Infrastructure

September 01, 2016

HCC

India Research

Bloomberg: HCC IN
Reuters: HCNS.BO

COMPANY UPDATE

BUY

New arbitration measure augurs well; Maintain Buy...

Recommendation

Cabinets approval of NITI Aayogs measures to revive construction sector

would augur well for HCC. Under the new measures approved by the Cabinet
Committee on Economic Affairs, government agencies would pay 75 % of the
arbitral award amount to the contractors in those cases where the award is
challenged. HCC has claims receivables of Rs 31.8 bn in its favor up to Aug
2016 and company expects 75% of the amount (~Rs 24 bn) will be received in
near term. We expect the gross debt (~Rs 49 bn in FY16 on standalone level)
come down going ahead on account of debt restructuring & claims settlement.

CMP:

Rs28

Target Price:

Rs46

Previous Target Price:

Rs32

Upside (%)

64%

New arbitration measure to boost liquidity in construction sector

The new arbitration measure would revive construction sector in terms of
addressing stressed loans and providing liquidity through releasing funds stuck
in arbitration awards. This will eventually help in revival of stalled projects
(which have been stuck due to pending claims from government bodies) as the
release of payments would reduce debt and will be used for working capital
requirements.

Sensex/ Nifty

Y/E March (Rs mn)

FY14

FY15

FY16

FY17E

FY18E

Revenue

40,395

41,267

40,661

44,402

49,447

EBITDA

7,947

6,407

7,737

8,112

7,637

EBITDA margin (%)

15.9

18.7

19.9

17.2

16.1

Adj. Net profit

806

816

850

856

2,090

EPS (Rs)

1.0

1.0

1.1

1.1

2.7

RoE (%)

6.6

6.2

5.2

4.5

10.2

RoCE (%)

11.7

12.4

12.7

12.0

14.0

P/E (x)

26.6

26.2

25.2

25.0

10.3

1.7

1.5

1.2

1.1

1.0

10.5

9.0

8.6

8.5

7.1

P/BV (x)
EV/EBITDA (x)
Source: Company, Karvy Stock Broking

29.2/16.6

3m ADV (Rs mn /US$ mn)

102/1.5

Beta

1
28,452/8,786

Share outstanding (mn)

779

Stock Performance (%)

Absolute

1M
45.4

3M
75.5

12M
85.4

YTD
31.0

Rel. to Sensex

42.9

64.1

67.2

20

Performance

Sensex (LHS)

Jul-16

Aug-16

Jun-16

Apr-16

Feb-16

Dec-15

Oct-15

30
25
20
15
10
5
0
Nov-15

31,500
27,500
23,500
19,500
15,500

HCC

Source: Bloomberg

Earning Revision
(%)

FY17E

FY18E

Sales

0.0

0.0

EBITDA

0.0

0.0

EPS

14.9

85.8

Source: Karvy Stock Broking

Key Financials

21/319

52-week High/Low (Rs)

Mar-16

Outlook and Valuation

We increase our earnings estimates for FY17E/18E by 15%/86% on account of
reduction in interest cost. The order backlog (including L1) at 5x of TTM sales
provides better visibility over the medium term. We believe that better clarity on
the core construction business led by increase in profitability and reduction in
debt during FY16-18E (net D/E expected to decline to 1.4x in FY18E from 2.6x in
FY15) to bode well for HCC. The payment of the arbitration awarded claims by
the government will be the key driver of reduction in debt going ahead. We
maintain BUY with a SOTP target price of Rs 46 (Exhibit: 2).

Market Cap. (Rs bn / US$ mn)

Sep-15

Order book at 5x TTM sales

The total orders inflow during FY16 stood at Rs 57.6 bn (details in Exhibit: 2). The
total order book post Q1FY17 stood at Rs 174.6bn (it received orders worth Rs
44.3bn during July16 which includes order of Rs 25.2 bn for Mumbai Metro Line3). The total order book is expected to cross Rs 230 bn post conversion of L1
orders which provides strong revenue visibility (order book to TTM sales : 5x).

Stock Information

Analysts Contact
Vijay Goel
022 6176 0828
vijay.goel@karvy.com

September 01, 2016

HCC

Balance sheet improvement key trigger

The company has claims receivables of Rs 31.8 bn in its favor up to Aug 2016. The
payment of these claims by the government will be the key driver of reduction in
debt going ahead. We expect the standalone gross debt to come down to Rs 30.8 bn
in FY18E from Rs 49 bn in FY16. The debt reduction would help in reduction in
interest cost for the company going ahead. The interest coverage ratio is expected
to improve from 1.2x in FY16 to 1.64x by FY18E.

