HCC - Infra giant with massive turnaround story!

[Capsule91]

HINDUSTAN CONSTRUCTION COMPANY
cmp=34.3
pe ratio=44.7
peg=2.26
ebit/ev=6.8%
p/b ratio=1.29
face value=1
market lot=1

Will Start with some interesting projects…
1954: first project…Vaitarna Dam, mumbai
1971:Words longest barriage, Farakka Barriage,WB & first nuclear power project,Rajasthan
2000:Mumbai-Pune expressway
2005:Delhi Metro
2009:Worli sea link
2010:2x 1000MW Kudankulam Nuclear power plant, First &Largets Light Water Reactor

Domain of work
Roads, Railways including metro, Ports and terminals , Dams and Hydro Power
Nuclear projects-HCC has built over 65% of India’s nuclear power generation capacity.
Tunnels , irrigation and water supply
Mass Rapid Transit System (MRTS)

attached here the projects with landmarks-projects.pdf (2.7 MB)

Stand alone specifications-
orderbook update-

order back log update-

Financials (Why is it a Valuepot now!)

YoY 9m ending comparison…

topline growth- 10.39% (excluding other income)
EBIT growth-38.7%
EBITDA margine-14.56% (17.47% in fy17 9m)
expense growth- 8.82%
increase in cost of raw materials-28.18%
Finance cost decrease-12.05%
EPS growth-16.32%

here is the latest financials-

QoQ comparison of total expense-
q1 to q2- up 4.4%
q2 to q3-up 22.9%
q1 to q3- up 28.4%

QoQ comparison of cost of raw material-
q1 to q2 to q3- 302.33cr to 194.46cr to 258.22cr

Notable is subcontracting expenses going up drastically
q1 to q3-up 194.8%
But the employee benefit expense is up by 4% (q1oq3)
This is reasonable considering the complex nature of the projects handling by the company and seasonal variation of the business, as mentioned by management on being called.

Now directly coming to the value in the balance sheet…
…
Total Borrowings - 3865.5cr as of q3 end
** VS**
Total arbitration award receivable as on q3…3025.94cr
Total receivables as on q3 inclusive of awards…6071cr

You get a debt free company! period!

total 9m PAT=61cr (up 57% yoy)
expected fy 18 PAT=95cr

Award to be received within q4fy18 or stretched a bit to q1fy19…414cr
The company is pursuing certain customers to release 704cr of awards and will be received soon…
That totals to 1672cr…
Remember long term debt is just 2268cr and only 596cr will be left after q2fy19 (expected)…

the Q3 finance cost of the company was 150cr at the current debt levels, which if negated in debt free status and considering other parameters constant to focus on this effect, we will have a total 600cr added to the bottom line…

So we will be having an increase of Rs.6 eps over time with debt reduction, which is significant… Because at present the ttm eps is 0.77
A total of 800percent increase in earnings over time just due to reduction of finance cost which is visible…!
Also note, the arbitral tribunal is a total of 5333cr
Of which 3026cr is current award receivable rest is yet to be received and pending court process, which if won, will lead to a total cash flow in future of 2307cr…

This was a standalone basis estimate…

Other than this fin cost reduction magic,
Topline is foing at 10percent yoy
BUT EBITF ( revenue-(expense-finance cost)) is down 3% yoy mainly because of increase in subcontracting expense…So organic growth is not magnificent!

Now, the process of arbitral award receipt is slow and any timeline on it is purely speculative…
Unless on receiving the awards and trade receivables the debt burden will not come down and it will continue to hurt PAT margins…
So exercising patience in this company is of utmost importance…

Also note the promoter holding of this company is just 27% approx with 85% pledged shares,
while this may be a turn off scenario, but once debt is reduced atleast in the long term debt, the company will be in the position to use free cash flow to buy back shares and increase promoter holding and also as the pledged shares are in collateral of long term debt, upon total repayment of the later, all the pledged shares would also be free…

So annually this portion of the liability will be free and can be a free cash flow tofurther repay f=debt from the next financial year…
Please refer to subsequent posts for details on SDR on lavasa
Disclaimer… Took position today…
This is a very long term bet, with average time line of 5 years of investment…

This was my first presentation in Valuepicker and to all members it is a humble request to share you opinions and criticize for benefits…
for everyone’s quick referral, i attach here all the financials referred to…
thank you…
HCC-Analyst-Presentation-Q1-FY-2017-18.pdf (650.6 KB)
HCC-Analyst-Presentation-Q3-FY-2017-18.pdf (562.2 KB)
HCC-Q3-FY2017-18-Results.pdf (240.4 KB)
HCC-Analyst-Presentation-Q2-FY-2017-18.pdf (862.0 KB)
HCC-Analyst-Presentation-Q4-FY2016-17.pdf (1001.2 KB)

[caravishah]

@Capsule91

my 2 cents -

1. For companies like HCC looking yoy/qoq financials has little relevance. These are lag indicators. They have long period contracts and so P&L from a project is spreaded over multiple years. Backlog and new awards are key forward looking indicators to watch for these kind of companies.

