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HCC: One time provisioning mars profits - Views on News from Equitymaster

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HCC: One time provisioning mars profits

Jan 23, 2012

Hindustan Construction Company (HCC) has announced third quarter results of financial year 2011-2012 (3QFY12). Net sales declined 6.2% YoY and the company reported a net loss of Rs 1.3 bn during the quarter. Here is our analysis of the results.

Performance summary
  • Top line declined 6.2% YoY during 3QFY12. Delays in execution cycle and slowdown in order-inflows impacted top-line growth.
  • Operating profits decline 16.3% YoY in 3QFY12 due to increase in construction expenses.
  • The company reported a net loss of Rs 1.3 bn due to disappointing performance at the operating level, increase in interest expenses and provisioning requirement on certain exceptional items.
  • Order book at the end of the quarter stood at Rs 162.4 bn. The company is also L1 in orders to the extent of Rs 15.7 bn.

Standalone financial snapshot
(Rs m) 3QFY11 3QFY12 Change 9MFY11 9MFY12 Change
Income from operations 10,086 9,460 -6.2% 28,885 28,326 -1.9%
Expenditure 8,766 8,356 -4.7% 25,175 24,905 -1.1%
Operating profit (EBDITA) 1,320 1,105 -16.3% 3,711 3,421 -7.8%
Operating profit margin (%) 13.1% 11.7%   12.8% 12.1%  
Other income 5 170 3506.4% 66 184 177.9%
Interest 748 1,043 39.4% 1996 3,050 52.8%
Depreciation 382 412 8.0% 1087 1,219 12.1%
Exchange gain/(loss) (61) (68)   (31) (105)  
Profit before tax 134 (249)   663 (769)  
Tax 55 (609)   179 (752)  
Exceptional items 0 (1,663)   0 (1,663)  
Profit after tax/(loss) 79 (1,304)   484 (1,681)  
Net profit margin (%) 0.8% -13.8%   1.7% -5.9%  
No. of shares (m)         606.6  
Basic earnings per share (Rs)         (2.77)  
P/E ratio (x) *         NM  
*On a trailing 12 months basis

What has driven performance in 3QFY12?
  • HCC’s top line declined 6.2% YoY during 3QFY12. Slowdown in order inflows over the last four quarters and execution delays impacted the top-line growth.

  • Operating margins declined to 11.7% in 3QFY12 due to raw material price inflation. Further, slower execution also impacted the fixed overhead absorption rate, resulting in margin erosion.

  • The company reported a net loss of Rs 1.3 bn during the quarter. Dismal performance at the operating level and rising interest expenses amidst stretched working capital cycle impacted profits. Further, provisioning due to expected losses on future projects awarded recently, cost revisions in certain projects and losses due to exchange fluctuations too overweighed profits. However, other income increased substantially during the quarter as the company recorded a profit of Rs 142.6 m on sale of residential flats thereby cushioning profits.

What to expect?
It was the second consecutive quarter where the company’s profits came under significant pressure. Rising interest expenses amidst payment delays from customers and exchange losses on foreign currency liabilities due to significant rupee depreciation impacted profits. Further, provisioning on certain exceptional items during the quarter did not help the matter either. Even the top-line growth has remained under pressure due to execution delays. Overall the core construction business of the company has been a laggard.

As far as the performance of the subsidiaries is concerned, HCC Concessions which houses the Build, Operate & Transfer (BOT) assets of the company received clearance from NHAI to commence the operations across the Dhule-Palesner Highway. The performance of Steiner AG has also been satisfactory over the past nine month period. It has a strong order backlog of Rs 80.1 bn. With respect to Lavasa, it may be noted that after the environmental clearance granted by Ministry of Environment and Forest (MoEF) for the first phase, the construction work at the site has commenced.

Considering the risks to the core construction business, high debt and uncertainty lingering around the Lavasa project the near term prospects appear to be challenging. However, we believe that most of the negatives are already into the price. As a result, we maintain our positive view on the company. Nonetheless, we would like to highlight that the company is a high risk play due to inherent environmental and political issues.

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