Hindustan Construction Company Limited (500185) Earnings Call Transcript & Summary

Very good evening, everyone, and we welcome you all in this -- today's meeting for our quarterly results. Joining with us are our senior management, Mr. Arjun Dhawan, our Vice Chairman has joined the call; Mr. Jaspreet Bhullar, our MD and CEO; and shortly, our CFO, Mr. Girish Gangal will also be joining.

He has also joined.

Okay. Already joined. So we will take you through this presentation. As a quick refresher to someone who is new to HCC, it's a pioneer in construction industry. HCC has completed more than 4,000 lane kilometers of highways, almost 400 kilometers of tunneling, especially in the complex Himalayan region. 60% of installed nuclear capacity has been contributed by HCC and almost 26% of installed hydro power capacity has been done by us. We have got presence all across India and executed projects in almost every state. Apart from India, we have executed projects in Bhutan, Nepal and Bangladesh as well. Our current order backlog is of 31st of December stands at INR 9,773 crores, primarily dominated by transport sector, which accounts for 47%, followed by hydro, 26%; water, 22%; and nuclear, 5%. Geographically, also, we are very well diversified with Uttarakhand leading the show because of our hydro projects being there, followed by Maharashtra and Gujarat. This order book position excludes L1 position worth INR 3,513 crores, which we expect to realize very soon. On our quarterly numbers, on a stand-alone basis, we have achieved a turnover of INR 1,002 crores for this quarter versus INR 1,244 crores in the Q3 of last financial year. Our EBITDA margin had been quite well, 14.7%, which is also consistent with our historical track record. However, last financial year, it was 12.3%. Profit before tax, excluding exceptional items, was INR 18 crores for this quarter vis-a-vis last year's Q3 of INR 21 crores. However, on a stand-alone basis, we have booked a loss of INR 216 crores during the quarter because of certain exceptional items, which I will be explaining in the next point, against a net profit of INR 68.5 crores during last year. Now on the exceptional item. Basically, company has opted for new tax regime. Till now we have been working on old tax regime. Because of that, we had to restate certain deferred tax assets and liabilities. And accordingly, INR 147 crores of deferred tax assets had to be reversed. Also since this new tax regime doesn't allow MAT provisions, we had to take a write-off of INR 154 crores of MAT credits. However, at the same time, this has helped us in boosting our liquidity because we have received tax refund of INR 54.74 crores. So this was written back. So the net impact though accounting-wise it appears that we have made a loss of INR 216 crores. But net-net, if we exclude these items, we have made a PBT of INR 18 crores. Now on a consol level, our revenue has been almost INR 1,000 crore -- INR 1,006 crores against INR 1,474 crores during Q3 of last financial year, essentially on account of Steiner divestment because those numbers are not there now. On a consol basis, we have made a net loss of INR 38.9 crores versus net profit of INR 233 crores because of the tax regime change that I explained just now. On business development side, we have received the Letter of Award for Agardanda Creek Bridge of INR 1,032 crores. In addition to this, we are also L1 in projects worth INR 3,513 crores. And we have also submitted bids for INR 17,679 crores, which essentially comprises of 3 metro rails, 2 pump storage projects, one elevated road, and one railway corridor and also one dam. So these bids are yet to be opened. Last year had been a little slow in terms of announcement of bids, but we certainly expect that this quarter being last quarter of the year, bulk of bid results should be announced, and we hope to get a decent amount of L1 positions during the quarter. In addition to this, we are also very closely working on projects worth almost INR 36,000 crores, which we plan to bid in coming quarters. We also completed a Qualified Institutional Placement of INR 600 crores, which was well subscribed by very renowned investors. And we divested stake in Steiner AG, which is our Swiss real estate entity, to focus on core operations in India. Now I'll take you through this Steiner transaction. So as I mentioned, that company wants to focus on growing Indian market, this last quarter, there has been a divestment of this Steiner business. And Steiner was initially owned by HCC through its Mauritius entity, HMEL and HMIL, which were wholly owned subsidiaries of HCC. And our goal has always been to divest our noncore businesses. As far as China is concerned, our focus has been to maximize return on capital in the right timing for this was the target. We faced challenges in the past when we look to divest the business as a whole. The transaction with M3 last December has helped us provide a clear liquidity path as we have been able to bifurcate the construction-related asset receivables, which we have retained, while the development business was sold to a Swiss base developer with whom we can look forward to joint success by INR 200 crores of earnout. To summarize, HCC has retained claims and receivables worth almost INR 1,000 crores. That will be bound down in next 5 to 6 years. Earnout from Steiner Development AG up to INR 200 crores, and ownership of Steiner India, which has land assets worth almost INR 43 crores. So this is how this slide summarizes this transaction. M3 Group retains Steiner AG and Steiner Development AG. Moving on to operational updates. Anji Khad project, we have received the completion certificate. Mumbai Coastal Road project, Northbound arm of this project was inaugurated by Chief Minister of Maharashtra. So project is fully functional now. BARC Tarapur, all structure works completed and handing over is in progress. Tehri pump storage scheme, synchronization of Unit 5 has been completed and finishing works are in progress. Vishnugad Pipalkoti HEP, here we have achieved 4.8 kilometer of TBM mining out of 12.1 kilometer in the HRT. Mumbai Metro projects at the fag end, almost finishing works of almost every station is being done. And we are hoping that by March, trail run will also be started. Stand-alone financials, key numbers I have already explained, and you can just take a look. You will notice tax expenses here, which are quite high because of the shifting to new tax regime that I explained in the previous slide -- consolidated numbers. Thank you so much. Now we are open to questions.

