The June quarter results of Hindustan Construction Company (HCC) clearly indicate that challenges in terms of execution, higher working capital requirements, and thus, higher interest outgo, haven’t eased. For the quarter, HCC reported a 90 per cent decline in net profit on a marginal 6.6 per cent growth in revenues, post which analysts have lowered their earnings estimates for the current and next financial years. On the back of these issues, coupled with worries over its Lavasa project, its stock has corrected almost 60 per cent in a year, wherein most of these issues are factored in. Patient investors with some appetite for risk (given that there is some downside) can look at this stock.
DRIVING VALUE
On the positive side, the company recently sold a 14.5 per cent stake in HCC Concessions for Rs 240 crore. This business, which holds BOT (build-operate-transfer) road projects, is valued at Rs 1,650 crore or almost two times its book value. HCC’s remaining stake of 85.5 per cent is thus worth about Rs 14 per share (after adjusting for a 30 per cent holding company discount). These valuations are higher than analysts’ earlier estimate of about Rs 7-8 per share and should boost HCC’s overall valuations.
HCC’s current market capitalisation is Rs 1,832 crore, which along with net consolidated debt of Rs 6,682 crore, translates into an enterprise value of Rs 8,514 crore. This looks reasonable, considering the company’s positioning in the infrastructure space – expertise in the high margin less competitive hydro power project segment. Additionally, its order book of Rs 17,000 crore, (four times its FY11 construction business revenues) provides reasonable visibility.
| PROFITS UNDER PRESSURE | ||
| in Rs crore | Q1FY12 | FY12E |
| Net sales | 1,057.7 | 4,600.0 |
| % change | 6.6 | 12.3 |
| PBIDT | 138.6 | 578.6 |
| % change | 7.6 | 12.6 |
| PBIDT (%) | 13.1 | 12.6 |
| Net profit | 2.9 | 17.9 |
| % change | -89.9 | -71.2 |
| E: Estimates % change is year-on-year Source: Capitaline, analyst reports | ||
WORRIES CONTINUE
The low valuations, however, can partly be attributed to deteriorating fundamentals, which are likely to take some time to stabilise and improve. Here, the biggest issue relates to HCC’s high debt of Rs 7,382 crore, largely on account of working capital arising out of its business need. Going ahead, analysts believe that incremental sales may require the company to borrow more, which could put further pressure on profitability. The company’s working capital, in terms of the number of days, has shot up to almost 280 days of sales in the June quarter as against 223 days in the year- ago one.
This comes at a time when interest rates are on the rise and execution has been a key challenge. The company’s borrowing cost has already gone up from 8.25 per cent to 10 per cent. On the positive side, the company has set up a team to recover large dues from various government agencies, which should lower some of the pressure.
Overall, given the environment, analysts believe that the next few quarters could be muted in terms of profits growth. Also, the development (environment clearance) at its project at Lavasa will be among key things to watch, as the company incurring losses of about Rs 2 crore per day due delays in the executing project.