Research Notes - Buy HCC

Buy HCC – TP Rs.33

· Hindustan Construction Company (HCC) is recommended to buy with a target price of Rs.33 over one year.

· The company has reported higher than expected net loss of Rs.40.54 crore for 2QFY12 as against the market estimated net loss of Rs.21.22.

· The loss is mainly due to slower execution and higher interest cost.

· Revenue at Rs.830 crore during the quarter declined 6.3% yoy. EBITDA margin at 11.3% declined 150 bps yoy. Interest cost at Rs.108 crore for the quarter increased 60% higher yoy.

· The Mumbai High Court has directed the state government to pass an unambiguous order in three weeks if it has accepted or rejected Lavasa’s application for approval.

· The balance sheet has further weakened with rising debt / equity ratio because of higher working capital requirement.

· HCC continues to be a play on Lavasa despite there has been no sign of improvement in its core business.

· The stock is recommended at a target price of Rs.33 over one year. Risk to the target price include higher debt to fund its working capital or higher equity in its developmental projects, lower than expected order flow and execution, lower than expected margins due to higher input costs etc.

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