Hindustan Dorr Oliver - Orbiting in moderate growth trajectory - Elara Capital

• Hindustan Dorr Oliver
• Rating : Accumulate
• Target Price : INR153
• Upside : 7%
• CMP : INR144 (as on 10 August 2010)

Orbiting in moderate growth trajectory

Execution pace maintained, results in line with expectations

HDOL registered a 39.8% YoY increase in revenues at ~INR2.5bn. Though operating margins declined by 55bps YoY to 11.8% owing primarily to higher personnel expenses (+73bps YoY), operating profits managed to grow at a healthy pace of 33.7% YoY to INR299mn. Net profits for the quarter stood at INR166mn (+29.3% YoY).

Order backlog stagnant at INR12.9bn

While the metals and mineral beneficiation accounts for ~45% of the total order backlog, environmental management, special projects and manufacturing orders score 40%, 3% and 12% respectively. The company has bagged fresh orders worth INR2bn during the quarter, representing a decline of ~49% YoY. We expect additional jobs amounting to INR11.6bn by end FY11 and model in a healthy CAGR of 31.1% over FY10-13.

Maintain estimates, rating revised to Accumulate at INR153

Despite lingering concerns on its fresh order inflows and alarming revenue to bill ratio of 1.1x, we remain confident on HDOL clocking a 31% CAGR in profitability during FY10-12 period backed by a 36.2% revenue CAGR. However, post the steep price appreciation seen in the past quarter, potential positives arising from the bid pipeline, the recent acquisition (DavyMarkham) and MoUs (with SPIG & Bronswerk) remain largely factored in the present valuation.

We maintain 13.3x FY11 earnings multiple to HDOL's core business model (~10% discount since the acquisition by IVRCL). The same has been arrived at by taking into account a moderate growth trajectory (Vs FY06-10), an increase in the technical complexity of newer jobs leading to a rise in average execution period, and a higher working capital need. Our SOTP valuation pegs the company's fair value per share at INR153, indicating a potential upside of ~7%. We revise downwards our recommendation to Accumulate on the stock.

Source : Equity Bulls

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