Hindustan Construction Company – Riding through rough weather - Aditya Birla Money

Sales increase marginally by 4%; order inflows showing signs of improvement: Company's sales increased marginally by 4% y-o-y to Rs.8,657mn in line with our expectations. The company's order book stands at~ Rs.150.1bn (32% hydro, 33% transport, 21% water and 14% nuclear and others), with an strong order inflow of Rs.19,070 mn. The order inflow outlook remains bleak as industrial capex has slowed down and also many projects are facing execution issues on account of which top-line growth is likely to be sluggish for FY13.

- Operating profit jump by 106bps y-o-y and 582bps q-o-q: During 2QFY13, the company's operating profit jumped by 13.7% y-o-y to Rs.1,121mn, while the operating margin improved by 106bps y-o-y and 582bps q-o-q to 12.9% due to better top-line growth and better cost control management. We expect the operating margin to be at ~10% levels as the share of high margin hydro projects is coming down.

- Operating profits and higher other income lead to lower losses; Higher debt and interest costs still an overhang: Company reported a net loss of Rs.178mn during 2QFY13 below our as well as street estimates due to better operating performance and higher other income. The company reported a forex gain of Rs.59mn and an exceptional item of Rs.21.7mn on account of reversal of interest costs due to debt restructuring. Interest cost rose by 21.1% y-o-y to Rs.1,301 mn.

HCC has posted good set of results on the top-line as well as operating front; Top-line is likely to be sluggish during FY13 due to execution issues and lower capex investments; however operating performance has improved and is likely to stabilize on account of various cost control measures. Profitability has been hit badly on account of higher debt and interest costs. Despite CDR package and control in capex, debt and interest costs are showing no signs of stabilization and are increasing which is likely to take a toll in its profitability.

Factoring in a) muted order inflows b) improvement in operating performance we maintain our top-line estimates and marginally increase our operating margin estimates (~20bps); however interest costs and debt levels are showing no signs of improvement and hence we revise interest costs upwards. Considering the above factors we revise our FY13 and FY 14 to loss of Rs.1,797mn (previously loss of Rs.1,856mn) and loss of Rs.1,416mn (previously loss of Rs.1,305mn) respectively.

Infrastructure segment has been under severe pressure and we not foresee the situation improving in the near term. HCC has witnessed muted top-line growth however operating margins are showing signs of stabilisation. The company's balance sheet is highly leveraged and with low visibility on fund raising, high debt and interest cost burden are likely to be an overhang on the stock to and hence we maintain our "Hold rating" on the stock. At the CMP, the stock trades at 1.1xFY14E P/B and 14.6x FY14E EV/EBITDA.

Source : Equity Bulls

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