Initiating coverage | Infrastructure
November 16, 2015
National Buildings Construction Corporation
BUY
CMP
`893
New Opportunities to unearth growth potential
Target Price
`1,089
National Building Construction Corporation (NBCC) a ‘Navratna’ company, is
Investment Period
12 Months
one of the largest Public Sector Enterprises (PSEs) in the construction space. Its
Project Management Contract (PMC) division (~85% of FY2015 revenues) is a
Stock Info
cash cow business, which gets large orders on nomination basis and enjoys a
Sector
Infrastructure
negative working capital cycle.
Market Cap (` cr)
10,721
Huge opportunities in the pipeline…
Net debt (` cr)
(1,067)
NBCC reported an order book of `30,000cr as of 2QFY2016-end, reflecting 5.8x
Beta
1.5
last twelve month (LTM) revenues. Of the `30,000cr order book, the PMC
52 Week High / Low
1215/683
segment accounted for a major 92% (includes ~`3,500cr Kidwainagar re-
Avg. Daily Volume
69,293
development project), whereas the remaining is from Real Estate (5%) and EPC
Face Value (`)
10
(3%) segments. Considering the emerging bid pipeline for re-development works
from Delhi and other State governments, and with ‘Smart City’ projects to take-off
BSE Sensex
25,611
shortly, we expect NBCC’s order book to grow 2-fold during 1HFY2016-18E to
Nifty
7,762
`59,440cr.
Reuters Code
NATO.BO
Revenues and PAT to report 26.7% & 32.7% CAGR during FY2015-18E
Bloomberg Code
[email protected]
We expect NBCC to report a 26.7% revenue CAGR during FY2015-18E (to
`9,506cr), mainly driven by an estimated 29.3% revenue CAGR from the PMC
Shareholding Pattern (%)
segment, where re-development projects would contribute the maximum. We
Promoters
90.0
expect NBCC to report 41.5% EBITDA CAGR during the same period, led by
increased contribution from the PMC segment, which is likely to experience
MF / Banks / Indian Fls
1.0
margin expansion (PMC segment’s EBIT margin to expand from 7.3% in FY2015
FII / NRIs / OCBs
2.5
to 8.9% in FY2018E). Owing to lower other income growth assumption, we expect
Indian Public / Others
6.5
NBCC to report a 32.7% PAT CAGR during FY2015-18E to `653cr.
Long term story; recommend BUY…
Abs. (%)
3m 1yr 3yr
We have a strong positive view on NBCC, given its growth prospects as reflected
by its strong order book of `30,000cr (5.8x LTM revenues). Also, emerging
Sensex
(8.8)
(8.7)
38.6
opportunities in the re-development space, government’s initiative of developing
NBCC
(12.7)
15.5
480.7
‘Smart Cities’, and the company’s cash rich status, should aid its growth. Given
the bid pipeline and huge order book, we are convinced about the strong
3 year price chart
earnings growth potential of the company for the next few years. Accordingly, we have
1,400
conservatively assigned 20.0x P/E multiple to our FY2018E EPS of `54/share; we
1,200
1,000
arrive at a price target of `1,089. Given the 22% upside potential in the stock from
800
the current level, we initiate coverage on the stock with a Buy recommendation.
600
400
Key Financials (Consolidated)
200
Y/E March (` cr)
FY2014
FY2015
FY2016E
FY2017E
FY2018E
0
Net Sales
4,070
4,674
5,816
7,382
9,506
% chg
14.8
24.4
26.9
28.8
Net Profit
257
278
355
478
653
% chg
8.1
27.6
34.6
36.7
Source: Company, Angel Research
EBITDA (%)
5.9
6.2
6.9
7.7
8.6
EPS (`)
21
23
30
40
54
P/E (x)
41.6
38.5
30.2
22.4
16.4
P/BV (x)
9.4
8.0
6.7
5.4
4.3
RoE (%)
22.6
22.5
24.1
26.7
29.1
RoCE (%)
36.2
39.3
42.3
45.2
47.5
Yellapu Santosh
EV/Sales (x)
2.3
2.1
1.6
1.2
0.9
022 - 3935 7800 Ext: 6811
EV/EBITDA (x)
39.5
33.0
22.5
15.4
10.2
[email protected]
Source: Company, Angel Research; Note: CMP as of November 13, 2015
Please refer to important disclosures at the end of this report
1
Initiating coverage | NBCC
Investment Arguments
NBCC to gain from redevelopment opportunity in Delhi
Delhi houses commercial office and residential quarters of various government
bodies and entities. Notably, most of these government buildings constructed are
over 40 years old. Given the infrastructure bottlenecks (such as, increased
congestion, growing traffic and requirement for more office space in key localities)
faced by
30 government colonies (Commercial+Residential) spread across
~1,190 hectares in Delhi, there exists potential for re-development. These 30
redevelopment projects, in our view, are an opportunity size north of
~`100,000cr, which could come up for awarding in the next 5-7 years.
Exhibit 1: Details of Government colonies to be redeveloped in Delhi
30 re-development projects in Delhi,
Colonies to be re-developed
Comments
with opportunity north of ~`100,000cr,
TPC- `3,500cr; Covers 86 acres and is expected to start
would come up for awarding in the next
East Kidwai Nagar
in 2HFY2016 and complete in 4 years there-on
5-7 years.