We request to kindly raise your arm so that I can allow you to speak. Viraj, please go ahead.

Still a little unclear. Can you please let us know what is the net debt in the business as it stands today? And what are the implications on that absolute net debt over the next FY '26 and '27, given the staggered payments and earnouts connection on Steiner AG?

So Viraj, net debt today stands at around INR 3,500 crores, which includes almost INR 1,700 crores of principle. So net debt today includes around INR 3,500 -- it is around INR 3,500 crores. And going forward, we can see that year-on-year, we are making repayments...

Rahul, let me interrupt for a second. Net debt, as I'm guessing, Viraj, and the analyst community would like to probably have a sense, would be net of cash available on the balance sheet. So you take the gross debt position, subtract all the cash and then actually project these numbers out. And maybe if Viraj requires a little more detail that can be provided separately offline, but you can go ahead and communicate, but just subtract all the cash, please.

And also, if you can tell me off that net debt number, how much is term loan and how much is working capital debt?

So total debt as of now is almost INR 3,500 crores, which is a term loan, not a working capital loan. And cash-wise, we have almost INR 600 crores. So net debt, you can say almost INR 2,900 crores. Cash number, I'll have to recheck, but -- so we don't have working capital loan as of now. Hope that answers.

Okay. And how do we see this INR 2,900 crores reducing over -- as an absolute over FY '26 and FY '27, best guess estimate?

So if we clearly go as per the repayment plan, it will reduce by every year by almost 15%. So next year, it will reduce by almost 15%, which is our repayment plan. However, we plan to accelerate the repayment process, and there are quite a few avenues which we are exploring with lenders, including repayment through core BG transaction, which in the previous call -- some of the previous call we had explained also, and generation of cash from other revenues. So that will be extra that we will be doing.

Okay. And the Steiner monies that will come in, the INR 200 crore earnout from STAG, is it linked to anything in particular, in a particular year?

So it's an earnout, and it's linked with performance of the company, as well as new acquirers ability to raise -- they are planning to go public and all that. So there are quite a few milestones that needs to be achieved. So we are -- it is today, not in a position to put a strict time line to that.

Okay. And is this over the next 2, 3 years? Or is it a shorter period?

Yes. Correct, you're right. 2, 3 years.

Bharat Mani, you may please go ahead.

Sir, I was looking at the HCC stand-alone numbers. So I guess in the corresponding quarter you did INR 1,200 crores of revenue, and this quarter, you have done INR 1,000 crores. So what has been the reason for this decline? Just standalone, not the console. I can agree console-level the Steiner AG divestment took place. But what about stand-alone numbers?

