Hindustan Construction?s Q4 earnings were 22% below consensus. Sustained high working capital (288 days- against our estimate of 247 days) on the back of low recoveries in receivables kept net debt equity high at 2.0x. This in turn hurt execution (net sales grew by a mere 11%, 9% below HSBC and 5% below consensus). While Ebitda margins were 40bps higher than estimates at 13.8%, net profit was down by 44% to R22.6 crore (22% below consensus, 47% below HSBC est.) and interest expenses grew by 104% through a combination of higher debt and higher interest cost.
A change in tax regulation further added to the woes as the company paid an effective tax rate of 50% (retrospective effect for full year).
While HCC has improved its creditor terms over the past 2 quarters, disputed claims continue to remain high (40% of working capital). HCC?s recovery process has not been effective as yet, which in our view will keep working capital intensity high. Hence, despite our assumption that working capital cycle has peaked, we don?t expect a meaningful decline over FY12, FY13 now (219 days against 170 days earlier by FY14). This is mainly due to sustained investment in new projects, slow recoveries and weak sector outlook for working capital cycle due to increased competition.
Consequently, net-debt equity should increase from existing 2.0x to c2.6x by FY13 (2.0x earlier), keeping pressure on execution and profits. We cut sales by 22%/18% over FY12/13e, increase interest cost by 23%/22% and cut EPS by 48%/57% over FY12/13e.
Our positive view on HCC earlier was based on expectations of improving working capital intensity there by leading to stable leverage and improved profits. However, we do not foresee this to happen over the next 12 months and hence have revised earnings estimate to c17% earnings CAGR over FY12-13 (42% earlier).
In line with this, we have lowered our parent valuation to R16 (R28 earlier), which implies 7x Mar-13 EPS (7x Sep-12 earlier). We have maintained our subsidiary value at R31. Sustained high working capital days is a key downside risk and successful capital raising at better-than-expected value for Lavasa is a key upside risk.