Govt. has allocated these 3 colonies to Central Public
Sarojini Nagar
Works Dept. (CPWD); Cabinet approval is pending;
Srinivaspuri
NBCC expects to get the project from CPWD soon; TPC
of these 3 projects would be in the range of ~`7,000-
Mohammadpur, South Delhi
8,000cr
TPC- `12,000cr; 75 acres project to be executed over the
Karkardooma, East Delhi
next 3-4 years; Engineering Work already started. In the
process of selecting architect and engineering companies
TPC- `2,000cr; Spread across 25 acres, this project in
Sanjay Lake, Trilokpuri, East
our view would be executed in the next 2-3 years;
Delhi
Engineering Work has been started. In the process of
selecting architect and engineering companies
Ramakrishnapuram (R K Puram)
Netaji Nagar
TPC- `12,000cr; Cabinet approval is pending; Awarding
Kasturba Nagar
at advanced stages; NBCC expects these 3 projects to be
awarded by 4QFY2016;
Thyagraj Nagar
Laxmibai Nagar
Netaji Nagar
Lodhi Road
West Kidwai Nagar
New Moti Bagh
Source: Company, Angel Research, Media Articles
Post successful completion of Old Moti Bagh re-development project, the
government has started working on re-development works of ~15 colonies across
Delhi. Notably, of these 15 colonies, ~10 are either awarded or are close to
getting awarded. The total cost of these projects is north of `50,000cr.
10 Re-development projects valued at
Following Delhi government’s re-development model, Orissa, Madhya Pradesh,
over `50,000cr are either awarded or
West Bengal and Rajasthan governments have started exploring re-development
are close to getting awarded.
potential across their states. For re-development works, NBCC has formed a JV
with Rajasthan State Government, while it is in discussion with Orissa government
to re-develop 2 properties spread across 100 acres each. Further, discussions are
on with Madhya Pradesh and West Bengal governments to re-develop properties
spread across 20-30 acres each. On the whole, we expect opportunities in the re-
development space to grow multi-fold in the years to come.
November 16, 2015
2
Initiating coverage | NBCC
We are of the view that NBCC is well positioned to gain substantially from the
opportunities emerging in the government re-development projects space. This
would be on account of following factors (1) NBCC is notified as a Public Works
Organization (PWO) covered under revised Rule 126 [2] of GFRs, as per which
Government Department(s)/ PSUs and Autonomous Bodies award work to NBCC
on nomination basis, and (2) NBCC is the only PSU with a long execution track
record of developing/ re-developing/ selling government real estate properties.
Exploring opportunities from ‘Smart Cities’ space…
To benefit from government’s
100
NBCC is currently exploring potential opportunities emerging from 100 Smart
Smart Cities & AMRUT Scheme
Cities & Atal Mission for Rejuvenation & Urban Transformation (AMRUT) scheme
announced by the Ministry of Urban Development (MoUD).
Exhibit 2: 98 Smart Cities Identified by the Government
Smart Cities
Smart Cities
Smart Cities
Smart Cities
Port Blair
Hubballi-Dharwad
Ludhiana
Allahabad
Vishakhapatnam
Tumakuru
Jalandhar
Lucknow
Tirupati
Davanegere
Amritsar
Varanasi
Kakinada
Kochi
Jaipur
Ghaziabad
Pasighat
Kavaratti
Udaipur
Agra
Guwahati
Bhopal
Kota
Rampur
Muzaffarpur
Indore
Ajmer
Dehradun
Bhagalpur
Jabalpur
Namchi
New Town Kolkatta
Biharsharif
Gwalior
Tiruchirapalli
Biddhannagar
Chandigarh
Sagar
Tirunelveli
Durgapur
Raipur
Satna
Dindigul
Haldia
Bilaspur
Ujjain
Thanjavur
Aligarh
Diu
Navi Mumbai
Tiruppur
Saharanpur
Silvassa
Nashik
Salem
Bareilly
New Delhi Municipal Council
Thane
Vellore
Jhansi
Panaji
Greater Mumbai
Coimbatore
Kanpur
Gandhinagar
Amravati
Madurai
Aizawal
Ahmedabad
Solapur
Erode
Kohima
Surat
Nagpur
Thoothukudi
Bhubaneshwar
Vadodara
Kalyan-Dombivali
Chennai
Rourkela
Rajkot
Aurangabad
Greater Hyderabad
Oulgaret
Dahod
Pune
Greater Warangal
Dharamshala
Karnal
Imphal
Agartala
Ranchi
Faridabad
Shillong
Moradabad
Mangaluru
Belagavi
Shivamogga
Source: Company, Angel Research, Ministry of Urban Development
`48,000cr has been earmarked by the
government for “100 Smart Cities”
Scheme, to be invested over the next
5 years. Although the design and
development framework for ‘Smart Cities’ in India is at an early stage, we expect
execution to pick-up once requisite approvals are in place and issues pertaining to
financing are addressed. We expect awarding in the ‘Smart Cities’ Scheme to start
in 1HFY2017E.
November 16, 2015
3
Initiating coverage | NBCC
Gearing up to the emerging opportunities and strengthening its position, NBCC
has already entered into 3 MoUs/ JVs, ie (1) with CDBIH, Malaysia (to gain access
to new technologies, which would be helpful in the development of smart cities),
(2) with IBM (to work on smart cities), and (3) with a Korean Company (to work on
Smart Cities).
