Stock Market Result Update on HCC for 2QFY2012

Stock Market Result Update on HCC for 2QFY2012 with an Neutral recommendation. 

For 2QFY2012, HCC’s numbers came in much lower than our and street expectations. As of 2QFY2012, the company’s total outstanding order book stands at `16,175cr (excluding L1 orders of `2,077cr), with no order inflow during the quarter. Owing to HCC’s poor performance in 2QFY2012 and given the headwinds faced by the infrastructure sector, we are revising our estimates downwards for FY2012 and FY2013. Further, owing to concerns such as uncertainty on Lavasa project, slowdown in order inflow, high debt and stretched working capital, we remain Neutral on the stock.

Abysmal performance on all fronts: On the top-line front, HCC’s revenue declined by 6.3% yoy to `828.6cr (`884.6cr), against our estimate of `946.5cr, due to slowdown in execution. EBITDAM came in at 11.3% (12.8%), a dip of 150bp yoy and lower than our estimate of 13.2% on account of commodity price pressures and fixed overheads not covered by lower revenue. On the earnings front, HCC reported a loss of `40.5cr vs. profit of `12.1cr in 2QFY2011, against our estimated loss of `7.4cr. Shocking performance on the bottom-line front was due to lower revenues, compression on EBITDA margin front and higher interest cost (`107.4cr, 60.2%/15.2% yoy/qoq jump).

Outlook and valuation: On the valuations front, at current levels, the stock trades at 41.0x PE and 1.2x P/BV on FY2013E standalone basis. We have valued HCC on an SOTP basis with a fair value of `44/share by assigning 6x FY2013E earnings (standalone). The company’s real estate venture has been valued on NAV basis and its BOT assets have been valued by giving a 30% discount to P/E deal. Our fair value implies an upside of 65.3% from current levels, but we continue to maintain our Neutral recommendation on the stock, owing to concerns mentioned above. Further, in the infrastructure space, we believe there are better bets than HCC such as L&T and Sadbhav.