HCC's Q2FY20 results (Underperformer) - Awaiting Supreme Court Judgment on arbitration act

Q2FY20 result highlights

• During the quarter, HCC had filed a writ petition before Supreme Court for immediate release of payment from arbitration awards and has challenged the constitutional validity of Section 87 (came into force on August 31, 2019) which led to inapplicability of various provision of speedy recovery of arbitration awards introduced by The Arbitration and Conciliation (Amendment) Act, 2015 for cases filed prior to 23^rd Oct, 2015. The judgement is due in couple of weeks ( hearing has been completed)
• HCC deal with Blackrock may undergo a change depending on the Supreme Court Judgement.  Almost 96% of the lenders in value terms have agreed to the deal. Conclusion of the deal will depend on the judgement.
• HCC reported revenue of Rs9.9bn in Q2FY20 (vs our estimate of Rs8.6bn), flat yoy. Excluding arbitration claims of Rs800m in Q2FY19, revenues grew by 9% yoy.  Stoppage of work on Mumbai Coastal road project continues to impact the revenues adversely.
• EBITDA came in at Rs1.9bn, -1.7% yoy (vs our estimate of Rs1.5bn) due to favourable mix towards higher margin projects. As a result, EBITDA margin came in at 18.9%.
• Adjusted loss in Q2FY20 was Rs142m (vsR265m in Q2FY19). Reported losses came in at Rs1.7bn due to write down of deferred tax assets (on re-assessment of whether company can avail the DTA on books)
• Order backlog as on Sep 2019 declined 11% yoy to Rs170bn (4.0x book to bill ratio) due to nil order inflow during the quarter. Note that company is L1 in Subansiri order of worth Rs22bn

Key positives: L1 in Subansiri order worth Rs22bn ; Pending Supreme Court Judgement on Arbitration act

Key negatives: Delay in conclusion of sale of arbitration claims deal; Stay on Mumbai Coastal Road projects

Impact on financials: Maintain FY20E/FY21E estimates

Valuations & view

HCC’s core execution which has so far remained constrained due to tight liquidity is showing signs of recovery. The complete write-off of investments and contingent liabilities towards Lavasa has brought finality to the overhang on HCC due to Lavasa. The erosion in networth due to this write-off has been partly compensated through infusion of capital through rights issue. However, the earnings visibility continues to remain weak due to elevated debt/ borrowing costs. We maintain our Underperformer rating on HCC with a price target of Rs8.