HCC's Q4FY18 results (Underperformer) - Lavasa continues to remain a key overhang

Q4FY18 result highlights

• HCC’s Q4FY18 earnings were operationally weak with decline in earnings by 52.3%yoy to Rs201m, sharply below estimate of Rs348m.
• Net sales grew 6.2%yoy to Rs14.4bn (est: Rs13bn) led by revenue of Rs2.2bn (est: Rs1.7bn) from claims. Adjusting for revenue from claims, core EPC revenue grew 23.4%yoy to Rs12.2bn. EBITDA declined 28.8%yoy to Rs1.6bn (est: Rs1.8bn) and EBITDA margin declined 545bp yoy to 11.1% (est: 13.8%) due to lower core EPC margins. Adjusted for profits on claims, EBITDA margin stood at 8.5%.
• In FY18, net sales grew 9%yoy to Rs45.8bn and adjusting for revenue from claims of Rs8bn, core EPC revenue grew 6.9%yoy to Rs37.7bn. EBITDA declined 14.6%yoy to Rs6.4bn and adjusting for EBITDA of Rs2bn from claims, core EPC EBITDA declined 18.3%yoy to Rs4.4bn. EBITDA margin declined 390bp yoy to 14.1% and adjusted for profits from claims, EBITDA margin declined 360yoy to 11.7% in FY18.
• Interest cost grew 8.8%qoq to Rs1.6bn (est: Rs1.5bn) due to increase in average rate of interest and higher bank guarantee commissions. Gross standalone debt declined ~Rs1bn qoq to Rs37bn.
• Order inflows in FY18 declined 57.6%yoy to Rs22.8bn due to cancellation of a single largest order of Rs8.1bn form J&K and higher base of LY. Order backlog as on Mar 2018 stood at Rs192bn (4.2x FY18 rev).
• HCC has upto Mar 2018 received cash of Rs17.7bn against arbitration awards of Rs48.2bn and the company expects to receive further cash of Rs15bn in FY19. Further, claims worth Rs49.2bn are under various stages of arbitration.
• HCC is in a process of formulating a resolution plan with lenders to restructure debt in Lavasa. Further, HCC has also received interest from certain investors to buy majority stake in Lavasa.

Key positives: Release of Rs17.7bn cash (cumulatively) from arbitration awards and court cases.

Key negatives: Higher interest cost.

Impact on financials: Downgrade in FY19E/FY20E earnings by 16%/21.8% due higher than expected interest cost and higher depreciation.

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 Rs17.