 "HCC: Some bright spots")
HCC's winning of new orders worth Rs 1,748 crore from NHAI for constructing 32 kilometres (KMs) of highways in Jammu & Kashmir a few days back has boosted sentiments. Expectations of HCC bagging order for Mumbai Metro project where it has reportedly emerged as the L1 (lowest) bidder for one of the seven sections, is also providing traction, given that the stock gained 19.33% to close at Rs 23.15 on Monday. This takes the total stock gains to 30% since the NHAI order announcement based on Tuesday's flat closing of Rs 23.10.
A stronger order book provides better revenue visibility, but improving its cash flows is crucial which the street will be watching carefully, particularly at a time when HCC has been under pressure because of slow execution, subdued cash flow and high debt. During the June quarter also, HCC's revenues were soft because as its core EPC revenue was impacted owing to delayed execution at Kishanganga and NH-34 NHAI projects. The core EPC margins too were soft at about 14%. It is the claim recognition of about Rs 100 crore that helped. Analysts at Elara Capital say that the company is targeting further cash inflows of Rs 1,000 crore from arbitration awards over FY16-17 that will also help in reducing debt. Analysts at Systematix add, "We believe the conversion of claims into cash is crucial to ramp up the execution of current order book".
Debt is major portion to be addressed by the company. On consolidated level the company has seen its debt-equity ratio increase from 4.5x in FY11 to 21.34x in FY15 whereas its standalone debt-equity ratio increased from 2.01x in FY11 to 3.71x in FY15. HCC has utilized QIP proceeds of Rs 400 crore in April'15 to reduce its standalone debt to Rs 4,750 crore and thereby bringing its debt-equity ratio to 2.6x, compared to Rs 5,010 crore at FY15-end. The company also has realised Rs 158 crore from the sale of 247 Park, a large commercial property in the eastern suburbs of Vikhroli (in Mumbai). In addition, it expects to realise Rs 150 crore from sale of its stake in Nirmal and Dhule - Palasnar road BOT (build-operate-transfer) projects. Both these will further pare the debt of the standalone entity.
While on standalone level the debt may be coming down, the concerns still lie on the cash flows and debt on the Lavasa project. With debt close to Rs 3,500 crore, the interest obligations comes close to Rs 400 crore, as per analysts. The operating cash flows have not been adequate to service this interest costs for the project in FY15. Analysts at Elara say that with no visible near-term improvement in sales expected, they expect Lavasa's debt to rise further in FY16 barring any large sale to institutions.
Thus, value unlocking through Lavasa IPO will hold key for the company's prospects and will provide a boost to its efforts towards de-leveraging its balance sheet. The improving order flow nevertheless should lead to higher growth for the company.