HCC has sizable backlog and is a reputational construction player so there is a decent probability of HCC getting good awards as infra spends increases.

2. Deleveraging - this is the main thing to look out for in this stock. Yes, if they can deleverage their BS w/o sale of core operating assets, stock can explode. But million $ ? is, can they?

They have been successful to an extent in deleveraging with the recent arbitrage awards but I would like clarity/a roadmap for bringing down debt to reasonable levels/become debt free before diving in. Do we have anything from management here?

Btw where do you get the debt numbers from? have they publish dec17 debt? mar17 debt was around 9,300 cr. (screener.in)

Disc - Not invested, considering to buy.

[yudiagg]

It has a reserve of (-) 475 Cr as on 31 3 2017 - as per ratestar.in.

[SlownSteady]

HCC is running huge losses on a consolidated basis for the last many years. A consolidated turnover of Rs 10,000 cr means that a 20,000cr orderbook doesn’t really look that attractive. Also debt at the consolidated level is around Rs9,000cr which is much higher than Rs3,800cr you have mentioned. A negative book value tops it up. And promoters have pledged 85% of their holdings.

[Capsule91]

@caravishah… I talked with the IR today and made calculations from h1 balance sheet…

And yes, they dont have a time line on the debt handling but they did mention to me all the arbitral awards are going to be used to reduce debt on a standalone basis…

For reference, call up hcc media department and ask for Mr.Rohan Soares…he handles the IR part…

[Capsule91]

@SlownSteady hi…
Yes the promoter holding is low and a lot of pledging…
But once they reduce even their stand alone debt to almost nil by virtue of the receivbles dont you think, the promoter holding will become pledge free…
Also they are planning a SDR on lavasa and lavasa is on the path to recovery…
Read below…

Once the standalone debt is wiped off and lavasa is restructured, the company’s networth will be more positive on stand alone basis and also start generating free cash…And onve debt free, pledged holdings will be freed…
In that case even if any long term debt is req they wont have to pledge again…
For lavasa, a equity capital involvement can totally turn around the debt situation…
We have to see what happens of HREL…

[Capsule91]

@yudiagg hi…
Yes… And they are ina turnaround process, thats why i think this is a good time for a very long term view…

[Capsule91]

@caravishah &everyone…
I missed asking whats the rate of interest on long and shortbterm debt …
You have any info?

[Capsule91]

@caravishah

For companies like HCC looking yoy/qoq financials has little relevance. These are lag indicators. They have long period contracts and so P&L from a project is spreaded over multiple years. Backlog and new awards are key forward looking indicators to watch for these kind of companies.

I just mentioned 9m yoy to give a sense on a standalone basis we have cash flow increasing nicely…
Other than that you are absolutely correct, i agree with you

[Capsule91]

following is the current status of thr huge number of subsidiaries which is dragging the consolidated financials

View of the standalone interest costs…

View on the interest costs of subsidiaries…

Equity investments …

Loss from equity investments in subsidiary companies…

[Capsule91]

Along with standalone debt reduction if SDR in Lavasa is succesfull and a subsequent turnaround, we may see a very different HCC incoming times, both of which is visible…

[Capsule91]

LAVASA SDR …A Game Changer within a Turnaround !

According to financial information available on Lavasa Corporation’s website, the company reported a loss of Rs 166 crore for the year-ended March 31, 2017, as compared with a profit of Rs 269 crore in the previous year. Total income fell 39 percent to Rs 609.5 crore year-on-year.
HCC has been attempting an initial public offering of Lavasa Corporation since November 2010, but has been unsuccessful so far.
Rf…Bloomberg quint

Lenders Invoke Strategic Debt Restructuring For HCC’s Lavasa Project

Banks will have to provide at least 15 per cent of their residual loan to a company while converting debt to equity under the SDR norms, by the end of the 18-month period from the reference date.
Ref…Banks invoke SDR for Lavasa Corporation | Business News,The Indian Express

So we will soon have 255 to 300cr of cash flow unlocked to reduce debt further…

[Capsule91]

RBI asks for weekly default disclosures in revised framework; withdraws SDR, S4A and JLF

RBI asks for weekly default disclosures in revised framework; withdraws SDR, S4A...

Now maybe the lenders shall call for an auction of lavasa!
The only good spot in consolidated balace sheet is gone now, lavasa will still be a dead weight!
Disappointing…

[Capsule91]

HCC price action in a decisive point but looks like the bears are winning!!

Points in favor of bearish traction…
1.Weekly action has just broken the holy grail 3/1 gann fan line of bullish take over
2.This 3/1 line in the gann fan has been broken with a spinning top indecision candle and then the bears won
3.Ichimoku cloud has been broken after 126days of incloud activity, which is damage
**4.Channel has been broken along with ichimoku cloud and 3/1 gann fan line break…A Tripple Whammy! **
5.The monthly action is deep in the bearish territory below the 1/2 line of gann fan.