Exhibit 3: NBCC’s scope of works in a Smart City
NBCC's prior experience-
Yes/ No
Transportation Projects
Yes
Power Generation/ Transmission Projects
Yes
Integrated Water Management
Yes
Solid Waste Management
Yes
Multimodal Logistics Parks
Yes
Telecommunications
No
Water Supply Distribution/ Sewerage & Storm Water Drainage
Yes
Solar Power Projects
Yes
Recycling of Waste for Industrial Use
Yes
Business Parks/ Industrial Parks/ Warehousing and Distribution
Yes
Telemedicine/ Telehealth/ Hospitals & Medical Centres
Yes
Eco Logistics System
Yes
Source: Company, Angel Research
NBCC is amongst the few Indian
NBCC has worked either individually or through the JV route on all the key areas
companies to have experience on all
integral to develop a Smart City (except Telecommunications). It therefore stands a
the key areas integral to develop a
fair chance to get a good chunk of the orders awarded from FY2017E onwards.
Smart City (except Telecommunications)
Our view of the company enjoying a strong market positioning also stems from the
fact that the company is the only listed player which has executed large scale re-
development projects on the ‘Smart City’ guidelines. NBCC executed the 105 acre
Moti Bagh redevelopment colony on the ‘Smart City’ lines in 2012. Successful
execution of works across Waste Water Management, Solar Heating & Lighting,
and Rain Water Harvesting in the past should help the company understand the
‘Smart City’ execution dynamics very well. In order to further gain experience,
NBCC is negotiating with MoUD to deploy Wi-Fi, Fibre-to-Home concept, 6-layer
Security, IP TV, Smart Energy, Smart Electricity, Parallel policing, IP Security,
Emergency Response, Periphery Security, and Integrated Building Management
System. On these lines, the company is working on upgrading the Moti Bagh
colony. Also, NBCC has set-up a separate 5-6 member internal team, which is
constantly interacting with respective state government authorities to work on the
‘Smart City’ projects.
NBCC has signed Memorandum of Understanding (MoU) with Delhi Development
Authority (DDA) to develop the first smart sub-city at Karkardooma, East Delhi. The
first phase of this project is spread across 30 of the total 75 hectacres, and is
Company working on the Karkardooma
expected to be executed in the next 36 months. This is India’s first Transit Oriented
project, which is India’s first Transit
Development (ToD) project, which aims to promote access to amenities within
Oriented Development project. This
walking distance, thereby de-congesting city roads and ensuring a cleaner
gives it an early mover advantage for
environment.
the upcoming ‘Smart Cities’ Scheme.
Taking into consideration, (1) the company’s early mover advantage in the ‘Smart
City’ projects segment, (2) tie-ups with international players to strengthen its range
November 16, 2015
4
Initiating coverage | NBCC
of offerings, (3) execution track record of re-development works, (4) past track
record of having worked with state governments across the country, and
(5)
Management’s optimistic guidance of winning
12-15 ‘Smart City’ projects
(indicating 15% market share), we expect a huge spurt in NBCC’s order book,
going forward.
Entry in Omanese markets to support growth…
In order to de-risk its business model geographically and identify new areas of
growth, NBCC has started exploring international markets, mainly in the Middle
East region. As a first step, NBCC has tied-up with Al Naba Services LLC, Oman,
to form “NBCC Gulf LLC”. NBCC has 70% stake in the newly formed entity, with
the remaining 30% being held by Al Naba Services LLC. This newly formed entity
will carry out commercial construction of buildings, roads, airport, harbour, water
Entry into Oman to support future
sewerage, and electricity network in Oman. NBCC has already opened its local
growth…
office in Oman. The Management sounded optimistic towards the company
reporting order wins from Oman, from 2HFY2016E onwards.
New Avenues to contribute to Order Book growth…
In addition to opportunities emerging from re-development works of government
colonies and development of ‘Smart Cities’, NBCC is also exploring other avenues
to grow its order book. These include (1) re-development works for NAWADCO,
the Waqf Board (MoU already signed), (2) development/ re-development of land
bank at Railways, Air India and other ailing sick units.
NBCC has already bagged its first development project from Gulistan Shadi
Mahal, MasjideMavalli, and Dargah Hazrat Attaullah Shah, all 3 from Bangalore;
and Takiya Chand Shah, Jodhpur (Waqf Board) across 4 locations worth `398cr.
The Management guided that it expects more orders from Waqf board, going
forward.
NBCC signed a MoU with Air India to develop its land parcel. Modalities of how
Re-development opportunity emerging
the execution would be done are being worked upon. Air India could possibly
from Waqf Board, Indian Railways, Air
explore development/ re-development of following properties in the near-term: (1)
India and Sick PSUs gives improved
3.5 acre land parcel at Baba Kharak Singh Marg, New Delhi
(2)
1.3 acre
visibility on the growth prospects…
commercial plot in Anna Salai, Chennai, and (3) 3 lakh sq ft of Air India office
space at Nariman Point, Mumbai, amongst others.
Currently, there are ~65 sick Public Sector Undertakings (PSUs) in India (as of
March 31, 2015). NBCC is negotiating with the government to develop/re-develop
the idle lying land parcels of all these sick units. Following are some of the sick
units, where NBCC could be exploring land parcels for development- Bharat
Yantra Nigam Ltd, Bharat Ophthalmic Glass Ltd, STCL Ltd, Bihar Drugs & Organic
Chemicals Ltd, Indian Oil Technologies Ltd, Brushware Ltd, Pyrites Phosphastes &
Chemicals Ltd, National Instruments Ltd and Bharat Yantra Nigam Ltd.
On the whole, NBCC’s strategy to focus on identifying new growth avenues, such
as exploring to work with sick units/ Air India/ Indian Railways/ Waqf Boards is in
the right direction.
