. Additionally, there was a tax adjustment of |
2.6 crore pertaining to previous quarters. Adjusting for these items,
the net profit declined 6% YoY to | 12.2 crore
ƒ The decline in net profit was due to rising interest expenses (| 74.8
crore in Q3FY11 vs. | 49.6 crore in Q3FY10). The increase in interest
expenses was on account of rising debt level to fund its working
capital requirement
ƒ The debt has increased to ~| 3500 crore in Q3FY11 vs. | 2515 crore
while the net current assets (excluding cash) have increased to ~|
2,620 crore vs. | 2393 crore in FY10
ƒ The company has FCCBs outstanding of | 600 crore, which are
expected to be redeemed in March, 2011. To redeem that, the
company is looking to use cash of | 380 crore and cash credit of ~|
300 crore
Order book strong but did not witness order inflow in Q3FY11
ƒ While the order book remained strong at | 18,505 crore and the
order book to bill ratio was 4.7x on a TTM basis, the company did
not witness any order inflow during the quarter
ƒ During the quarter, the company cancelled the Lohari Nagpala order
of | 230 crore from its order book
Other highlights
ƒ The company received a claim of | 65 crore for the Naphtha Jhakri
JV. The company is looking to monetise | 200 crore in the next six
months against pending claims such as the Bandra Worli Sea Link,
Ennore Port, NHAI, Allahabad Bypass and Godavari Lift Irrigation
projects
The pending uncertainty over Lavasa continues to exist with the Ministry
of Environment and Forest’s (MoEF) recent notice maintaining status quo
over its earlier order on Lavasa Corporation to freeze all activity.
MoEF had, in November, sent a show cause notice to the company to
explain the charges of non clearance following which HCC challenged the
same in the high court. The court had maintained status quo over the
notice and asked MoEF to inspect the site and examine the state of affairs
and the company’s explanations before proceeding.
The MoEF team had visited the site in the first week of January and
recently came out with an order maintaining the status quo over stoppage
of work. The ministry, however, has also added that the company may be
condoned on paying up a fine, setting up an environment restoration fund
supervised by the MoEF and adhering to environment norms for further
construction.
With the recent developments giving no clear indication on the issue,
clarity will emerge on Lavasa only post the high court’s final decision.
Exhibit 7: Lavasa issue – chain of events
Date Event
25th November, 2010
MoEF issued showcause notice to Lavasa for environmental issues and
ordered stoppage of work at site
30th November, 2010 Lavasa filed a writ petition in high court challenging the order
7th December, 2010
High court directed MoEF to give a hearing to Lavasa and other parties
concerned with the issues raised
14th December, 2010
After the hearing, MoEF passed an order to maintain status quo till the final
hearding
22nd December, 2010
High court directed MoEF to visit Lavasa after being satisfied with the issues
raised by Lavasa
17th January, 2011
After the visit of officials in first week of January, MoEF passed an order to
maintain status quo and submit certain document to consider the plan
Source: Company, ICICIdirect.com Research
Valuations
Given the lower than expected order inflow, we have now revised our
FY12 earning estimates downward. Our FY12 revised EPS now stands at |
1.5 per share. With the uncertainty prevailing over Lavasa, we have kept
our recommendation and price target under review for HCC. At the CMP,
the stock is trading at 27.4x FY12E earning estimates (not adjusted for
subsidiary of real estate and BOT projects).
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