Change in estimates
We maintain our Revenue/EBITDA estimates for FY17E/18E. However, we reduce
our interest cost estimates by 2%/23% for FY17E/18E, owing to reduction in debt
after the release of stuck payments from government (post the new arbitration
measure). Accordingly, our earnings estimates for FY17E/18E have been revised
upwards by 14.9%/85.8% to Rs 1.1/share in FY17E and Rs 2.7/share in FY18E.
Exhibit 1: Change in estimates
Rs. mn

FY17E
Revised

Sales

FY18E

Earlier Change (%)

Revised

Earlier Change (%)

44,402

44,402

0.0

49,447

49,447

0.0

0.0

7,947

7,947

0.0

16.1

16.1

7,637

7,637

EBIDTA (%)

17.2

17.2

Net Profit

856

745

14.9

2,090

1,125

85.8

EPS

1.1

1.0

14.9

2.7

1.4

85.8

EBIDTA

Source: Karvy Stock Broking, Company

PAT expected to jump 2.5x over FY16-18E; Maintain Buy

The order backlog (including L1) at 5x of TTM sales provides better visibility over
the medium term. We expect revenues to grow by 10% CAGR during FY16-18E led
by strong order backlog and pick-up in execution in EPC projects. We expect
EBITDA margin at 17.2%/16.1% for FY17E/18E. PAT is expected to grow
significantly by 2.5x over FY16-18E, led by sharp decline in interest cost on account
of debt reduction.
We maintain our Buy rating on HCC with a revised target price of Rs 46/share. We
increase our target multiple to 10x P/E (from 9x earlier) to value the FY18E
earnings of standalone business considering the improvement in balance sheet
after the release of arbitration claim payments. We ascribe Rs 6/share to Lavasa, Rs
9/share to other BoTs and Rs 4/share to Steiner AG. For Lavasa (HCCs stake
68.7%), we have ascribed valuation of Rs 11mn/acre to 5000 acres and adjusted
debt of Rs 48bn to arrive at Rs 6/share.
Exhibit 2: SOTP Valuation
Components
Standalone Construction
Lavasa

Valuation Method

Revised TP

Earlier TP

10x FY18E EPS

27

13

Asset Valuation

Road BoTs

1x BV

Steiner AG

1x BV

46

32

Total
Source: Karvy Stock Broking, Company

September 01, 2016

HCC
Exhibit 3: Details of order inflows during FY16 & FY17 (YTD)
Name of Project

Business Line

State

HCC Share (Rs Mn)

Award Month

Buildings

AP

1,530

Jul-15

Single line BG Tunnel No. 12 A

Transportation

Manipur

7,720

Jul-15

4-Laning of Ramban-Banihal Sec of NH 1A

Transportation

J&K

17,830

Sep-15

C&S Works at BARC Tarapur, Ph 1

Nuclear

MH

9,430

Oct-15

DFMF Plant

Nuclear

TN

430

Dec-15

Transportation

Const of Tata Memorial Hospital, Vizag

Kangchup Tamenglong Road, Manipur

Manipur

8,130

Feb-16

Tapovan Vishnugad HEP - Bal. works of HRT

Hydro Uttarakhand

6,340

Mar-16

Double Lane Tunnel at Sawalkot, J&K

Hydro

J&K

1,670

Mar-16

Nikachhu HEP (118MW), Bhutan

Hydro

Bhutan

4,560

Mar-16

Total order inflow in FY16

57,640

Residential towers DAE Anushaktinagar in MH

Building

MH

1,590

Jul-16

Mumbai Metro Phase 3, Mumbai Metro Rail Corp., (HCC-MMS JV)

Transportation

MH

25,230

Jul-16

Two Tunnels and a Bridge by IRCON

Transportation

J&K

17,500

Jul-16

Total order inflow in FY17 (YTD)

44,320

Source: Company, Karvy Stock Broking

Exhibit 4: Order inflows and Order Backlog

Rs Mn

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

Order backlog

143,070

144,510

139,200

169,880

162,900

181,230

174,650

6.9

1.4

0.2

24.2

13.9

25.4

25.5

Order inflow

9,128

8,631

27,080

9,860

20,700

1,590

YoY (%)

-58.0

-17.4

-100.0

350.6

8.0

139.8

YoY (%)

Source: Company, Karvy Stock Broking

September 01, 2016

HCC
Exhibit 5: Profit & Loss statement
Y/E Mar (Rs mn)

FY14

FY15

FY16

FY17E

FY18E

Net Sales

40,395

41,267

40,661

44,402

49,447

% growth

5.3

2.2

(1.5)

9.2

11.4

Operating expenditure

33,988

33,530

32,549

36,765

41,500

EBITDA

6,407

7,737

8,112

7,637

7,947

% growth

67.1

20.8

4.8

(5.9)

4.1

Depreciation

1,446

1,503

1,359

1,545

1,604

Other income

2,028

1,551

1,741

1,710

1,677

EBIT

6,989

7,785

8,494

7,802

8,020

Interest

6,079

6,511

6,899

6,525

4,900

(265)

