We maintain ‘hold’ on Hindustan Construction (HCC) after the company started FY14 on a better note with execution improving after many quarters of disappointments. However, declining revenue visibility and a stretched working capital cycle, remain a challenge.
We have reduced our loss estimate for FY14e by 9% due to better Q1 performance. We maintain our SoTP-based target price of R22 per share (R17 per share from BOT projects and the balance from Lavasa).
We believe the stock will trade at a discount to fair value till revenue visibility improves and concerns on stretched balance sheet and Lavasa get resolved. HCC reported a profit of R19.2 crore in Q1FY14, aided by claims approved on certain projects.
The company’s top line showed signs of improvement after many quarters of sluggish growth, mainly due to strong execution on the Kishanganga project. However, order intake remains muted. Declining revenue visibility and high working capital cycle remain concerns.
Operating performance shows improvement. HCC has been hampered by execution issues, which have led to top line falling for two consecutive years over FY12 and FY13. Q1FY14 was a welcome change with revenues at R1,140 crore improving 18% y-o-y. Margins were aided by approval of certain claims, this boosted Ebitda margins to 17.7% (up 1,060 bps y-o-y).