HCC's Q3FY19 results (Underperformer) - Improved core performance

Q3FY19 result highlights

• HCC Q3FY19 earnings were below our estimates due to higher than expected interest costs. Reported PAT fell sharply by 68.3% yoy to Rs99m (est: Rs113m) on account of lower other income and higher interest costs.
• Revenue declined 10.5% yoy to Rs11bn and was below estimate of Rs11.7bn as PY revenues included arbitration awards worth Rs4bn against no material contribution in Q3FY19 revenues. Adjusted for this the core construction revenue grew 32.1 %yoy.
• EBITDA grew sharply by 21.6%yoy to Rs2bn (est: Rs1.9bn) due to higher gross margins as some large projects crossed the margin recognition threshold. EBITDA margin grew by 480bp yoy to 18.1% as against estimate of 16.4%. In Q3FY19, the reported EBITDA has been contributed largely by core operations as compared to sizeable share from contribution of arbitration awards in previous quarters.
• Gross debt reduced marginally qoq to Rs35bn as on Dec-18. However, interest expenses grew 15%yoy to Rs1.7bn (was Rs1.55bn in Q2FY19) mainly due to added interest provision (non-cash) on Rs7.5bn Lavasa debt taken over.
• Order backlog as on Dec-18 declined 9.1% yoy to at Rs182bn (4.1x TTM revenue) due to nil order inflow during the quarter.
• HCC received Rs3bn (against BG) via courts through successful filing of execution petitions in Mar-18. Cumulatively, it has received Rs20.8bn through arbitration awards.
• HCC sold Charosa Wineries. Though it will not receive any material equity, it will lead to divestment of Rs1.3bn of debt in business.
• HCC successfully concluded its Rights Issue amounting to Rs4.98bn post which promoter group's stake rose to 34.3% from 27.8%.

Key positives: Improved core performance and continued release of cash from arbitration awards.

Key negatives: Nil order inflow during the quarter

Impact on financials: Downgrade in FY19E/FY20E earnings by 59.0%/66.0%, due to higher interest expenses.

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 Rs10.