Sell HCC; target of Rs 16: Nirmal Bang

Nirmal Bang is bearish on Hindustan Construction Company (HCC) and has recommended sell rating on the stock with a target of Rs 16 in its April 30, 2012 research report.

“HCC reported a net loss for 4QFY12, for the third consecutive quarter, at Rs542mn, which was above our/Bloomberg consensus estimates of a loss of Rs154mn and Rs183mn, respectively, following a decline in net sales, subdued performance at the operating level and surge in interest costs. We believe project execution would continue to be slow because of higher debt, increased working capital requirement and lack of order inflow, which will impact future growth and profitability. However, the likely approval to the CDR (corporate debt restructuring) package will ease the financial strain and the company may improve its performance going ahead. We maintain our Sell rating on HCC with a revised target price of Rs16 (from Rs17 earlier).”
“We have cut our earnings estimates for FY13 and introduced FY14 estimates. We cut net sales estimate by 14% for FY13E to factor in lower-than-expected revenue traction and expect 6.5% YoY growth in FY14E. We have tweaked our EBITDA margin from 12.5% to 11.2% for FY13E and expect 11.6% for FY14E because of negative operating leverage in the wake of slower growth. Subsequently, we expect a net loss of Rs540mn for FY13E (from net profit estimate of Rs47mn earlier) and a net profit of Rs317mn for FY14E. Net sales fell 3.9% to Rs11.56bn because of sluggish project execution run-rate in the wake of higher leverage. EBITDA tumbled by 47% to Rs881mn (34% lower than our estimate) and EBITDA margin got squeezed by 630bps to 7.6% (lowest in the past six years) due to decline in revenue and also some of the projects not crossing the threshold limit for booking revenue, but were included in costs. Interest costs increased 67% YoY to Rs1.5bn due to higher debt burden and rising interest rates (currently, average interest rate at 12.5%) as well as the change in accounting methodology, which disallows net out of interest receipts for computing interest costs. Other income rose 100% YoY to Rs269mn, driven by interest income. Decline in revenue, lower performance at the operating level and high interest costs led the company to report a net loss of Rs542mn for the quarter.”
“HCC’s balance sheet would continue to be under strain because of higher debt level, thereby restraining the growth of its core business, and the company would report a net loss even in FY13. Meanwhile, the likely nod to its CDR package will ease short-term cash flow, thereby improving project execution. However, we believe HCC would take some time to come out of its problems. Following the earnings downgrade, we have revised our TP from Rs17 to Rs16 and retained our Sell rating on HCC,” says Nirmal Bang research report.    Institutional holding more than 40% in Indian cos Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. To read the full report click on the attachment

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