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HCC: Disappointing show
Jul 27, 2007

Performance summary
  • Topline grows by 27% YoY as the company started booking revenues on new orders after the initial mobilisation.

  • Operating margins expand by 2.9% to 10.8% due to reduction in construction expenses (as a percentage of sales)

  • Extraordinary income on account of forex gain leads to a 39% YoY growth in bottomline. Adjusted PAT decline by 82% YoY due to higher interest and tax expenses.

  • Unexecuted order book at the end of June 2007 stood at Rs 94 bn.

Performance Snapshot
(Rs m) 1QFY07 1QFY08 Change
Net Sales 5,735 7,290 27.1%
Expenditure 5,282 6,503 23.1%
Operating Profit (EBIDTA) 454 788 73.6%
EBITDA margin (%) 7.9% 10.8%  
Other income 2 6 154.5%
Interest 74 322 334.1%
Depreciation 161 228 40.9%
Profit before tax 220 244 10.7%
Extraordinary income/(expense) 60 315 -
Tax 36 206 467.8%
Profit after tax 244 353 -
Profit/(Loss) from integrated JVs 7 (3) -141.4%
Net profit 251 350 39.2%
Net profit margin (%) 4.4% 4.8%  
No. of Shares (m)   256.2  
Diluted earnings per share (Rs)*   2.5  
Price to earnings ratio (x)*   52.7  
*Calculated on recurring trailing twelve months earnings

What is the company’s business?
Established in 1926 by Walchand Hirachand Group, Hindustan Construction Company Ltd. (HCC) is one of the largest and oldest private sector construction companies in India. The company has been involved in the construction of diverse projects ranging from power dams, highways and bridges to marine structures, water supply, factories and waste treatment plant. Apart from the domestic presence, HCC has executed several projects overseas in countries like Iraq, Nepal and Tanzania. Towards this, the company has entered into a number of technical collaborations as well as joint ventures with overseas players, bringing the latest technical know-how into the execution of its projects.

What has driven the performance in 1QFY08?
order book composition
Segments FY04 FY05 FY06 FY07
Power 23 14 38 48
Transportation 38 38 43 40
Water supply & Irrigation 25 37 15 8
Others 14 12 4 3
Growth back on track: HCC reported a 27% YoY growth in topline for 1QFY08, compared to 8% YoY growth in 4QFY07. It should be recalled that the performance in 4QFY07 was subdued on account of heavy mobilisation undertaken by the company for its power related projects. Hence, we believe that the improved performance during the quarter is largely due to the revenue bookings on these projects. The order book position remained largely unchanged at Rs 94 bn as compared to Rs 93 bn at the end of previous quarter.

cost break-up
As % of sales 1QFY07 1QFY08
Construction expenses 49.1% 42.0%
Materials consumed 32.5% 35.0%
Staff cost 7.3% 8.8%
Other expenditure 3.2% 3.5%
Margin expansion boost operating profits: HCC’s operating margins expanded by 2.9% to 10.8% in 1QFY08. This led to 74% YoY growth in the operating profits, compared to 27% YoY growth in the topline. In our opinion, the increase in margins was largely on account of the new power projects being executed by the company. As a matter of fact, margins in power projects are typically higher than those in transportation and irrigation projects.

Profitability masked due to forex gains: As mentioned earlier, HCC is undertaking significant capital investments (around Rs 3.8 bn) towards executing the power projects. This has led to an increase in interest and depreciation expenses during 1QFY08. While interest witnessed a jump of 334% YoY, depreciation was up by 41% YoY. Tax outgo too witnessed a sharp increase (from Rs 36 m in the previous year to Rs 206 m in 1QFY08) as the company provided for full tax in the wake of withdrawal of 80IA tax benefits. The impact of these items was however arrested to some extent due to foreign exchange gains of Rs 315 m. As a result, net profit grew by 39% YoY. Adjusting for the forex gains, net profit witnessed a sharp decline of 82% YoY.

What to expect?
At the current market price of Rs 131, the stock is trading at 52.7 times its trailing twelve months earnings. Considering that the real estate business is still under investment phase, the near term profitability might be under pressure due to increase in finance cost. The company expects its real estate projects to start contributing from FY09 onwards. The company has a planned capex of around Rs 2 bn in FY08, which includes investments in its real estate projects.

HCC's real estate portfolio
Project Acres Msqft.
Lavasa (Pune) 12,500 150
Vikhroli West (Corporate Park) 11 2
Residentail project in Mumbai 10 1
Vikhroli East 15 1
Township In MMR* 200 6
Township in new Mumbai 250 3
SEZ/Township in Nashik 1,000 20
Township in Pune 300 6
Total 14,286 189
Source: Company *Mumbai Metropolitan Region

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