HCC's Q2FY18 results (Underperformer) - Execution remains weak

Q2FY18 result highlights

• HCC’s Q2FY18 earnings were operationally weak, but benefited from sharp reduction in interest costs sequentially (-10.5%qoq) due to debt repayment from arbitration proceeds. Adjusted PAT stood at Rs116m (-47.3%yoy) above estimate of Rs103m due to higher other income.
• Net sales grew 6.5%yoy to Rs9.7bn but were below estimate of Rs10.5bn due to weak execution. Arbitration awards booked in revenue during Q2FY18 were Rs1.9bn. EBITDA declined 23.7%yoy to Rs1.5bn (est: Rs1.6bn) and EBITDA margin declined 605bp yoy to 15.3%. EBITDA margin adjusted for profit on arbitration awards stood at 12.6%. Other income grew 2.3%yoy to Rs612m (est: Rs550m) and interest cost declined 14.2%yoy to Rs1.6bn (largely in line).
• Order inflows declined 64.7%yoy to Rs15.7bn on a high base and order backlog as of Sep-17 stood at Rs213bn (5.1x TTM revenues). YTD FY18 HCC has received order inflow of Rs28.4bn.
• HCC has so far received cash of Rs11bn (up from Rs8.4bn in Q1) against its arbitration awards of Rs42.7bn. It currently has letters for release of Rs8.4bn of claims on hand and will receive the claim amounts on complying with the necessary formalities. Further, claims worth Rs56bn are under various stages of arbitration. Out of Rs11bn of cash cumulatively received from claims so far Rs3.7bn has been utilized for debt reduction and the balance towards BG encashment and interest payments. Gross debt stood at Rs40bn as on Sep-17 as against Rs41bn as on Jun-17.
• The JLF has invoked SDR proceedings in Lavasa Corporation; current debt of Lavasa and subsidiaries stands at Rs52bn.

Key positives: Continued pace of order inflows and release of Rs11bn cash (cumulatively) from arbitration awards.

Key negatives: Slower than expected execution.

Impact on financials: No change in earnings.

Valuations & view

The release of 75% of arbitration awards against BGs and implementation of the S4A scheme will significantly alleviate stress levels for HCC, strengthen its equity base and also given it headroom to revive its operations. With lenders invoking SDR in Lavasa (debt of ~Rs52bn), we await clarity as regards to outstanding capital commitments and outstanding contingent liabilities on HCC for the Lavasa project. The current stock price adequately factors the likely gains from implementation of S4A and recovery of claims and does not offer upside potential. Maintain Underperformer with a revised price target of Rs36.