So Bharat, this is what we had budgeted for the quarter, and this is a good performance. In terms of that, we have completed lot of projects like we have completed Anji Khad project. We have completed Delhi Metro, Mumbai Metro Coastal Roads are also at the fag end of completion. So with limited availability of work front, this is a very good outcome as per our budget we have achieved. And certainly, with new orders which are lined up and which -- one is already there, others are about to come, we will be able to ramp up the turnover once again.

Do you expect the next quarter to be better than this? What is the outlook on the next quarter?

So next quarter, generally, we don't give future forward-looking statement.

No, I know that, but just a general...

Yes. But looking at current order position in the work front that will be available, we should be in the same range.

Okay. And one more question on the consolidated statements. So I could see a change in inventory of INR 305 crores. So could you just direct me what is that regarding?

I would request Mr. Gangal...

Yes. Bharat, see, as you know, we have divested Steiner. So because of divestment of Steiner, there are a lot of movements on these expenses, whether it is inventory or if you find finance costs or other expenses. Because all businesses have moved out, and there are typical transaction. For example, depreciation and other expenses have gone up because various lease transaction, what we had in Steiner. And we have to create as per Ind AS, the lease equalization fund, okay, which slowly realizes cost to the profit loss account. Whereas when you transfer this completely to a different party, the entire balance what is lying in the balance sheet has to be written off. So similarly, all this adjustment, including for the inventories have been written off as far as Steiner is concerned on a deconsolidation because of you'll see that variation.

So in the finance and depreciation cost as well, you could see the lease being written off partly in terms of interest and depreciation. That's what you're saying?

That's it.

In the inventory as well? So but is it a onetime or should we...

One time. No, no, no, that is over. So this is related to Steiner. So for us, Steiner is over now. Chapter is over now. This is the last quarter where we'll have all these adjustments. Next time, you will find more or less standalone and consol numbers will be more or less matching more or less precisely -- I mean particularly say that because there is no Steiner turnover or related costs coming in into HCC -- anymore.

Okay. And in the last quarter you had said about you had submitted a few bids for the Metro segment, the port project and the PSP project. So what is the status on that?

Those bids are unfortunately got delayed as far as opening up those tenders is concerned. But few of things are expected in this month itself, especially PSPs and some metro bid, and something will go to next quarter.

And there were a few projects that you were L1 as well, like INR 3,500 crores worth of projects. So what is the status on that?

Bharat, let me just give you -- Girish, let me just jump in. Just a broader perspective right now on order book and -- so certainly, I think we're a little disappointed that at the closure of this quarter, we're not able to communicate a much stronger LOA position. And that's a little unfortunate in terms of the timing of what we are expecting hopefully in the coming weeks would be a little more of a flurry of kind of not only L1s, but the conversion of L1s into LOAs. And so I think our expectation certainly is that we will have a much, much stronger Q4 that will actually make up for the previous couple of quarters. So we have also had a change of government in 2 states in Maharashtra and J&K, that's where both our L1 orders basically are. And as a result of that, we've actually had, I think, probably a 3- to 6-month delay that has been in our Maharashtra project, a land acquisition position that is going to probably get completed fairly soon. And so our expectation is that we should probably end up having those conversions done there. There was a question also that you had with regard to the turnover being lower. Yes, as Rahul has said, it's as per our budget, and it's comparable on an operating basis, historically, our business is seasonal, yes. But it also basically is a little lumpy depending on claim settlements and arbitration awards that we get from time to time. And so to some extent, the comparable quarter that you have before is not entirely comparable as in the previous...

Yes, that I agree. But at the same time, the corresponding quarter in the last year as well, you did around -- in standalone, you did INR 1,200 crores...

Clearly. And then this is where we request basically you as the analyst community and our shareholders to look beyond this coming fiscal year. So we've had such strong operational performance. And as we wind down our current order backlog, what is really going to see the growth in our future, basically turnover and our profitability is going to come from new orders. So to some extent, as we've said before in previous calls that we'd like for fiscal -- at least a large portion of Fiscal '26, this is now we're closing '25. So over the next 2 or 3 quarters, you will see some softness in the top line because the conversion of our current new jobs that we intend to win will probably take about 6 months or so. And the current order backlog as it winds down, will show a little softness in our numbers. But that certainly as far as basically fiscal '26, '27, '28, when you look at the future growth and turnover of the business and the profitability will not really -- from a shareholder perspective, really be disappointing.

