Earnings disappointment adds to Lavasa overhang on HCC stock

Earnings disappointment adds to Lavasa overhang on HCC stock

Hindustan Constuction Company Ltd’s woes continue. Even as the company negotiates to restart construction on Lavasa township project—which has been stalled by the environment ministry—its earnings added to the gloom.

Revenue growth at 11% for the December quarter from a year ago was less than expected as the company faced difficulty in executing some projects in Jammu & Kashmir and Andhra Pradesh. Another 2,300-crore order was cancelled.

Environmental issues, difficulties in land acquisitions and a slowdown on part of several state governments in starting new projects have hit HCC’s order book too. Currently it has pending orders worth Rs18,500 crore, less than the Rs19,700 crore it had at the end of September.

Costs too are increasing. Raw material as a percentage of net sales increased 3.46 percentage points from a year ago. The company had to keep paying labour and contractors despite work shutdowns in some areas.

Consequently, operating profit margins shrunk both sequentially and from a year ago.

Moreover, clients are not paying up on time, stretching HCC’s working capital cycle at a time of hardening interest rates, putting further pressure on earnings. Interest expenses shot up 50% in the December quarter over the year-ago period. Thus, net profit came in at 7.9 crore, nearly half from the December 2009 quarter.

Nevertheless, the disappointing numbers and the headwinds facing the sector seems to be priced in the stock. HCC’s price has shrunk by a quarter of its value since the ministry first issued a show-cause notice to it on 25 November, underperforming its peers. After the Lavasa notice most analysts have downgraded the contribution from this business to the stock valuation.

Further news on Lavasa—whether a resumption of construction or payment of penalty—would be triggers to watch.