Inflow of new orders positive for HCC

Street will track project execution, de-leveraging of balance sheet and value unlocking through Lavasa IPO

The fact that HCC has won an order worth Rs 1,748 crore from the National Highways Authority of India (NHAI) for constructing 32 km of highways in Jammu & Kashmir has boosted sentiment. Expectations of the company bagging an order for the Mumbai metro project, for which it has reportedly emerged as the lowest bidder for one of the seven sections, are also providing traction, given the stock has gained 19.33 per cent to close at Rs 23.15 on Monday. This takes the stock gains since the NHAI order announcement to 30 per cent.

A stronger order book provides better revenue visibility but improving its cash flow is crucial, which the Street will watch carefully, particularly at a time when HCC has been under pressure because of slow execution, subdued cash flow and high debt.

During the June quarter, HCC’s revenues were soft, as its core engineering, procurement and construction (EPC) revenue was hit by delay in execution at the Kishanganga and NH-34 NHAI projects. At 14 per cent, the core EPC margins were soft. Claim recognition of about Rs 100 crore helped. Analysts at Elara Capital say the company is targeting further cash inflow of Rs 1,000 crore from arbitration awards through FY16-17, which will help reduce debt. Analysts at Systematix say, “We believe the conversion of claims into cash is crucial to ramp up execution of the current order book.”

On a consolidated level, the company has seen its debt-equity ratio increase from 4.5 in FY11 to 21.34 in FY15, while its standalone debt-equity ratio increased from 2.01 in FY11 to 3.71 in FY15. HCC has used the proceeds of Rs 400 crore from a qualified institutional placement in April to reduce its standalone debt to Rs 4,750 crore (bringing its debt-equity ratio to 2.6) from Rs 5,010 crore at the end of FY15. The company has also realised Rs 158 crore from the sale of 247 Park, a large commercial property in the eastern suburbs of Vikhroli (Mumbai). It also expects to raise Rs 150 crore from the sale of its stake in the Nirmal and Dhule-Palasnar road build-operate-transfer projects. This will further reduce the debt of the standalone entity.

While the debt might be coming down on a standalone level, there’s concern on cash flows and debt pertaining to the Lavasa project. With debt of about Rs 3,500 crore, the interest obligation is close to Rs 400 crore, analysts say. Operating cash flows haven’t been adequate to service this interest cost in FY15. Analysts at Elara say with no visible near-term improvement in sales, they expect Lavasa’s debt to rise further in FY16, barring any large sale to institutions.

Therefore, value unlocking through the Lavasa initial public offering will be vital to the company’s prospects and provide a boost to its efforts to de-leverage its balance sheet. Nevertheless, the improving order flow should lead to higher growth for the company.