Hindustan Construction’s : HOLD

Results Disappoint, LAVASA – The Only Trigger

Hindustan Construction’s (HCC) Q4FY11 Adj. PAT was significantly below expectations at Rs 168 mn (v/s Rs 409 mn expected). While EBITDA margin surprised positively (13.8% v/s  12.9% expected), muted sales growth led to EBITDA disappointment (Rs 1.66 bn v/s 1.75 bn expected). Higher than expected interest costs (Rs 903 mn v/s Rs 765 mn expected) further impacted profitability. Mgmt anticipates FY12E project execution to pick-up, as some respite should come through on delayed govt. payments and as projects reach revenue recognition threshold. Additionally, confidence was exhibited at maintaining margins. While we have accounted for higher interest costs in FY12E, impact of the same has been offset by our assumptions of better margins and revenues. Hence, we are maintaining our FY12E EPS estimate and our Hold rating with TP of Rs 35.

Q4FY11 Analyst Meet Highlights

• EBITDA margins surprise positively, but revenue disappoints: HCC’s EBITDA margin surprised positively at 13.8% v/s 12.9% expected (up ~250 bps YoY). However, revenue was below estimates  (Rs 12 bn v/s Rs 13.6 bn expected), leading to EBITDA coming lower than expected (Rs 1.66 bn v/s 1.75 bn expected). However, reflective of mgmt’s confidence of maintaining higher margins, and revenue growth picking up in FY12E as projects touch revenue recognition levels, we have raised our EBITDA estimates by ~15-16% for FY12E.
• Interest costs surprise negatively: HCC’s interest costs have doubled YoY to Rs 903 mn (Rs 443 mn in 4QFY10), driven by higher working capital debt. Rise in debt and interest cost assumptions in FY12E, has offset the positive impact of rise in EBITDA estimates. Effectively, we are maintaining our FY12E EPS estimate (of Rs 1.0) for the core construction business.
• Lavasa upside capped in near-term: Mgmt is hopeful of Lavasa getting a clean chit on environmental clearances for all the 3 phases spread over 12,500 acres. However, given that the current market environment is not conducive for an IPO at valuations the mgmt may be comfortable with, we believe near-term upside remains capped from  this  event.  

We  have  a  HOLD  rating  with  a  TP  of  Rs  35  –  valuing  the  core  EPC business at Rs 8/sh i.e. 8x FY12E PE [balance value from Lavasa (Rs 15), BOT (Rs 5) and properties in Vikhroli (Rs 7)].