Buy Hindustan Construction Company - Destination Lavasa - Elara Capital

• HCC
• Rating : Buy
• Target Price : INR85
• Upside : 27%
• CMP : INR67* (ex-bonus) (as on 30 July 2010)

Destination Lavasa – '412112'

Heartening pick up in execution, results above expectations

HCC declared yet another write-off free quarter registering revenue growth of 13.7% yoy to INR9.9bn. Though operating margins declined marginally by 41bps yoy, led majorly by 26.5% yoy rise in construction expenses to INR4.2bn, the company managed to grow its operating profits by 10.1% yoy to INR1.2bn. While depreciation charges at INR347mn were 15.3% higher yoy, a decline of ~6% yoy in interest costs made up for the same. Sparked by an encouraging operational performance, adjusted net profits for the period blossomed by 51.7% yoy to INR303mn.

All is well with order backlog, adds fresh inflows worth ~INR16bn

The order backlog as of Jun'10 stands at INR210bn, including L1 orders worth INR20.4bn across transport and hydro power segments, providing revenue visibility over next 45-48 months. During the quarter, HCC bagged major orders from Rajasthan Atomic Power Plant (RAPP) Units 7&8 (INR8.9bn), Mumbai Metro VAG corridor (INR1.5bn) and Sainj Hydro-electric project (INR4.3bn). Around 20% of the existing backlog is from the Andhra Pradesh Irrigation Dept (7 projects) where the management has decided to slow down the execution pace.

Maintain FY11 estimates, rate 'Sector Outperformer' with an ex-bonus price target of INR85

Despite a paltry FY10, HCC's E&C business has shows signs of revival with an improved operational performance over the past couple of quarters. With a host of positives events (1:1 bonus, divestment in 247 Park, acquisition of Karl Steiner AG, MoU with Orascom Construction and launch of Highbar Technologies) already being announced and couple of major ones on the cards (divestment in HCC Infra and Lavasa IPO), we strongly believe the company is in for good times ahead. We are of the opinion that despite a sharp run up in the stock price over the past couple of months, the re-rating story of HCC has just begun and expect it to outperform its peers over the next 12-15 months. Retain BUY with an ex-bonus SOTP based price target of INR85.

Source : Equity Bulls

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