Buy HCC; target of Rs 46: Karvy

Cabinet’s approval of NITI Aayog’s measures to revive construction sector would augur well for HCC. Under the new measures approved by the Cabinet Committee on Economic Affairs, government agencies would pay 75 % of the arbitral award amount to the contractors in those cases where the award is challenged. HCC has claims receivables of Rs 31.8 bn in its favor up to Aug 2016 and company expects 75% of the amount (Rs 24 bn) will be received in near term. We expect the gross debt (Rs 49 bn in FY16 on standalone level) come down going ahead on account of debt restructuring & claims settlement.

 

We increase our earnings estimates for FY17E/18E by 15%/86% on account of reduction in interest cost. 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 1.4x in FY18E from 2.6x in FY15) to bode well for HCC. The payment of the arbitration awarded claims by the government will be the key driver of reduction in debt going ahead. We maintain ‘BUY’ with a SOTP target price of Rs 46.