The Hindustan Construction Co. stock was punished on Friday after the company declared a fall in net profit in the December quarter, compared with the year-ago period.
Net profit fell to Rs23.2 crore (against Rs25 crore a year ago) but that number was boosted by a big write-back of tax provisions of Rs8.96 crore. At the pre-tax level, profits were down 62.6% compared with the year-ago period. The stock fell 11.5% on Friday.
The company’s order book, however, continued to go from strength to strength, gaining Rs1,405 crore over the quarter and taking total orders outstanding to Rs12,177 crore.
The firm faces the challenge of funding the orders in its book. That’s reflected in burgeoning interest costs, which went up to Rs57.3 crore in the quarter, up from Rs49.2 crore in the September quarter. Profits before interest, depreciation and tax amounted to just 1.77 times interest outgo during the quarter.
Growth in net sales was a disappointment, growing 9.3% year-on-year (y-o-y). Nevertheless, operating profits were actually up 9.6% y-o-y, while operating margins remained at around the same level as in the September quarter.
Hindustan Construction has changed its method of accounting for the foreign currency effects on its borrowings from the second quarter and as a consequence, the profit after tax would have been lower by Rs24.5 crore in the December quarter if Accounting Standard 11 had been followed.
The firm has a very high debt-equity ratio, which is a cause for concern, apart from exposure to foreign currency convertible debentures. Its large exposure to real estate is not viewed as a positive in the current environment. It’s possible, as the firm’s management has said, that the government’s emphasis on infrastructure spending will provide an impetus to growth.
But a recent note on the construction sector by Reliance Equities points out: “We expect the working capital cycle to deteriorate further from here, which would lead to: declining net margins (as more debt is raised to meet funding needs); a slowdown in execution (as balance sheets are stretched); risk of bad debts/write-offs; and rising negative cash flows.”
Seen in that light, there are few short-term positives for the stock.
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