November 16, 2015
5
Initiating coverage | NBCC
Real Estate business with land parcels spread across India
NBCC diversified its business model by entering the Real Estate space. Here, the
company has followed a different business model, ie focus on quicker construction
and faster sales. This differentiates NBCC from other peers, which tend to hold the
land parcels for longer duration and execute entire projects over a 5-7 year cycle.
NBCC usually buys land from state governments, local municipal bodies and other
government entities. It currently has a land bank of over 178 acres (with total land
cost at `600cr) well spread across Tier I and II cities, like, Delhi, Gurgaon, Jaipur,
Kochi, Kolkata, Ahmedabad, Lucknow, Bhubaneshwar, Patna, Alwar, Faridabad,
Coimbatore, Ghazaibad and Naya Raipur. The Management highlighted that this
land bank has potential saleable area of ~1.4cr sq ft. (with over 1.0cr of unsold
inventory).
Among the few players in Real Estate
NBCC’s Management highlighted that it targets revenue contribution from Real
space to pursue Asset light business
Estate segment to reach ~20% levels in the long run (vs the current 16-17% levels).
model…
Asset light business to support future growth…
NBCC’s business model in recent years has evolved from being highly dependent
on the EPC business to diversifying across various types of Real Estate models.
These Real Estate models are reported under segment heads - Real Estate (share to
consolidated revenues increased from 2.9% in FY2012 to 11.0% in FY2015) and
PMC (captures re-development works; share to consolidated revenues increased
5.4% in FY2012 to 84.6% in FY2015).
Exhibit 4: Types of Real Estate Business models followed by NBCC
Possible Areas of Differentiation
Project
Reported
Upfront
Approval
Possibility of
Risks exposed
Margins
Model
Under
Investment
Delays
Realization Growth
To
Land
30-50% of project cost is
Potential to gain
Exposed to Execution as
Land Bank
Possibility for delays
Real Estate
Acquisition
locked-in towards the
from realization
well as Marketing risks
Model
exist
Cost
project
growth
@ 10% margins on final
project cost (includes
Exposed to only
construction and
Low, as approvals
Least, as sale
Marketing risks. Sale is
Re-development
development costs,
are taken by
PMC
Nil
happens on pre-
on 30 yrs. lease and not
Model
excludes land cost); plus
Consultants (NBCC
notified prices
on
additional 1-2%
appointed)
outright basis.
marketing fees on sale
value
Source: Company, Angel Research;
Real Estate and re-development works have seen strong order inflows in the recent
quarters on the back of favorable government announcements. Order inflow
growth in recent quarters has been mainly driven by re-development project order
wins. These re-development projects are basically premised on joint development
agreements (JDAs) with government bodies. As per JDA, the respective government
body contributes land to the project (not an outright sale, but on 30 years lease)
and NBCC brings its expertise towards the construction and marketing of the
project. Here, NBCC gets a flat fixed margin of 10% of the project value as a fee
towards project execution and 1-2% as marketing fee on the sale value. We view
November 16, 2015
6
Initiating coverage | NBCC
this business model to be favourable and asset light in nature in comparison to the
traditional land banking model, where the capital invested gets blocked over the
entire life cycle of the project. This asset light business model is better as more
projects get executed with minimal capital deployed. This also de-risks the
company from excessive dependence on any one project.
Exhibit 5: Order Book Mix (%) as of 2QFY2016
Exhibit 6: FY2015 Consol. Revenue mix (%)
5
3
11
4
85
92
Real Estate
EPC
PMC (inc. Redevelopment works)
Real Estate
EPC
PMC (inc. Redevelopment works)
Source: Company, Angel Research
Source: Company, Angel Research
NBCC executed its first re-development project at East Kidwainagar, Delhi where
NBCC was asked to put ~`200cr seed money towards the project with assured
15% p.a. returns. At the time of starting the project NBCC invested ~`90cr. Given
the project mix attractiveness and its location advantage, the project got sold within
3-4 months of the launch. As a result, NBCC was able to make 15% p.a. returns
on its ~`200cr of investments.
Order Book to grow 2-fold, gives strong revenue visibility
Order book to grow over 2-fold during
NBCC’s order book has grown at 17% CAGR during FY2010-15, mainly reflecting
1HFY2016-18E to `59,505cr…
almost doubling of the yearly order inflows (to ~`6,200cr in FY2015). Surge in the
order inflow numbers during the same period is mainly on account of development
project wins (shown under the PMC segment). Going forward, we expect the order
book to grow 2-fold during 1HFY2016-18, mainly on account of huge order wins
from re-development work and Smart City orders. NBCC at 2QFY2016-end is
sitting on an order book of `30,000cr, reflecting order book/ LTM revenues of
5.8x, which is impressive.
