>HINDUSTAN CONSTRUCTION COMPANY - Losses continue to mount

Result Analysis
 Sales decline by 9%; order inflows dry down: Company’s sales de-grew by 8.4% y-o-y to `9,694mn below our as well as street expectations on the back delay in project executions. The company’s order book stands at `150.0bn (40% hydro, 24% transport, 22% water and 14% nuclear and others), while there were no order inflows for 1QFY13. The outlook remains bleak as industrial capex has slowed down and also many projects are facing execution issues on account of which top-line is likely to be hit badly.


 Operating profit dip by 590bps y-o-y and 40bps q-o-q: During 1QFY13, the company’s operating profit declined by 49.9% y-o-y to `691mn, while the operating margin declined by 590bps y-o-y and 40bps q-o-q to 7.1%. The decline was mainly due to lower top-line and higher raw material expenses.


 Operating profits and interest costs continue to lead to losses: Company reported a net loss of `310mn during 1QFY13 due to lower sales, bad operating performance and interest costs. Interest cost rose by 37.5% y-o-y to `1,282 mn. The management expects the company to be out of red by end FY13.


 Approval of Corporate Debt Restructuring – the only positive surprise: The Corporate Debt Restructuring Empowered Group has approved the restructuring of its debt of ~`32bn which might bring down the interest costs and improve cash flow. The key terms of the CDR package are:-


a) Principal moratorium of 2 years and structured repayment of 8 years of restructured term loans


b) Softening of interest rates and need based additional working capital would be sanctioned by the existing bankers.


Other Key Highlights:
 Karl Steiner AG; another quarter of strong order inflows: The Company has a strong order backlog of CHF.1.5bn (`87.2bn) while the Company reported a turnover of CHF202.6mn (~`11.8bn) and inflows to the tune of ~CHF192 mn(`11.6bn).
 HCC Infrastructure: The Company won a six laning project between Vadodara-Surat junction with and total project cost of ~`14bn with a concession period of 12 years. Execution of West Bengal projects (NH34) underway and is ~30% complete.


Outlook and Valuations:
HCC has been hit across all fronts top-line, operating as well as profitability on account of dip in order inflows, slower execution of the projects and rising costs; Profitability has been hit badly on account of bad operating performance and interest costs. The outlook for order inflows and execution remains bleak and is likely to hit company’s overall performance badly. The CDR package approval is likely to lower the interest burden and improve cash flows; however if the current pace of project execution continues the effects will be negated. Factoring in a) muted order inflows b) continued slower execution performance and increasing levels of debt we revise our top-line estimates downwards ~by 7% and 6% to `39,202mn and `41,959mn for FY13 & FY14 respectively and expect the company to report a net loss of `1,856mn and `1,305mn.(Earlier estimates loss 1345mn and `819mn for FY13 and FY14 respectively.) Infrastructure segment has been marred from all fronts and we do not foresee the situation improving in the near term. HCC has not only seen a dip in its top-line but also on the operating parameter front which coupled with high debt burden is impacting the bottom-line and hence we maintain our “Hold rating” on the stock. At the CMP, the stock trades at 1.1xFY14E P/B and 13.5x FY14E EV/EBITDA.