HCC's Q2FY19 results (Underperformer) - Liabilities on Lavasa fully written-off

Q2FY19 result highlights

• HCC reported steep loss in Q2FY19 mainly on account of write-offs taken in HREL (HCC Real Estate Limited) and LCL (Lavasa Corporation Limited). HREL is the holding company for Lavasa. Reported net loss stood at Rs15.3bn against an estimated PAT of Rs36m.
• HCC has settled its guaranteed outstanding liabilities related to Lavasa worth Rs11.8bn at Rs7.5bn (partly in process of being settled). The company has assumed this liability on its books with a corresponding write-off in the P&L. HCC has also written off the entire amount of investments and loans given to HREL and Lavasa, totalling to Rs10.6bn and Rs2.1bn, respectively. Thus the total write-offs during the quarter  stood at Rs20.1bn (HREL: 10.6bn and LCL: 9.5bn).
• Revenue remained flat yoy at Rs9.8bn and was below estimate of Rs10.2bn as execution remained constrained due to insufficient liquidity. Revenue on account of favourable arbitration claims was at ~Rs800m in Q2 with profit element worth ~Rs400m. Adjusted for this the core construction revenue grew 3.8%yoy to Rs9bn.
• EBITDA grew sharply by 27.7%yoy to Rs1.9bn (est: Rs1.4bn) due to lower contracting expenses and profit on arbitration awards. EBITDA margin grew by 400bp yoy to 19.3% as against estimate of 14.1%.
• Other income fell 82.4%yoy to Rs108m as against estimate of Rs600m due to absence of interest income on L&A. Gross debt reduced marginally qoq to Rs36bn as on September 2018.
• Order backlog as on September 2018 stood at Rs191bn (4.2x TTM revenue). Order inflow grew 53.1%yoy to Rs11.7bn. HCC, in JV with Hyundai Development Corporation, won Rs21bn contract (HCC’s share: Rs11.7bn) by MCGM to build the Coastal Road in Q2FY19
• HCC has up to September 2018 received cash of Rs17.9bn (against submission of BGs) against arbitration awards of Rs51.6bn.

Key positives: Continued release of cash from arbitration awards.

Key negatives: Steep erosion in networth due to writeoffs

Impact on financials: Downgrade in FY19E/FY20E earnings by 85.4%/73.8% due lower than expected execution, lower margins and lower other income due to write-off of loans given to subsidiaries.

Valuations & view

HCC’s execution continues to remain constrained by its tight liquidity position. The complete write-off of investments and contingent liabilities towards Lavasa has brought finality to the overhang on HCC due to Lavasa. However, it has also eroded its networth substantially making it critical for the company to recapitalise the balance sheet. With uncertainty over a sustained revival of operations we maintain our Underperformer rating on HCC with a revised price target of Rs12.