November 16, 2015
7
Initiating coverage | NBCC
Exhibit 7: Order Inflows & yoy growth
Exhibit 8: Order Book (OB) & OB/ LTM ratio
30,000
27,399
400
70,000
9
7.8
350
59,505
8
60,000
25,000
342.3
300
7.7
49,376
7.4
7
19,500
50,000
250
20,000
18,050
6
4.8
4.9
38,640
200
40,000
5
15,000
150
82.7
3.4
30,000
4.7
4
100
10,000
28.7
3
7,188
7,273
17,000
6,194
8.0
50
20,000
15,427
12,163
2
3,934
0
8,162
5,000
10,000
1.2
1
(14.8)
(50)
(34.1)
0
0
(100)
0
FY2012
FY2013
FY2014
FY2015 FY2016E FY2017E FY2018E
FY2012
FY2013
FY2014
FY2015
FY2016E FY2017E FY2018E
Order Inflows (` cr)
yoy change (%)
Order Book (` cr)
OB/ LTM (x)
Source: Company, Angel Research
Source: Company, Angel Research
Expect 26.7% revenue CAGR during FY2015-18E
We expect NBCC to report 26.7% revenue CAGR during FY2015-18E to `9,506cr,
mainly driven by 29.3% revenue CAGR from PMC segment, where re-development
projects would contribute the maximum. EPC and Real Estate segments would
restrict the overall growth of the company. EPC segment revenues are expected to
grow at 17.3% CAGR on a lower FY2015 base to `334cr. Further, we expect the
Real Estate business to remain flattish in FY2016E and gradually pick-up from
FY2017E onwards. We expect the Real Estate segment to report 9.1% revenue
CAGR during FY2015-18E.
As highlighted, our expectation of 29.3% PMC segment revenue CAGR captures
2QFY2016 order backlog of `27,500cr and strong re-development projects bid-
pipeline of `10,000cr.
PAT to report 32.7% CAGR during FY2015-18E
Led by the huge Order book, we expect
Till FY2015, NBCC was getting ~81% of its revenues from PMC projects. Notably
NBCC to report 26.7% and 32.7% top-
revenue contribution from the re-development segments was insignificant.
line & bottom-line CAGR, respectively,
However, considering the recent order wins and the emerging bid pipeline, we are
during FY2015-18E…
optimistic that the revenue contribution from re-development projects vis-a-vis PMC
segment revenues and as a proportion of overall revenues would catch up.
Given the ‘fixed 10% margins + 1-2% marketing fees’ format being followed by
NBCC towards redevelopment of Government colonies, we expect PMC segment’s
gross margins to improve, going forward. These development projects in our view
are accruing at least 200-300bp higher margins than other contracts executed
under the PMC segment. With a shift in the PMC segment’s order book, we expect
segment level EBIT margins to improve by ~150bp during FY2015-18E.
We expect EBITDA of the company to report 41.5% CAGR during FY2015-18E,
mainly driven by increased contribution from PMC segment, which is likely to
experience sharp margin expansion. We expect PMC segment’s EBIT margins to
expand from 7.3% in FY2015 to 8.9% in FY2018E.
We expect NBCC to report 32.7% PAT CAGR during FY2015-18E to `653cr, after
factoring in lower other income assumption. Our lower other income assumption
November 16, 2015
8
Initiating coverage | NBCC
captures our conservative stance that re-development projects executed would
fetch lower/zero interest on advances made.
Company to gain from limited competition
NBCC is notified as a Public Works Organization under the revised Rule 126 (2) of
General Financial Rules (GFR), by virtue of which, government department(s), PSUs
and autonomous bodies can award works on nomination basis. Also, NBCC has
been designated as implementing agency for Jawaharlal Nehru National Urban
Preferred and nominated by various
Renewal Mission (JNNURM), Pradhan Mantri Gram Sadak Yojna (PMGSY), Solid
Ministries/ PSUs/ Government entities
Waste Management (SWM) and other developmental work schemes in the North
over other private players…
Eastern Region.
NBCC has a strong track record of developing government buildings and re-
development of government colonies. Considering entry barriers for competition,
the company’s fast growing market share, and the preferential nomination it gets
from government clients, we are optimistic that the company should continue to
post robust growth, going forward.
We are of the view that various ministries prefer working with NBCC and not with
private players owing to:
a) Cost escalation issues with private players
b) Avoid concerns over the due diligence process
c) Safeguard themselves by delegating the accountability part to NBCC
d) Avoid the scrutiny of government authorities such as CAG, CBI
Healthy Return Ratios…
NBCC undertakes Project Management & Consultancy works for Government
departments/ PSUs for various types of projects. Once a project is signed, NBCC
Cash rich Balance sheet status…
gets 10-25% of the total project cost as upfront advance, on which it earns interest.
potential to generate strong cash flow
Further, the company closely monitors construction progress, gets work certified;
from operations…helps it generate
and on attaining the respective milestone, makes payment to contractors. Hence,
healthy RoEs of over 20%
we are comforted that PMC contracts (contributed ~85% of FY2015 revenues)
require minimal capital investment, and have the potential to generate higher
return ratios.
November 16, 2015
9
Initiating coverage | NBCC
Exhibit 9: Return on Equity (%)
Exhibit 10: Return on Capital Employed (%)
35.0
50.0
47.5
45.2
29.1
45.0
42.3
30.0
39.3
26.7
40.0
36.2
24.1
25.0
22.6
22.5
35.0
30.0
20.0
25.0
15.0
20.0
10.0
15.0
10.0
5.0
5.0
0.0
0.0
FY2014
FY2015
FY2016E
FY2017E
FY2018E
FY2014
FY2015
FY2016E
FY2017E
FY2018E
Source: Company, Angel Research
Source: Company, Angel Research
We expect RoE/ RoCE ratios of the company to improve from 22.5%/ 39.3% in
FY2015 to 29.1%/ 47.5% in FY2018E, respectively.
November 16, 2015
10
Initiating coverage | NBCC
Understanding the Business Model
Project Management Consultancy to drive growth…
The PMC business is the largest segment contributor for NBCC (~85% of FY2015
sales and ~73% of FY2015 EBIT). NBCC is a notified Public Work Organization
under revised Rule 126 (2) of General Financial Rules (GFR), which positions it to
get projects on nomination basis by various Ministries, government bodies and
other PSUs. We are of the view that most government organisations are not well
equipped to handle Project Management Works of a civil project. Being 90% held
by the Government of India (GOI), NBCC fits into this need of government bodies
and plays the role of a third-party project manager, which co-ordinates between
the awarding government bodies and the contractors.
