Company Update: Hindustan Construction

HCC has diversified presence across verticals of power, transportation and water, which contributed 40%, 34% and 26% respectively, to its Q3FY2009 revenues.

On the Margin front, HCC’s performance was better than our estimates by registering OPM of 12.9% (12.9%) as against our estimate of 12.1%.

This was primarily on account of the proportion of orders from the transportation segment, on a cumulative basis, declining relative to the composition a year back (from 34% in 3QFY2008 to 19% in 3QFY2009) and the proportion of orders from the high margin water and power segment increasing.

Bottom line de-grew by 7.4% to Rs23.2 crore (Rs25 crore), as against our estimates of 19.2% de-growth to Rs20 crore, on account of tax write-back to the tune of Rs8.9 crore that lent a boost.

Outlook

On the back of disappointing numbers and higher-than-expected increase in debt we are revising our FY2009E and FY2010E estimates downwards for the company.

We are downgrading topline estimates for FY2009E and FY2010E by 4.7% and 3.4%, respectively. However, we expect higher interest costs to exert immense pressure on earnings in FY2010E.

Therefore, we are revising our target price to Rs55 (Rs70). We have valued HCC on SOTP basis and have assigned a PE of 6x to its Construction business (Rs20/share) and value its Road BOT business on DCFE basis (Rs5/share).

We have further discounted its real estate business at 50% considering the current market turmoil and have valued it at Rs30/share.

We believe that the company will face pressure on the Bottom-line front in the near future. However, there are embedded values, which might generate returns for long-term investors. Hence, we maintain a BUY on the stock.

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