Neutral on HCC - Motilal Oswal

HCC (HCC IN, Mkt Cap US$0.6b, CMP Rs42, Neutral)

HCC reported 33% drop in adjusted profit in 3QFY11, as interest cost increased sharply to Rs748m (up 51% YoY). Revenues stood at Rs10b (up 8.7%YoY) in 3QFY11 EBIDTA at Rs1.3b (up 30% YoY), EBITDA margins for the quarter stood at 12.8% up 66bp YoY.

HCC derives ~58% of its order book from state/central government and balance from the private sector. Order book stood at Rs185b (up 18% YoY, -6% QoQ), book to bill ratio at 4.7x TTM.

HCC has BOT road portfolio of six NHAI projects totaling Rs55b. HCC intends to grow the portfolio to Rs200b in the next 2-3 years

Lavasa Corporation recently received the final order from the Ministry of Environment and Forest (MoEF), which has brought out details about environmental damages and violations of environmental norms by the hill city. The company, however, has maintained its stand of having followed all laws and regulations applicable at various stages of development of the project. All construction work has been stopped at present. In the books of Lavasa Corporation, total debt stands at Rs18b, including Convertible Bonds of Rs10.5b and long-term debt of Rs9b. Total customer advances are at Rs6.5b and the total equity contribution of Rs3.5b. Of this, convertible bond of Rs2.5b is due in June 2011.

Debt now stands at Rs35b (up from Rs25b at FY10-end) resulting in steep rise in interest cost during the quarter. HCC’s working capital, which stood at Rs24b at the beginning of FY11, now stands at Rs30b in 3QFY11.

We cut our FY11 and FY12 earnings estimates by 24% and 23% respectively. Our FY12 estimates assume 19% revenue growth, 30% order intake growth and stable EBITDA margin of 12.6%. We believe that there exists downside risk to our estimates; as revenue slowdown can lead to poor fixed costs absorption.

Source : Equity Bulls

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