At current market capitalisation of Rs 3,585 crore, its stock is trading at 14.3 times its FY19 estimated earnings which is quite attractive
Jitendra Kumar Gupta
The pace at which HCC is recovering its previous claims, a contentious issue in the past, it could be a perfect turnaround candidate in the infrastructure space.
Till December quarter, the company received close to Rs 1,400 crore of its arbitration money and another Rs 1,400 crore will be received in the coming months. This money is being used for reducing debt.
Its gross debt has fallen from Rs 4,350 crore in FY17 to Rs 3,750 crore by the end of December quarter. What is worth noting is that this is also helping in improving the profitability and cash flows. As a result of conservative accounting policies, the company did not book these claims in the revenues and profits in the past.
During the December quarter, the company reported 30% increase in sales to Rs 1,231 crore. Moreover, during the quarter it recognised claims worth Rs 390 crore boosting its profits by 585% to Rs 31.3 crore.
Easing liquidity to fuel growth
This is happening at the right time. Today the company has the highest revenue visibility with the current order book standing at Rs 20000 crore, which is about 4.8 times its revenues. There is enough work in its hand and if the working capital issue is sorted out this would boost profitability and cash flows further.
There is a reason to be positive. The company is sitting on arbitration of close to Rs 4540 crore in its favour and it is entitled to receive Rs 2,830 crore of claims. That apart, it is also expecting another Rs 400 crore from its clients. This could come as a huge relief for the company which would release its working capital pressure and improve execution. That apart, interest cost will reduce with the reduction in debt and improvement in credit ratings. The company has already reduced its interest cost substantially. During the quarter its interest cost fell by 23% to Rs 150.8 crore on an EBIDTA of Rs 164 crore improving its interest coverage ratio.
Outlook and valuations
We are expecting its debt to fall from Rs 4397 crore in FY17 to around Rs 2600 crore taking its debt to equity to less 1 time by the end of FY19. As deleveraging gather pace, company’s revenues and profitability will improve. This is precisely a reason that consensus estimates suggest an almost four-fold increase in its net profit to around Rs 250 crore by the end of FY19 as against a net profit of Rs 59.4 crore in FY17.
At current market capitalisation of Rs 3,585 crore, its stock is trading at 14.3 times its FY19 estimated earnings which is quite attractive. The other positive trigger could be a positive news from Lavasa. In September last year, SDR was invoked by the joint lander forum.Today few investors are evaluating and appraising these assets whose outcome could come any time before the end of March 2018. Earlier, the management indicated to Moneycontrol Research that Lavasa’s land value is close to Rs 8,000 crore as against the value of loans at about Rs 4,400 crore.