Wednesday, December 23, 2015

NBCC: Betting big on nation building - Buy

In a lacklustre market, State-owned engineering and construction firm National Building Construction Company (NBCC) has had a great run. It rose six-fold in 2014 followed by a 25 per cent gain in the last 12 months.

NBCC has proven project execution capabilities, sizeable cash balance and access to land assets to steer growth. Investor interest was also buoyed by the company’s strong order book growth, thanks to it being the preferred choice of Central and many State Governments as well as public sector enterprises. Its order book increased over 40 per cent Y-o-Y to Rs.20,000 crore in 2014-15; it is expected to reach Rs.40,000 crore in 2015-16.

The stock is however, not cheap. The current stock price of Rs.994 discounts the company’s trailing 12-month earnings by 47 times. The valuation is much higher than 30 times when a buy recommendation was given in February 2015.

Still, investors with a long-term perspective of two-three years can buy the stock as the company is on a strong wicket. Revenue in the first half of 2015-16 increased 30 per cent Y-o-Y to Rs.2,275 crore; profit increased 20 per cent to Rs.110 crore in the same period. Its order book is expected to grow and help sustain annual revenue growth of 25 per cent in the next two years. Operating margin is also likely to improve in the next two years, aiding profits.

Good revenue visibility

NBCC’s revenue mainstay is project management consultancy (PMC), accounting for 80 per cent share. The company performs construction work, such as housing complexes and educational institutions; it receives advances for actual costs and about 10 per cent of project cost as fee.

It is the default contractor for various Ministries and is the designated implementing agency for schemes, such as Jawaharlal Nehru National Urban Renewal Mission. Besides working with the Centre, the company also works for the State Governments of Rajasthan, Odisha and Haryana.

The company’s current order book is Rs.30,000 crore — about six times its 2014-15 revenue. The management expects an order of about Rs.20,000 crore for the redevelopment of four (out of a total of seven) colonies in Delhi by March 2016. This could potentially add Rs.4,000 crore to revenue every year for five years, starting 2017-18, once construction starts, a year after the project is awarded.

While the margins in this segment are low (about 6 per cent), there are two advantages. Advance received helps its working capital and the long-term orders improve revenue visibility.

Margin improvement

NBCC’s margins are expected to improve, thanks to three factors. One, larger orders could aid margins in the PMC segment to improve from about 6 per cent currently to 7-7.5 per cent on better efficiencies.

Two, on redevelopment projects, the company additionally earns 1 per cent of sale price as marketing margin. There are about 40 ongoing redevelopment projects, and it was awarded a Rs.6,000-crore project by the All India Institute of Medical Sciences, Delhi, recently. With an expected increase in redevelopment project orders, margins could get a boost.

Three, growth in its property development segment, where margins are over 20 per cent, should push up profit. The company has postponed project launch plans due to the prevailing market softness.

The company has a land bank of 178 acres and tie-ups with sick public sector undertakings with land assets for joint development. It also has a large cash pile of Rs.1,060 crore as of September 2015 to fund new launches.

NBCC’s revenue increased 15 per cent Y-o-Y to Rs.4,700 crore in 2014-15. Net profit grew only 8 per cent to Rs.278 crore during the same period, dragged down by lower profits in the property segment, mainly in the December 2014 quarter. Margin improvement in the PMC segment should aid earnings growth.

The government owns 90 per cent stake in the company; while there is talk of a stake sale (disinvestment), there are no definite plans as of now.

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