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Hindustan Dorr Oliver: Buy

[Source - The hindu Business Line]

Investors with a two-year perspective can consider adding the stock of integrated engineering solutions provider Hindustan Dorr Oliver (HDO).

The stock has risen sharply in the latest rally. The company’s strong June quarter earnings, steady order inflows and scaling up of manufacturing facilities to cater to diversified sectors have heightened the earnings prospects, calling for a re-rating.

At the current price of Rs 132, the stock trades at seven times its expected per share earnings for FY10 and 4.5 times its likely earnings for 2010-11.

The earnings have grown at a compounded annual rate of 40 per cent over the last two years, after it became a subsidiary of IVRCL Infrastructures & Projects.

HDO has quickly ramped up its operations from providing engineering solutions primarily in the water and environment management space to providing engineering, procurement and construction (EPC) services for most of the process industries in the commodity space.

It has diversified its product portfolio to cater to the hydrocarbon sector, apart from supplying to the water, pulp and paper and fertiliser industries.

While the manufacturing division accounted for only 10 per cent of the revenue for FY09, we expect this segment to add further value, given the increased activity in the oil and gas space.

Besides, the company has agreements with global players to cater to their outsourced manufacturing requirements. A ramp-up in this segment’s revenue could also provide more steady income than that by the EPC division.

Breakthrough

While HDO is not new to the mineral processing industry, it made a major breakthrough by winning an order worth Rs 441 crore from the Uranium Corporation of India for a processing plant in 2008-09. It appears keen to make progress in this sector as it recently received board approval to execute projects relating to nuclear power plants and allied activities. This segment, together with new areas such as equipment for material handling and components for oil and gas space, could be the new driver of revenue going forward.

The current order book of close to Rs 1,800 crore can be expected to be executed over the next 18-24 months. This order book is thrice its FY09 revenues of Rs 522 crore.

High concentration of public sector orders, all of which may not have cost-escalation clauses, can dampen operating profit margins if input prices rally significantly.

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