Tuesday, October 6, 2015

HCC: Some bright spots

HCC bagging new orders worth Rs 1,748 crore from NHAI for constructing 32 kilometres of highways in Jammu & Kashmir a few days back has boosted sentiments. Expectations of it winning an order for the Mumbai Metro project, where it has emerged as the L1 (lowest) bidder for one of the seven sections, is also providing traction, given that the stock gained 19.33% to close at Rs 23.15 on Monday. This takes the total stock gains to 30% since the NHAI order announcement. 

A stronger order book provides better revenue visibility, but the street will be watching for improvement in cash flows, particularly at a time when HCC has been under pressure because of slow execution, subdued cash flow and high debt. 

During the June quarter also, HCC’s revenues were soft because its core EPC revenue was impacted due to delayed execution of Kishanganga and NH-34 NHAI projects. The core EPC margins were soft at about 14%, but claim recognition of about Rs 100 crore helped. 

Analysts at Elara Capital say that the company is targeting further cash inflows of Rs 1,000 crore from arbitration awards over FY16-17 that will also help in reducing debt. 

Analysts at Systematix say, “We believe the conversion of claims into cash is crucial to ramp up the execution of current order book”. 

Debt is major issue that needs to be addressed by the company. On consolidated level, the company has seen its debt equity ratio increase from 4.5x in FY11 to 21.34x in FY15 whereas on standalone levels its debt equity ratio increased from 2.01 in FY11 to 3.71 in FY15. 

HCC has utilised QIP proceeds of Rs 400 crore in April 2015 to reduce its standalone debt to Rs 4,750 crore and thereby bringing its debt equity ratio to 2.6x, compared to Rs 5,010 crore at FY15-end. The company also has realised Rs 158 crore from the sale of 247 Park. In addition, it expects to realise Rs 150 crore from sale of its stake in Nirmal BOT and Dhule – Palasnar road BOT projects. Both these will pare the standalone debt further. 

But while on a standalone level the debt may be coming down, concerns still remain on cash flows and debt of the Lavasa project. With debt close to Rs 3,500 crore, the interest obligations come close to Rs 400 crore, as per analysts. The operating cash flows have not been adequate to service this interest costs for the project in FY15. Analysts at Elara say that with no visible near-term improvement in sales expected, we expect Lavasa’s debt to rise further in FY16 barring any large sale to institutions. 

Thus value unlocking through Lavasa IPO will hold key for the company’s prospects and will provide a boost to its efforts towards de-leveraging its balance sheet. The improving order flow nevertheless should lead to higher growth for the company.

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