Sell HCC; target of Rs 17: ICICIdirect.com

ICICIdirect.com is bearish on Hindustan Construction Company (HCC) and has recommended sell rating on the stock with a target of Rs 17 in its April 30, 2012 research report.

“HCC’s Q4FY12 performance was dismal led by poor EBITDA margins (7.6% vs. our expectation of 12%) and higher net interest cost (Rs 122.8 crore vs. our estimates of Rs 109.9 crore). Consequently, the company reported a loss of Rs 54.2 crore vs. our estimates of Rs 22.2 crore. During the quarter, HCC has also applied for CDR cell for re-alignment of debt wherein the company is looking to apply for repayment structure of (2+8) wherein it is seeking 2 years of moratorium and 8 years of repayment period as well as marginal reduction in interest rates. With EPC business remaining a drag, Lavasa sales & execution pick yet to be seen and CDR issue is pending, we assign a SELL rating on the stock.”

“HCC topline came at Rs 1155.7 crore came higher than our estimates of Rs 1057.9 crore. It, however, reported net losses of Rs 54.2 crore vs. our expectations of Rs 22.2 crore in Q4FY12 mainly due to lower margins (7.6% vs. our expectation of 12%) and higher net interest cost (Rs 122.8 crore vs. our estimates of Rs 109.9 crore). The Board has approved for re-alignment of debt of HCC through CDR process. The same has been referred to CDR cell and consequently the proposal has been admitted. The company is looking to apply for repayment structure of (2+8) wherein it is seeking 2 years of moratorium and 8 years of repayment period. It is also looking for marginal reduction in interest rates as well as additional working capital. HCC expects decision on the same in next couple of months. The net Interest expenses at ~140% of EBITDA means that the operating profits are not enough to service debts. With the stretched working capital, lower operating margin and execution rate yet to pick up, HCC’s EPC business remains a major drag and a reason for concern.”

“At the CMP, the stock is trading at 1.2x FY13 P/BV. With the EPC business remaining a major drag due to stretched working capital, sluggish execution, and clarity on debt restructuring yet to emerge, we believe that stock would continue to remain under pressure. We have assigned a SELL rating to the stock with a target price of Rs 17/share,” says ICICIdirect.com research report.         

Non-Institutions holding more than 90% in Indian cos

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