Exhibit 11: Advances from Clients & Earnest Deposits as % of Sales
2,000
60%
51.8%
1,800
50%
1,600
43.8%
46.3%
38.4%
1,400
40%
1,200
35.4%
1,000
30%
800
20%
600
400
10%
200
0
0%
FY2011
FY2012
FY2013
FY2014
FY2015
Adv. from Clients & Earnest Deposits (` in cr)
As % of sales
Source: Company, Angel Research
The Management indicated that a major 70-80% of the orders it wins are on direct
nomination basis and face very little competition. As a result, NBCC enjoys better
terms and conditions, which result in better operating margins. This when coupled
with the point that NBCC commands 10-25% of the total project cost as advance
amount from the client, indicates how well the company is positioned to manage
its cash flows. Given that no cash gets deployed in to business, coupled with the
advances received from clients, positions NBCC as an asset light player, with
potential to generate high return ratios (reflected in its financials).
Management bullish on Real Estate development business…
The Real estate business involves development of residential and commercial
projects on Government/ PSU land bank, through the joint development or land
bank development model. NBCC has 178 acres of land parcel spread across
Delhi, Gurgaon, Kolkata, Kochi, Alwar, Meerut, Ghaziabad, Faridabad, Lucknow,
and Patna, amongst other cities. Its Real Estate business contributed ~11% of
FY2015 sales and ~28% of FY2015 EBIT.
NBCC’s Management highlighted that the company would pursue Real Estate
business by being selective on acquiring land parcels either individually or through
the JV model. In the near term, the company is exploring alternatives to buy 1/2
November 16, 2015
11
Initiating coverage | NBCC
Slum Rehabilitation related land packages. The company’s Management expects
this segment to report strong growth, going forward.
As a strategy, the Management has made its intent clear that rather than
depending on debt, it would re-deploy the profits generated back into the business
to purchase land parcels.
As a strategy to avoid purchasing land banks with high value (mainly in Tier I
cities), NBCC has shifted its focus on Tier II and III cities. As a result, purchase of
land parcels is resulting in less capital outflow. Also, NBCC’s Management claims
that being a government company, it has an edge in being able to procure land at
cheaper rates from various state and central governments and also get faster
approvals. The Management claims that this puts NBCC in an advantageous
position to launch and scale projects quickly at attractive rates (usually 7-12% less
than the competition; ie from private developers). Such attractive pricing strategy
and faster churn translate into large upfront sales (in some projects, owing to high
demand, the company had to depend on lottery-based mechanism) for the
company. Also, the faster churn translates to minimal cash requirement for project
execution, as well as lowering the risk of unsold inventory.
EPC business to gain traction…
NBCC was incorporated 1960, as a pure play EPC company, where the scope of
works was to provide execution, engineering and construction services for projects
such as chimneys, cooling towers, various types of power plant works, and projects
from Sewerage & Water Treatment space. Over the years, the company has
diversified across other areas and its dependency on this segment has declined.
The EPC segment contributed ~4% of FY2015 sales. Growth across this segment
in the last few years has remained subdued. However, with government shifting its
priority towards infrastructure spending, we are optimistic that NBCC would gain
from here-on. The company as a diversification strategy has started looking at
politically stable Middle East countries for EPC business. As an entry strategy,
NBCC formed JV with a local player in Oman and expects to win an order in
2HFY2016E itself. Also, its ‘Navratna’ status gives flexibility for the company to
take investment decisions up to `1,000cr. Even though international revenues
contribute negligibly to the current business, the Management expects revenues
from the international business to contribute by ~5% in the long-run.
November 16, 2015
12
Initiating coverage | NBCC
Outlook & Valuation
Strong bid pipeline, huge order book,
NBCC during FY2011-13, reported an order book CAGR of 26%, whereas slower
growth in earnings profile, coupled with
execution translated to 14.1% PAT CAGR during FY2013-15.
strong balance sheet comforts us to
assign 20.0x FY2018E P/E multiple to
NBCC as of 2QFY2016 is sitting on a huge order book of `30,000cr. Considering
arrive at value of `1,089/share. Given
this and with an uptick in re-development projects (which draw higher margins vs
the upside, we initiate coverage on the
other contracts from the PMC segment), we are optimistic towards NBCC reporting
stock with a Buy recommendation…
strong growth. We expect the company to post 26.7% top-line and 32.7% bottom-
line CAGR during FY2015-18E to `9,506cr and `653cr, respectively.
Exhibit 12: PE Band and financials
40
35
FY2011-13
FY2013-15
FY2015-18E
OB Growth - 26.0%
OB Growth - 18.2%
OB Growth - 51.8%
30
PAT Growth - 21.3%
PAT Growth - 14.1%
PAT Growth - 32.7%
25
20
15
10
5
0
Source: Company, Angel Research
Also NBCC is sitting on cash balance of `1,042cr (as of 1HFY2016-end), which
further gives comfort that growth would not get hindered due to unavailability of
capital, which has been the case for some of the other infra companies.
On considering the company’s cash rich status and strong potential to generate
further cash, we expect NBCC to report impressive FY2017/18E RoEs of 26.7%/
29.1%, respectively.
