Accumulate HCC; target of Rs 43: Dolat Capital

Dolat Capital's research report on HCC

Q3FY18 standalone revenue grew by 30.4% YoY to `12.3bn (6.9% above estimates) owing to `3.0 bn arbitration claims. Excluding claims of ` 3.0bn (` 340mn in Q3FY17), core revenue grew 2.3% YoY to `9.3 bn. EBITDA margin trimmed 375bps YoY to 13.3% (254bps below estimates) due to lower EBITDA margin of 18% vs. 47% on claims recovery. Excluding claims, core EBITDA margin declined 414bps YoY to 11.8%. Fall in interest cost to 22.6% YoY /7.5% QoQ to `1.5 bn. There was a massive jump in Reported PAT by 588.1% YoY to `313 mn (41.6% below estimates). HCC could reduce its debt by `6.5 bn during 9MFY18 despite arbitration cash flow of `12.7 bn due to encashment of `1.8 bn bank guarantee by IRCON and adjustment of `1.2 bn by NHPC.  Our FY18E/ FY19E/ FY20E revenue `43.7 bn/ `50.2 bn/ `58.5 bn (up 4.2%/ 14.7%/ 16.5% YoY) includes `9.4 bn/ `8 bn/ `10 bn claims awards and 1.4%/ 15%/ 20% YoY growth on core revenue. We have considered 24% (earlier 35%) EBITDA margin on claims award and 12% (earlier 13%) on core EBITDA margin in FY18E/ FY19E/ FY20E.  Interest cost will see a major decline in FY18E/ FY19E/ FY20E to `6.3 bn/ `4.6 bn/ `3.2 bn vs. `7.7 bn (FY17) owing to `27.4 bn debt reduction during FY18-20E. Hence, Adj. PAT is expected to post 80.6% CAGR over FY17-20E. We have lowered our debt reduction estimates to `27.4 bn over FY17-20E (`30 bn over FY17-19E) due to delay in cash receipt against claims.

Outlook

We valued construction business based on FY20E core EV/ EBITDA as it does not contain any claims and is sustainable. However, due to limited upside potential, we maintain ‘Accumulate’ with a SOTP-based TP of `43.4 (Exhibit 1).