PBT

910

1,273

1,331

1,277

3,120

Tax

103

457

481

422

1,030

Reported PAT

806

816

850

856

2,090

806

816

850

856

2,090

1.3

4.1

0.7

144.3

FY14

FY15

FY16

FY17E

Exceptional items

Extra-ord (inc)/exp
Adjusted PAT
% growth
Source: Company, Karvy Stock Broking

Exhibit 6: Balance sheet

Y/E Mar (Rs mn)
Cash & cash equivalents

FY18E

1,470

964

908

966

671

Trade receivables

16,929

24,169

26,687

17,317

10,878

Inventories

36,587

35,678

36,205

38,603

40,670

Loans & advances

13,969

14,804

19,965

21,008

22,428

Other assets

4,291

5,809

3,103

2,971

3,160

Investments

6,900

6,929

5,924

5,647

6,247

Fixed Assets

9,204

7,910

6,708

6,807

6,053

Total assets

89,348

96,263

99,500

93,318

90,107

Current liabilities & provisions

15,707

17,121

15,630

16,395

18,200

Other liabilities

12,600

14,477

15,040

15,871

18,015

237

681

1,162

1,264

1,513

Debt

48,170

50,109

49,040

40,304

30,804

Total liabilities

76,714

82,388

80,871

73,834

68,533

607

646

779

779

779

Reserves & surpluses

12,027

13,229

17,849

18,705

20,795

Shareholders' funds

12,634

13,875

18,628

19,484

21,574

Total Equity and Liabilities

89,348

96,263

99,500

93,318

90,107

Deferred tax liabilities (net)

Shareholders' equity

Source: Karvy Stock Broking, Company

September 01, 2016

HCC
Exhibit 7: Cash flow statement
Y/E Mar (Rs mn)
PBT

FY14

FY15

FY16

FY17E

FY18E

910

1,273

1,331

1,277

3,120

Depreciation

1,446

1,503

1,359

1,545

1,604

Interest/Financial Charges

6,079

6,511

6,899

6,525

4,900

Other income

(1,231)

(1,220)

(1,768)

(1,690)

(1,656)

Other non-cash adjustments

(805)

(267.3)

112.20

Tax paid

1,128

(123)

(29)

(319)

(780)

(2,497)

(3,844)

(4,194)

7,657

6,711

Cash flow from operating activities

5,031

3,833

3,710

14,995

13,900

(Incr) / decr in capital expenditure

(317)

(296)

(237)

(850)

(850)

(Incr) / decr in investments

18

(205.2)

(173)

277

(600)

Others

13

(451)

1,151

1,690

1,656

Change in working capital

Cash flow from investing activities

(286)

(952)

740

1,117

206

Incr / (decr) in borrowings

1,862

4,422

2,787

(8,736)

(9,500)

(26.4)

3,903

(1)

(1.6)

(1.30)

(5,997)

(5,874)

(7,243)

(6,525)

(4,900)

(130)

(1,907)

(3,951)

(793.80)

(4,266)

(3,386)

(4,506)

(16,055)

(14,400)

478

(506)

(56)

57

(294)

991

1,470

964

908

966

1,470

964

908

966

671

Issuance of equity
Dividend paid
Interest paid
Others
Cash flow from financing activities
Net change in cash
Opening Cash
Closing Cash
Source: Company, Karvy Stock Broking

Exhibit 8: Ratios
Y/E Mar (%)

FY14

FY15

FY16

FY17E

FY18E

EBITDA margin

15.9

18.7

19.9

17.2

16.1

EBIT margin

17.3

18.9

20.9

17.6

16.2

Net profit margin

1.9

1.9

2.0

1.9

4.1

Dividend payout ratio

0.0

0.0

0.0

0.0

0.0

Net debt: equity (x)

3.7

3.5

2.6

2.0

1.4

11.7

12.4

12.7

12.0

14.0

6.6

6.2

5.2

4.5

10.2

Y/E Mar

FY14

FY15

FY16

FY17E

FY18E

EPS (Rs)

1.0

1.0

1.1

1.1

2.7

Book value per share (Rs)

16.2

17.8

23.9

25.0

27.7

P/E (x)

26.6

26.2

25.2

25.0

10.3

RoCE
RoE
Source: Company, Karvy Stock Broking

Exhibit 9: Valuations

P/BV (x)
EV/EBITDA (x)
EV/Sales (x)

1.7

1.5

1.2

1.1

1.0

10.5

9.0

8.6

8.5

7.1

1.6

1.6

1.7

1.5

1.1

Source: Karvy Stock Broking, Company

September 01, 2016

HCC

Stock Ratings
Buy
Hold
Sell

:
:
:

Absolute Returns
> 15%
5-15%
< 5%

For further enquiries please contact:

research@karvy.com
Tel: +91-22-6149 1500
Disclosures Appendix
Analyst certification
The following analyst(s), Vijay Goel, who is (are) primarily responsible for this report and whose name(s) is/are
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the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or
indirectly related to the specific recommendation(s) or views contained in this research report.
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September 01, 2016

HCC

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