Exhibit 13: PE Band
Exhibit 14: One year forward avg. PE Band
1,400
40
1,200
35
30
1,000
25
800
20
600
15
400
10
200
5
0
0
Price
10x
18x
26x
34x
P/E (x)
Avg. P/E (x)
Source: Company, Angel Research
Source: Company, Angel Research
November 16, 2015
13
Initiating coverage | NBCC
At the current market price of `893/share, NBCC is trading at FY2017E and
FY2018E P/E multiple of 22.4x and 16.4x.
Given the strong bid pipeline, huge order book, strong earnings growth profile,
coupled with strong balance sheet comforts us to conservatively assign 20.0x
FY2018E P/E multiple to arrive at a business value of `1,089/share. Given the
upside the stock has from the current levels, we initiate coverage on the stock with
a BUY rating.
Risks to our Estimates
NBCC executes PMC or redevelopment projects which are mostly funded
and approved by the government. Government inaction may result in
execution delays and can negatively impact our growth estimates.
Slowdown in real estate demand can negatively impact our growth and
balance sheet estimates.
Currently, NBCC gets redevelopment projects on a nomination basis. Any
switch in awarding process through competitive bidding route could lower
our growth and margin estimates.
Any expansion in the equity base of the company through announcement of
a FPO could act as an overhang on the stock’s performance.
November 16, 2015
14
Initiating coverage | NBCC
Company Overview
National Buildings Construction Corporation (NBCC) is a Navratna PSU company
engaged in the business of Project Management Consultancy (PMC), Engineering
Procurement and Construction (EPC) and Real Estate development.
PMC business contributed ~85% of FY2015 sales and ~73% of FY2015 EBIT.
NBCC works on the entire project cycle, right from concept stage to commissioning
to civil construction works. NBCC gets PMC contracts on nomination basis, as it is
notified as Public Work Organization under revised Rule 126 (2) of General
Financial Rules (GFR).
The real estate business involves development of residential and commercial
projects on Government/ PSU land bank, through the joint development or land
bank development model. NBCC has 140+ acres of land parcel spread across
Delhi, Gurgaon, Kolkata, Kochi, Alwar, Meerut, Ghaziabad, Faridabad, Lucknow,
and Patna, amongst other cities. The Real Estate business contributed ~11% of
FY2015 sales and ~28% of FY2015 EBIT.
NBCC also undertakes EPC contracts, which involve civil works in the power BOP
space, and Sewerage & Water Treatment space. This segment contributed ~4% of
FY2015 sales.
As of 2QFY2016-end, NBCC had an order book of ~`30,000cr, which is 5.8x its
LTM revenues.
Employees
NBCC has strength of 2,047 regular employees, well led by a qualified and
proven Management team. Majorly, 1,100+ of them are engineers and ~1,000
are C&D workers.
Exhibit 15: Employee Split (functionality-wise)
Finance, 6%
Engineers, 46%
C&D Works,
42%
HR & Admin, 6%
Source: Company, Angel Research
November 16, 2015
15
Initiating coverage | NBCC
Exhibit 16: List of recently won Projects
Order won
Order Val.
Project details
during
(` in cr)
Construction of Trade Facilitation Centre and Crafts Museum at Varanasi, U.P.
2QFY2016
197
Re-development of Indian Institute of Public Administration (IIPA) campus at IP estate, New Delhi
2QFY2016
435
Development of Lake View Complex, on 25 acres DDA land at Trilokpuri, Delhi
1QFY2016
2,000
Construction of 2,400 seats Indoor Auditorium at Alipur, Kolkata
1QFY2016
418
Construct Medical College Campus & Upgrade Govt. Hospital at Bharatpur & Dungarpur, Rajasthan 1QFY2016
378
Develop 4 Waqf Board properties at Gulistan Shadi Mahal, Masjid-e-Mavalli, Dargah Hazrat
1QFY2016
398
Attaullah Shah (all 3 in Bangalore) and Takiya Chand Shah (in Jodhpur)
Develop 30 hectare land at East Delhi Hub, Karkardooma
4QFY2015
6,000
PMC business works from Indian Institute of Technology (IIT), Roorkee
4QFY2015
231
PMGSY works from Orissa
4QFY2015
1,237
Construction/ Improvement/ Maintenance of roads at Miao-Vijaynagar, Arunachal Pradesh
3QFY2015
1,850
Construct Engineering Core Lab, Research Complex (Phase-I) and retrofit Aerospace Engineering
3QFY2015
338
block Multi-storied building at IIT, Kanpur
Total Order Book (as of 2QFY2016)
30,000
Source: Company, Angel Research
November 16, 2015
16
Initiating coverage | NBCC
Profit and Loss Statement (Consolidated)
Y/E March (` cr)
FY14
FY15
FY16E
FY17E
FY18E
Net Sales
4,070
4,674
5,816
7,382
9,506
% Chg
14.8
24.4
26.9
28.8
Total Expenditure
3,831
4,386
5,416
6,816
8,689
Land & Materials Consumed
426
299
364
499
643
Work and Consultancy Expenses
3,169
3,835
4,734
5,921
7,564
Employee benefits Expense
182
195
248
308
378
Other Expenses
55
57
69
88
104
EBITDA
239
288
400
566
817
% Chg
20.8
38.8
41.5
44.3
EBIDTA %
5.9
6.2
6.9
7.7
8.6
Depreciation
1
2
3
3
3
EBIT
237
286
397
563
814
% Chg
20.5
38.9
41.8
44.5
Interest and Financial Charges
22
40
45
50
53
Other Income
134
147
155
169
172
PBT
349
393
507
683
933
Tax
92
115
152
205
280
% of PBT
26.3
29.2
30.0
30.0
30.0
PAT before Extraordinary item
257
278
355
478
653
Extraordinary item
0
0
0
0
0
PAT before Minority Interest
257
278
355
478
653
Minority Interest
0
0
0
0
0
Share of Profit/ (Loss) of Associates
0
0
0
0
0
PAT after MI, profit share from Associat.
