Key highlights from the results
For 4QFY2011, HCC’s numbers came in line with our expectations. On the top line front, HCC reported growth of 10.8% yoy to `1,202cr (`1085cr) almost as per our estimate of `1,217cr. The muted revenue performance was due to slow moving hydro projects and low contribution from AP projects as expected. EBITDAM surprised positively with an improvement of 250bps and stood at 13.8% (11.3%) for the quarter against our estimates 90bps improvement. PAT de-grew by 47.4% yoy to `22.6cr (`43.0cr) in line with our estimate of de-growth of 44.7%. Poor performance on bottom line was due to higher depreciation cost (118.4% increase yoy) and swell in interest cost (103.8% jump on yoy basis, attributed by increase in debt levels and hardening of interest rates) and higher tax rate (50.2%). HCC has redeemed FCCB during 4QFY2011 with an outflow of ~`600cr and the same has been funded by additional debt which will further increase its interest cost. The current outstanding order book of the company stands at `16,187cr (excluding the disputed and L1 orders worth `1,940cr and `1,208cr respectively) Going ahead, we expect HCC’s interest cost to increase on the back of higher debt requirements to fund its working capital and rising interest rates regime. We believe that HCC’s stock performance depends on the outcome of the ongoing Lavasa legal wrangle with the Ministry of Environment and Forests (MOEF). Owing to these concerns we maintain our Neutral view on the stock.
Quarterly performance (Standalone)
| Y/E March (` cr) | 4QFY11 | 4QFY10 | % chg(yoy) | 3QFY11 | % chg(qoq) | FY2011 | FY2010 | % chg(yoy) |
| Income from Operations | 1,202.1 | 1,085.0 | 10.8 | 1,002.5 | 19.9 | 4,084.5 | 3,629.2 | 12.5 |
| Total Expenditure | 1,035.9 | 962.0 | 7.7 | 876.6 | 18.2 | 3,553 | 3,201 | 11.0 |
| Operating Profit | 166.2 | 123.0 | 35.1 | 125.9 | 32.0 | 531.2 | 427.9 | 24.1 |
| OPM (%) | 13.8 | 11.3 | 250bp | 12.6 | 120bp | 13.0 | 11.8 | 120bp |
| Interest | 90.3 | 44.3 | 103.8 | 74.8 | 20.7 | 290 | 205.2 | 41.3 |
| Depreciation | 44.0 | 20.1 | 118.4 | 38.2 | 15.2 | 153 | 113.9 | 34.0 |
| Non Operating Income | 13.4 | 4.2 | 220.6 | 0.5 | 2648.8 | 23 | 13.0 | 77.6 |
| Nonrecurring items | 0.0 | 0.0 | - | 0.0 | - | - | - | - |
| Profit Before tax | 45.4 | 62.8 | (27.7) | 13.4 | 238.9 | 111.7 | 121.8 | (8.3) |
| Tax | 22.8 | 19.8 | 15.0 | 5.5 | 318.1 | 41 | 40.4 | 0.7 |
| PAT | 22.6 | 43.0 | (47.4) | 7.9 | 184.6 | 71.0 | 81.4 | (12.8) |
| PAT (%) | 1.9 | 4.0 | (210)bp | 0.8 | 110bp | 1.7 | 2.2 | (50)bp |
| FDEPS (`) | 0.4 | 0.7 | (47.4) | 0.1 | 184.6 | 1.2 | 1.3 | (12.8) |
Source: Company, Angel Research
| 4QFY2011 Actual v/s Angel estimates | ||||||||||||||||
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| Source: Company, Angel Research |
Outlook and valuation: On the valuation front, at current levels the stock trades at 22.2x PE and 1.4x P/BV on FY2013E standalone basis. We have valued HCC on SOTP basis with a fair value of `43/share by assigning 8x FY2013E earnings (standalone). Its real estate venture valued on NAV basis and it’s BOT assets have been valued on DCF basis. Our fair value implies an upside of >20% from current levels but we continue to maintain Neutral on the stock owing to 1) We expect strain on cash flows for HCC and Lavasa on several accounts for short to medium term – a) Lavasa has debt of `1,950cr, and with construction coming to a standstill has stalled (loss of ~`2cr per day as per management) its cash flows without clarity about restoration of the same in the near future; b) The proposed IPO to fund the Lavasa project has been delayed indefinitely along with investor confidence getting affected; c) Also, if the MoEF penalty is substantial, HCC’s balance sheet and cash position would be further stretched; and 2) We are also concerned about HCC’s standalone business due the poor order booking for FY2011 along with weak outlook for new orders due to slowdown in award activity (read power segment), deteriorating working capital situation and increased debt levels.
Also, we believe that in the infrastructure space there are better bets than HCC like NCC, IVRCL and ITNL. Also, given the recent correction, investors have an excellent opportunity to switch from HCC to these stocks.
Key Financials (Standalone)
| Y/E March (` cr) | FY2010 | FY2011 | FY2012E | FY2013E |
| Net sales | 3,629 | 4,091 | 4,722 | 5,485 |
| % chg | 9.5 | 12.7 | 15.4 | 16.2 |
| Adj. net profit | 81 | 71 | 64 | 96 |
| % chg | 7.2 | (12.8) | (9.4) | 50.0 |
| EBITDA (%) | 11.8 | 13.1 | 12.5 | 12.3 |
| FDEPS (`) | 1.3 | 1.2 | 1.1 | 1.6 |
| P/E (x) | 26.3 | 30.2 | 33.4 | 22.2 |
| P/BV (x) | 1.4 | 1.4 | 1.4 | 1.4 |
| RoE (%) | 6.5 | 4.7 | 4.2 | 6.3 |
| RoCE (%) | 8.2 | 8.2 | 7.8 | 8.2 |
| EV/Sales (x) | 1.2 | 1.3 | 1.3 | 1.3 |
| EV/EBITDA (x) | 10.4 | 10.1 | 10.6 | 10.2 |
Source: Company, Angel Research
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