Buy and Hold Value Pics for more than 1-3 years

Buy Hindustan Construction Company –Target Price Rs.49

 Hindustan Construction Company (HCC) is recommended to buy with a target price of Rs.49 over one year. The stock is currently traded in the range of Rs.31.

 The company has reported revenue of Rs.1060 crore for 1QFY12. Revenue is higher by 6.3% yoy but lower than street estimates. For the company, the first two quarters of the financial year are seasonally weak.

 Order book stands at Rs.17000 crore, excluding Rs.1940 crore Sawalkote project and the order book is 3.7 multiple of FY12 expected revenue. Water and hydro projects dominate order book constituting 60% of oreder backlog.

 EBITDA at Rs.140 crore increased 9.7% yoy and better than market estimates. EBITDA margin has increased by 40 bps yoy to 13%.

 Interest expenses at Rs.93.25 crore increased 61% yoy due to higher interest from FCCB refinancing and 200 bps increase in interest rate on average.

 Tax rate for the quarter was 53% versus 22% in 1QFY11 due to disallowance of certain interest expenditure related to its subsidiaries.

 PAT declined by 83% yoy to Rs.4.87 crore.

 Debt increased 7% qoq and 23% yoy to Rs.3710 crore.

 HCC has divested 14.5% stake in its BOT holding company for Rs.240 crore. The BOT holding company has been valued at Rs.1650 crore and HCC had 85.5% stake in it. The company had invested Rs.653 crore in the equity of the BOT company. More funds will be infused in the BOT holding company in the coming 12 -18 months.

 Based on the quarterly performance, it seems that the core business of the company continues to suffer and Lavasa is the lone driver for the stock.

 The scrip is recommended to buy with a one year target price of Rs.49. Target price would be revised in due course.