Buy HCC; target of Rs 32: Karvy

HCC’s Q1FY17 profitability was better than estimates on account of higher than expected OPM (driven by higher claims recognition at Rs 600 mn). EBITDA of Rs 1.73bn (-3% YoY) was ~5% higher than consensus estimate as the margin stood at 17.6% (vs. est. of 16.5%). However, the net revenue of Rs 9.8bn (+1% YoY) was in-line with estimate of Rs 10bn. Thus, adjusted net profit at Rs 115mn was higher than estimate of Rs 20mn. Gross debt on standalone level stood at Rs 49.5 bn in FY16 which is expected to come down going ahead on account of debt restructuring & claims settlement. We broadly maintain our earnings estimates for FY17E/18E and believe that the recovery in investment cycle with focus on debt reduction would augur well for HCC. Maintain Buy with revised TP of Rs 32.       

We broadly maintain our earnings estimates for FY17E/18E. The order backlog (including L1) at 5x of TTM sales provides better visibility over the medium term. We believe that better clarity on the core construction business led by increase in profitability and reduction in debt during FY16-18E (net D/E expected to decline to ~2x in FY18E from 3.5x in FY15) to bode well for HCC. The payment of the arbitration awareded claims by the government will be the key driver of reduction in debt going ahead. We maintain ‘BUY’ with a SOTP target price of Rs32 (Exhibit: 5). We value standalone FY18E EPS at 9x P/E and ascribe Rs 19/share to other businesses (Lavasa, Steiner AG and BoTs). For all recommendations, click here 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.