HCC - Robust margin, forex gains stem loss - Edelweiss

Hindustan Construction (HCC) reported lower-than-expected loss in Q2FY13 at INR179mn (our expectation INR628mn loss) due to sharp expansion in EBITDA margin and forex gains. However, execution and order intake continued to remain soft. Also, working capital cycle remains high, which is likely to dilute any potential benefit of interest rate softening. Maintain 'HOLD' with SOTP-based TP of INR25/share.

Surge in operating profitability

HCC's revenue booking continued to remain sluggish; revenue, at INR8.6bn, grew 4% YoY. EBITDA margin, which had plummeted in the past two quarters due to cost overruns, bounced back sharply to 12.9% during the quarter, improving 100bps YoY. Also, higher-than-expected other income coupled with forex gains of INR59mn stemmed the loss. Further, there was an exceptional income of INR22mn due to reversal of interest costs of INR181mn consequent to debt restructuring programme and related expenses of INR159mn. As a result, INR179mn loss was lower than our expectation of INR628mn loss.

Order intake a concern

The company's order book at Q2FY13 end stood at INR151bn (INR147bn at FY12 end); it is L1 in INR19bn worth of projects. Book-to-bill remained at 3.8x, as previous quarter, providing limited revenue visibility to HCC, which has a long execution cycle. The company has excluded INR6.6bn of projects from its order book where the client has not received environment clearance.

Outlook and valuations: High leverage a worry; maintain 'HOLD'

Slow order intake and weak execution have led us to tone down our revenue estimates; however, we have revised our operating profitability assumptions on uptick in EBITDA margins. This, coupled with higher-than-expected other income has led us to lower our loss estimates for HCC. We remain concerned about the high leverage (3.7x at Q2FY13 end) and the elevated working capital cycle. We maintain our SOTP-based target price of INR25/share (INR19/share from BOT projects and balance from Lavasa). Execution concerns, a stretched balance sheet and Lavasa issues mean that the stock is expected to be range bound in the near future. Hence, we maintain 'HOLD' recommendation on the stock.

Source : Equity Bulls

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