Okay. So just one last question. So did you receive any claims or awards in this quarter?

We don't -- Girish, I think, I'll let my CFO answer that question. We tend to not answer the question as directly. I'm afraid as to whether we did or we did not. Unless, of course, Girish, you may clarify that we did not in this quarter, yet any.

Yes. No. I think I can answer it in such a way that we did not receive any material claim or award in this quarter. There is some marginal thing as compared to what you have received in last quarter, that's why you are seeing also the reduction in turnover, what you have seen in this quarter vis-a-vis last quarter. But specific numbers, naturally would not like to share, what is included, what is excluded.

Gaurav, you may please start.

My question is on the subcontracting expense. So looking at the December quarter figure, we have INR 316 crores against the September quarter number of INR 715 crores. So quite a significant drop in the number. So can you provide some more color on it? Does it mean slower execution this quarter compared to last quarter?

Gaurav, that is not the case. See, the accounting as far as this cost of metal consumed and subcontracting expenses, it is based on the accounting standard of accounting revenues and costs, that is AS115, which has a particular method in which you can account. That is the first statement. Secondly, we have certain turnover, which is of our own and which is something what is subcontracted. So if at all in a particular quarter, if at all we have done a turnover more where we have subcontracted the work, naturally, the subcontracting cost of that quarter goes up. And in a particular quarter when this execution of subcontractor is less as compared to our own execution, the subcontracting cost goes down. So it depends on composition of my revenue what I have and the typical nature of accounting standard, the way it is accounted which is called, if at all, just for your information, cost to completion method. So because of that, I mean, typically, abnormalities will be seen.

But it doesn't mean the slower execution this quarter, right?

No, absolutely not. Absolutely not. Rather, that's what Rahul has confirmed and I'm reiterating that we have done the turnover, what we have envisaged for the quarter fully. We are not even down by 1% than our estimation from our budget or expectation, both.

Shikha Mehta, please start.

I just had a few questions. One, in our growth for this quarter and next quarter, if I refer to the last few con calls, we said...

Shikha, you're gone on mute, can you please unmute, again?

Yes. Sorry. I'll just repeat my question. I think earlier, we had said that FY '25 would be a washout year. And FY '26 onwards we would start seeing growth. I think we have deferred that guidance from what I understand that FY '27 onwards we'll start seeing meaningful growth. Is that the right way to look at it?

No, I don't think that is the situation. We continue to state the same thing that this year, that is financial year '25, we might be more or less having a flattish turnover. But next year onwards, you can see the results, once these tenders or orders are converted, I mean orders are issued in our favor during the year -- during the next few months.

A little bit of a lag, I guess you would probably -- it would be fair to say about 6 months. There's been about a delay in sort of our plan, but we respond. But I think the goal is for us to actually make that up considerably. And as far as we're concerned from a profitability standpoint, I think that we hope to kind of still be on track for what we actually have planned in terms of growth in profitability and margins.

Understood. So internally, you are expecting FY '26 to be better than FY '25 and '27 better than '26, would that be the right way to see it?

Yes, you can take it that way. Yes, please.

And look, one of the key measures for us, Shikha is, as Rahul has already pointed out before, is an accelerated deleveraging of the business. We have a considerable amount of assets in the forms of our arbitration awards and claims. There are settlements that we expect to accelerate with our clients. There's award monies that [ deposit in ] court that we plan to actually have with our banks taken out in prepaid debt. So you will see a substantial reduction in finance charges is what our goal is to achieve. And yes, while I think that you will have a combination of new jobs building in pushing up turnover, I think next couple of quarters year-over-year, I think you could probably expect to see some softness, and that's because it will take time for the new jobs that we actually convert to actually flow into our P&L, which will probably be about 6 months from today.

So when we say softness, do we mean around the same as this quarter? Or do we mean this quarter is the bottom and then...

Yes. I guess it would be unfair for me to be more precise than the broader general statement that I've made, I think that my CFO would actually probably not be too happy if we actually give a little more detail on that. Girish, do you want to give any more color? Or is that...

No, I think that is fair because we'll not like to make too many specific forward-looking statements because this is not permitted also as per the...