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HCC: Rising interest costs mar profits
Oct 28, 2011

Hindustan Construction Company (HCC) has announced second quarter results of financial year 2011-2012 (2QFY12). Net sales declined 6.3% YoY and the company reported a net loss of Rs 405.3 m during the quarter. Here is our analysis of the results.

Performance summary
  • Top line decline 6.3% YoY during 2QFY12. Delays in execution cycle impacted top-line growth.
  • Operating profits decline 17.3% YoY in 2QFY12 due to commodity price inflation. Further, delays in execution cycle also impacted the fixed overhead absorption rate resulting in margin erosion.
  • The company reported a net loss of Rs 405.3 m due to disappointing performance at the operating level and increase in interest expenses.
  • Order book at the end of the quarter stood at Rs 161.7 bn. The company is also L1 in orders to the extent of Rs 20.7 bn.

(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Income from operations 8,846 8,286 -6.3% 18,799 18,865 0.4%
Expenditure 7,713 7,349 -4.7% 16,409 16,549 0.9%
Operating profit (EBDITA) 1,133 937 -17.3% 2,390 2,316 -3.1%
Operating profit margin (%) 12.8% 11.3%   12.7% 12.3%  
Other income 1 12 819.4% 61 14 -76.9%
Interest 671 1,074 60.2% 1248 2,007 60.8%
Depreciation 359 414 15.5% 705 806 14.3%
Exchange gain/(loss) 60 (42)   31 (37)  
Profit before tax 165 (581)   529 (520)  
Tax 43 (176)   124 (143)  
Profit after tax/(loss) 121 (405)   405 (377)  
Net profit margin (%) 1.4% -4.9%   2.2% -2.0%  
No. of shares (m)         606.6  
Basic earnings per share (Rs)         (0.62)  
P/E ratio (x) *         NM  
* On a trailing 12-months basis

What has driven performance in 2QFY12?

  • HCC's top line declined 6.3% YoY during 2QFY12. Delays in approval processes have impacted the execution cycle. Secondly, it may be noted that during 1HFY12, the general order inflow activity has remained subdued (a decline of 21% YoY). Slowdown in award of transportation projects by National Highways Authority of India (NHAI) has impacted the order pipeline of the company.

  • Operating margins declined to 11.3% in 2QFY12 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 405.3 m during the quarter. Dismal performance at the operating level and rising interest expenses impacted profits. Interest expenses increased due to rising debt levels and repayment of zero coupon FCCBs.
What to expect?
Environmental issues and land acquisition delays have been impacting the execution cycle of the company. Further, increase in commodity prices and hardening interest rates have pressurized margins. Even the debt levels have been rising due to stretched working capital cycle.

As far as the Build, Operate & Transfer (BOT) business is concerned, the company has finally completed its fund raising exercise by diluting its stake in a subsidiary. HCC raised Rs 2.4 bn by diluting 14.5% of its stake in HCC Concessions (a wholly owned subsidiary) to Xander Group, a global investment firm focused on infrastructure and real estate sectors. With respect to Lavasa, it may be noted that high court has directed Ministry of Environment and Forest (MoEF) to pass a decisive order by 16th November 2011.

While the current quarter results had nothing to cheer about and the near term prospects too appear bleak, we believe that most of the negatives have already been priced into the stock price. As a result, we maintain our positive view on the company.

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