Hindustan Construction Company (HCC) reported higher-than-expected Q1 FY19 loss of Rs 197 million (versus Rs 104 million) owing to lower claims recognition. The company has arbitration awards worth ~Rs 49.2 billion in its favour, out of which it has received ~Rs 16.2 billion till date. Following the RBI’s circular on debt restructuring (that led to withdrawal of proposed SDR of Lavasa), HCC submitted its resolution plan to Lavasa’s lenders. Clarity on Lavasa debt resolution (and consequently HCC’s liabilities) along with the receipt of balance claims will be key catalysts for the stock. We maintain buy with an SOTP-based TP of Rs 17. Revenue of ~Rs 9.3 billion (flat y-o-y, down 35% q-o-q) missed our Rs 10.1 billion estimate.
The company booked claims worth ~Rs 340 million during the quarter (~Rs 0.8 billion in Q1 FY18). These claims did not contribute to Ebitda during Q1 FY19, which dragged Ebitda margin by 720 bps y-o-y to 11.1%. While interest costs slid 11% y-o-y owing to debt-reduction, higher depreciation expenses led to a loss during the quarter. After the RBI’s withdrawal of the SDR scheme in February, Lavasa submitted a resolution plan to its lenders. The plan involves a substantial recovery by the lenders given the intrinsic value of land at Lavasa. If the resolution plan is not approved this month, NCLT will take over the case.
Progress on this front is thus going to be a key catalyst for HCC. Slower-than-anticipated receipt of claims along with concerns pertaining to Lavasa have dragged HCC’s stock price. We believe receipt of arbitration claims money, traction in revenue growth, monetisation of BOT assets (for which management is in talks with investors) and progress in Lavasa’s debt resolution will determine the stock’s performance going ahead.