HCC: Profit surprises but too early to raise a toast

Construction companies remain under pressure for some more time due to high debt burden

Hindustan Construction Company (HCC) is the first among the large players in the construction space to report its results for the fourth quarter of FY14. On a stand-alone basis, HCC reported a 20.5 per cent growth in revenues and a surprise net profit of Rs 24.4 crore (Rs 50.26 crore loss in the corresponding quarter last year). Operating margins expanded by 560 basis points year-on-year. A large part of this growth came from recovery of revenue arrears to the extent of Rs 240 crore. Praveen Sood, group chief financial officer at HCC, says there were other reasons, too. The company took several other initiatives to bring in organisational changes and controls that have started to yield results.

The surprise good show by HCC, however, cannot be extrapolated to other companies given that the March quarter is usually the best for the industry. Interest burden will be a key variable to watch out for as it is now the single-biggest cost head for most infrastructure companies. For example, HCC reported an 11 per cent rise in its interest burden to Rs 150 crore in the fourth quarter, a tad below its operating profit of Rs 173.8 crore, providing little financial comfort to analysts. The company said higher interest cost was due to the 50-basis point hike in base rate and higher credit limits.

To some extent, this pain will ease for companies that have been able to monetise assets. However, firms such as IVRCL, NCC, Gammon India, GVK, GMR and others will remain under pressure on account of interest cost and high debt.

Meanwhile, the stock prices of these companies have already surged in the hope of recovery. "I think most of rise in share price is more to do with sentiment. But things on the ground still have not improved and even after elections, a real change will only get reflected after six to eight months," says an analyst with a domestic broking house.

Sood agrees and says the problems in the sector will persist for at least another six months as issues such as slow award of new projects, delay in existing projects and working-capital issues will continue as clients might not release money on schedule.