Point in favour of bullish traction…
1.Weekly action is still above the 1/1 angle line of the gann fan and also above the critical 1/1-2/1 bullish range, and high up in 2/1 to 3/1 range…

Reference screen shots …

1.Weekly price action with Gann fan…

2.Monthly price action with gann fan, note the price is deep in bearish territory which starts below the 1/1 angle line…

3.The ichimoku cloud break with weekly action

4.The channel break with ichimoku cloud break after the weekly action was travelling intra cloud for 126days…

5. A brief history of HCC since 2013…

A tragedy of the infrastructure bull…

Please note the first cup and handle and double bottom effect in 2013 was a huge run in 2014, after a cloud break out but then again the price got caught in cloud in 2015 and the cloud rejected the price and the price action was thrown down, only to for another massive double bottom in 2015-16, broke another cloud in 2016 and run up again only again to lose steam and get caught in the cloud again and like back in 2015, the cloud again rejected…
Whats up in 2018-19, another W pattern, a double bottom or a cup handle and then again a huge cloud break out???

The fundamentals are supporting, the balace sheet is supporting, the working capital has turned positive in fy17 after a long time and still is, and most of all huge infra boom is bound to come…

The bears might take over, but the bulls never sleep…

Disclaimer… Invested and averaging down…

[Capsule91]

presently a weak head and shoulder pattern is present in the daily chart, with a bullish neck line…

The present channel in daily chart…

But there is a catch, note the volumes are drying up…

So in short term although the downtrend seems in tact, the reducing volumes show a contrast!..

[KUNJ]

HCC definitely seems to be on turnaround path. Will it regain its lost glory? It remains to be seen. However they have disappointed on execution front recently. With Order Book almost 5x of revenue, execution was expected to be faster, however with >25% of order book in J&K (where there is unrest) and slower then expected receipt of arbitral proceeds , execution has taken a hit. Of around Rs. 1400 cr received from Arbitral proceeds, only around Rs.600 cr has gone for debt reduction. Still debt reduction will continue (at a slower pace). Another positive is diversified nature of Order Book. Execution remains the key monitorable obviously.

Discl: Invested and evaluating.

[Capsule91]

This is a short term trend technical analysis…

This is harmonic trading theory applied here, which gives a fine equivalent bullish AB=CD pattern …
The price is now potential reversal zone, 34 level/0.886AB is the breakout mark from which a positive trend might start, the lowest green line is the end of the PRZ , so any breakout below that will be deadly downtrend which is the actual medium term bearish trend that is prevailing…

The first significant resistance level is 37.84/0.382AB mark , a good upmove can be seen only this this level is crossed…
Here is my worksheet…

Just to give a sense why the down trend happened , because there was a gross price momentum divergence and that lead to a down trend which is continuing according to the channel in the down trend and no signal of trend reversal is there at present unless a good volume breakout from the channel is seen…

Disclaimer, invested and bottom fishing for some trading quantity

[aayush1602]

@capsule91 Look at HCC by removing Lavasa from it. It is best for HCC and its shareholders if Lavasa moves to NCLT…Banks take a haircut and HCC shareholders a 800 cr loss…

[Capsule91]

@aayush1602 yes, i completely agree with you… i think its enough! promoters should show some character and get this company out of the mess…So many groups are conducting restructuring of business…Just look at Jindal Saw, i loved the way they cut down all the subsidiaries and non core businesses, and basically now we dont have to look at the consolidated balance sheet at all…
Same is going on with tata power…
I this they are in such a mirage of mess they should definitely try and get out of here…
Get the receivables and arbitation award, pay off the stand alone loans, get out of subsidiaries with whatever money they can retain and buy back shares to increase the holding along with remove the pledges after becoming debt free…

But the management seems to be a turtle/snail regarding all this governance issue, they should increase man power, tangible assets and not subcontract so much(did u see the q3 subcontracting expense!) …

The problem is the management and the promoters, otherwise the situation is favourable on a standalone basis and their balance sheet seems to be improving…But a incompetent management team can destroy it all, thats why i am not employing a lot of capital in this scrip…

[aayush1602]

Exactly…promoter capabilities matter a lot. HCC had strong execution capabilites before they fell into debt trap. It seems like management is not much interested in getting out of it quickly. They don’t even do a conference call. Without Lavasa, HCC would have defnitiely gotten valuation that L&T enjoys.

All the profits that are generated vanishes because of that. Even on consolidated level, they will be profitable becasue Steiner is doing exceptionally well.

With the current downtrend in HCC, one of the most amongst the derivatives space, what I am seeing is that markets have already eroded those 800cr that will be lost in Lavasa (42 to 34). Markets seems to have priced Lavassa NCLT. Maybe we might find a bottom 10%-15% from here (@ 10k nifty). 50 price seems difficult to achieve now. Unless and until some exceptional thing happens, HCC will remain rangebound from 32 to 38.

What remains thoughful is when they have strong market reputation, they are losing in this golden period of infrastructure boom. Look at KNR, IRB, Dilip Buildcon and Ashoka Buildcon. Even Reliance Infra is doing well now.

Subcontracting is done by everyone @capsule91. These are non-contract workers, so the employee costs are less. What increases HCC’s subcontracting costs is that they operate in difficult geographies and tougher environments. Very few companies operate in J&K and NE e.g.