Buy HCC; tgt Rs 125: Emkay

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Buy HCC; tgt Rs 125: Emkay

The stock is currently trading at 13.1x FY09E EPS of Rs 4.3 and 8.5x FY10E EPS of Rs 6.8 (adjusting for value of non-contracting businesses). We value the construction business at Rs 87 per share base on 12.8x FY10E EPS.

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Emkay Research has maintained buy recommendation on Hindustan Construction Company with price target of Rs 125, in its report dated 28th July, 2008.

"Hindustan Construction Company (HCC) reported a mix set of Q1FY09 results. Following are the key highlights of the results:

The revenue for the quarter were below are estimates at Rs 8.7 billion (growth of 18.8% y-o-y) against our expectations of Rs 9.2 billion.

EBITDA for the quarter was at Rs911 million (up 15.6% y-o-y) at an EBITDA margin of 10.5% (-30 bps y-o-y). We had expected the EBITDA margins to expand to 11.1% despite the input cost pressure as in Q1FY08 the company had booked losses on the Bandra-Worli Sealink project, which has not continued during the current year. Thus, the EBITDA margins were below our estimates.

The Adjusted PAT however was in line with our estimates to Rs 195.2 million (+29% y-oy). The growth in APAT was mainly on two counts a) lower effective tax rate of 30%, while it was exceptionally high at 37.1% in Q1FY08 and b) the company reported lower than our expected interest cost as the company had replace some of the existing debt with low cost external commercial borrowings.

The company has also reported a forex loss to the tune of Rs 505 million which was on account of mark-to-market loss on the outstanding FCCBs and ECBs. The company has an outstanding FCCB of USD 100 million and ECB of 60 milliion. This was however offset by a gain of Rs 620 million which was on account of profits on transfer of the Vikhroli East property by the company to its subsidiary. As a result there was net extraordinary gain of Rs 89.1 million (net of tax at the effective tax rate of 21.3%). The reported PAT was at Rs 308 million for the quarter.

Overall, the operational results were below our expectation, but were compensated by lower interest cost and lower tax resulting in adjusted PAT to be in line with the estimates".

Valuation

"We continue to maintain our positive view on the company, as we believe that the company has one of the best quality orders, which should help it withstand the tough times ahead. The company's real estate business is also shaping up well with two key projects of Lavasa and Vikhroli IT park expected to start generating revenues in the near term. The stock is currently trading at 13.1x FY09E EPS of Rs 4.3 and 8.5x FY10E EPS of Rs 6.8 (adjusting for value of non-contracting businesses). We value the construction business at Rs 87 per share base on 12.8x FY10E EPS. We assign our bear case valuation to the non-contracting businesses with real estate being valued at Rs 36 per share and the alone annuity BOT project valued at Rs 2 per share. We thus arrive at our target price of Rs 125 per share, which represents an upside of 30% from the current market price. We maintain our 'BUY' rating".

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