HCC's Q3FY18 results (Underperformer) - Execution continues to remain weak

Q3FY18 result highlights

• HCC’s Q3FY18 PAT grew 6.9x yoy to Rs313m (est: Rs305m) led by higher revenue from claims and higher other income.
• Net sales grew 30.4%yoy to Rs12.3bn (est: Rs11.8bn) led by revenue of Rs4bn (est: Rs1.5bn) from claims. Adjusting for revenue from claims, core EPC revenue declined 8.3%yoy to Rs8.3bn due to execution challenges led by stretched working capital situation. EBITDA grew 1.7%yoy to Rs1.6bn (est: Rs1.8bn) and EBITDA margin declined 375bp yoy to 13.3% (est: 15.4%). Adjusted for profits on claims, EBITDA margin stood at 11.1%.
• Other income declined 13.7%yoy to Rs621m but was ahead to estimate of Rs525m. Interest cost declined 22.6%yoy to Rs1.5bn (largely in line). Gross standalone debt declined by Rs700m qoq to Rs38bn as on Dec-17.
• Order inflows for 9mFY18 declined 59.4%yoy to Rs20.3bn led by cancellation of a single order worth Rs8.1bn (New Ganderbal hydro project, J&K) and higher base of LY. Order backlog as of Dec-17 stood at Rs200bn (4.5x TTM revenues). HCC is L1 in orders worth Rs2.5bn.  
• HCC has upto Dec-17 received cash of Rs17.3bn against its arbitration awards of Rs45.4bn. Of the total arbitration awards, the company currently have letters for release of Rs4.1bn of claims on hand and will receive the claim amounts on complying with the necessary formalities. Further, claims worth Rs53bn are under various stages of arbitration. So far in Q4FY18, HCC has received cash of Rs2bn against arbitration award of Lucknow NH project.
• The JLF has invoked SDR proceedings in Lavasa and its wholly owned subsidiaries. As per the RBI guidelines, the SDR proceeding needs to be completed within 18 months from the reference date (20 Sep 2017).    

Key positives:  Release of Rs19.3bn cash (cumulatively) from arbitration awards.

Key negatives: Slower than expected execution.

Impact on financials: Downgrade in FY18E/FY19E earnings by 40.1%/5.4% due to lower than expected execution partly offset higher other income. Introduced FY20E 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 Rs38.