HCC's Q1FY19 results (Underperformer) - Execution remains impacted by tight liquidity

Q1FY19 result highlights

• HCC reported a net loss in Q1FY19 largely due to lower than expected revenue and higher subcontracting costs. Reported net loss stood at Rs197m as against an estimated PAT of Rs121m.
• Revenue remained flat yoy at Rs9.3bn and was below estimate of Rs10.6bn as execution remained constrained due to insufficient liquidity. Revenue on account of favourable arbitration claims was only at ~Rs340m in Q1 with a very marginal profit element. Adjusted for this the core construction revenue declined 3.4%yoy to Rs9bn.
• EBITDA declined sharply by 39.3%yoy to Rs1bn (est: Rs1.7bn) due to lower than expected revenue and higher subcontracting costs. EBITDA margin declined sharply by 720bp yoy to 11.1% as against estimate of 16%. The company has been resorting to more subcontracting in the last 1-2 quarters due to constraints on its liquidity/WC limits. This has also impacted the company’s margins.
• Other income grew 12.6%yoy to Rs681m as against estimate of Rs450m. Interest cost declined 11.5%yoy to Rs1.6bn (in line). Interest cost includes non-cash charge of Rs580m on account of OCDs of Rs13.4bn. Gross debt remained unchanged qoq and stood at Rs37bn as on June 2018. Gross debt comprises of term debt of Rs13.2bn, working capital debt of Rs10.6bn and OCDs of Rs13.4bn.
• Order backlog as on June 2018 stood at Rs187bn (4.1x TTM revenue). Order inflow declined 70.5%yoy to Rs3bn. HCC is L1 in orders worth Rs12bn (HCC's share of the coastal road project Pkg2: Baroda Palace - Worli End).
• HCC has upto June 2018 received cash of Rs17.4bn (against submission of BGs) against arbitration awards of Rs49.2bn.
• HCC has submitted a resolution plan to the lenders for the Lavasa project and is awaiting its outcome.

Key positives: Release of Rs17.4bn cash (cumulatively) from arbitration awards and court cases.

Key negatives: Slower than expected execution, tight liquidity and higher subcontracting cost.

Impact on financials: Downgrade in FY19E/FY20E earnings by 47.6%/36.1% due lower than expected execution and higher subcontracting.

Valuations & view

The continued release of 75% of arbitration awards against BGs will significantly alleviate stress levels for HCC, strengthen its equity base and also given it headroom to revive its operations. However, current stock price adequately factors the likely gains from implementation of S4A and recovery of claims and does not offer upside potential. We also await clarity as regards to outstanding capital commitments and outstanding contingent liabilities on HCC for the Lavasa project. Maintain Underperformer with a revised price target of Rs12.