HCC's Q1FY20 results (Underperformer) - Closure of arbitration sale deal likely in Q2
Q1FY20 result highlights
- HCC reported revenue of Rs8.3bn in Q1FY20 (vs our estimate of Rs9.8bn), a decline of 11% yoy. However, excluding the arbitration claims booked during Q1FY19, revenues grew by 4% yoy in a quarter where execution was slow led by elections. Arbitration claims of Rs1.4bn were not booked in Q1FY20 as it was part of pool where sale agreement has been entered with Blackrock.
- EBITDA came in at Rs1.8bn, +73% up yoy (vs our estimate of Rs1.2bn) due to favourable mix towards higher margin projects. As a result, EBITDA margin grew by 1918 bps to 21.5%. Execution on low margin state orders business suffered due to elections.
- HCC Q1FY20 losses were higher than our estimates despite huge beat in margins due to lower other income of Rs66m (vsRs681m in Q1FY19). Reported losses came in at Rs151m (vs our estimate of loss of Rs52m)
- Gross debt reduced marginally qoq to Rs34bn as on June 2019. However, interest expenses grew 7%yoy to Rs1.7bn (was Rs1.55bn in Q1FY19) mainly due to added interest provision (non-cash) on Rs7.5bn Lavasa debt taken over.
- Order backlog as on June 2019 declined 5% yoy to Rs177bn (4.2x book to bill ratio) due to nil order inflow during the quarter.
- HCC has sold its arbitration claims to Black Rock in a deal valued at Rs17.5bn. Almost 96% of the lenders in value terms have agreed to the broad contours of the deal. 3 to 4 lenders are still to give their final approval. 55% lenders have entered into definitive agreement. Conclusion of the deal is likely by Q2FY20E
Key positives: Improved core performance
Key negatives: Delay in conclusion of sale of arbitration claims deal; Stay on Mumbai Coastal Road projects
Impact on financials: Maintain FY20E estimates and introduce our 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 revised price target of Rs8
Hindustan Construction Company Limited is engaged in engineering and construction activities. The Company's segments include Engineering and Construction, Infrastructure, Real estate, Comprehensive Urban Development and Management, and Others. The Company provides engineering and construction services for projects across sectors, such as power, transportation, water and industrial projects. Its operations include construction of dams, barrages, tunnels, underground power stations and surface power stations, along with water conductor systems, such as surge shafts, pressure shafts and penstocks. Its operations also include material handling, such as aerial cableways for concrete placement, tower cranes, ropeways and hydraulic operated traveling/collapsible tunnel formwork, among others. It provides solutions in nuclear power by tie-ups with engineering and construction solution providers. In addition, the Company delivers transport systems, bridges and highways.
IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.
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