257
278
355
478
653
% Chg
8.1
27.6
34.6
36.7
PAT %
6.3
6.0
6.1
6.5
6.9
November 16, 2015
17
Initiating coverage | NBCC
Balance Sheet (Consolidated)
Y/E March (` cr)
FY14
FY15
FY16E
FY17E
FY18E
Sources of Funds
Equity Capital
120
120
120
120
120
Reserves Total
1,021
1,218
1,485
1,860
2,391
Networth
1,141
1,338
1,605
1,980
2,511
Minority Interest
0
0
0
0
0
Total Debt
0
0
0
0
0
Long-term Liabilities
53
45
52
54
56
Total Liabilities
1,194
1,383
1,657
2,034
2,567
Application of Funds
Gross Block
35
42
43
47
50
Accumulated Depreciation
13
15
18
21
24
Net Block
23
26
25
25
26
Capital WIP
0
0
0
0
0
Investments
100
146
161
161
161
Goodwill
0
0
0
0
0
Current Assets
Inventories
1,020
1,173
1,274
1,604
2,140
Sundry Debtors
1,315
1,704
1,776
2,245
2,894
Cash and Bank Balance
1,201
1,067
1,571
1,839
2,221
Loans & Advances
515
612
685
926
1,125
Other Current Asset
11
16
21
26
34
Current Liabilities
3,013
3,381
3,877
4,813
6,054
Net Current Assets
1,047
1,192
1,451
1,828
2,360
Deferred Tax Asset
23
20
20
20
20
Total Assets
1,194
1,383
1,657
2,034
2,567
November 16, 2015
18
Initiating coverage | NBCC
Cash Flow Statement (Consolidated)
Y/E March (` cr)
FY14
FY15
FY16E
FY17E
FY18E
Profit before tax
334
391
507
683
933
Depreciation & Amortization Exp.
1
2
3
3
3
Other non-Cash Expenses
(122)
(158)
(158)
(171)
(177)
Change in Working Capital & Oth. Adj.
(619)
(342)
297
(61)
(97)
Cash Generated from Operations
(407)
(107)
648
454
661
Direct taxes paid
(32)
(47)
(165)
(220)
(298)
Net Cash Flow from Operations
(439)
(154)
483
234
363
(Inc)/ Dec in Fixed Assets
0
(7)
(1)
(4)
(3)
(Inc)/ Dec in Investments
718
(140)
(73)
(50)
(70)
(Inc)/ Dec in Other Investing Cash Flows
101
142
129
139
145
Cash Flow from Investing
818
(5)
55
86
71
Issue/ (Buy Back) of Equity
0
0
0
0
0
Inc./ (Dec.) in Loans
0
0
0
0
0
Dividend Paid (Incl. Tax)
(53)
(70)
(89)
(102)
(123)
Other Financing Cash Flows
0
0
0
0
0
Cash Flow from Financing
(53)
(70)
(89)
(102)
(123)
Inc./(Dec.) in Cash
327
(229)
449
218
312
Opening Cash balance & Oth. Adj.
569
896
667
1,116
1,334
Closing Cash balances
896
667
1,116
1,334
1,646
November 16, 2015
19
Initiating coverage | NBCC
Key Ratios
Y/E March
FY14
FY15
FY16E
FY17E
FY18E
Valuation Ratio (x)
P/E (on FDEPS)
41.6
38.5
30.2
22.4
16.4
P/CEPS
41.4
38.2
30.0
22.3
16.3
Dividend yield (%)
0.6
0.6
0.7
0.8
1.0
EV/Sales
2.3
2.1
1.6
1.2
0.9
EV/EBITDA
39.5
33.0
22.5
15.4
10.2
EV / Total Assets
7.9
6.9
5.4
4.3
3.3
Per Share Data (`)
EPS (fully diluted)
21.5
23.2
29.6
39.8
54.4
Cash EPS
41.4
38.2
30.0
22.3
16.3
DPS
5.0
5.5
6.3
7.3
8.7
Book Value
95
112
134
165
209
Returns (%)
RoCE (Pre-tax)
36.2
39.3
42.3
45.2
47.5
Angel RoIC (Pre-tax)
32.6
32.4
34.4
37.0
39.3
RoE
22.6
22.5
24.1
26.7
29.1
Turnover ratios (x)
Inventory / Sales (days)
91
86
77
71
72
Receivables (days)
118
118
109
99
99
Payables (days)
287
266
245
233
228
November 16, 2015
20
Initiating coverage | NBCC
Research Team Tel: 022 - 39357800
E-mail: [email protected]
Website: www.angelbroking.com
DISCLAIMER
Angel Broking Private Limited (hereinafter referred to as “Angel”) is a registered Member of National Stock Exchange of India Limited,
Bombay Stock Exchange Limited and Metropolitan Stock Exchange of India Limited. It is also registered as a Depository Participant with
CDSL and Portfolio Manager with SEBI. It also has registration with AMFI as a Mutual Fund Distributor. Angel Broking Private Limited is
a registered entity with SEBI for Research Analyst in terms of SEBI (Research Analyst) Regulations, 2014 vide registration number
INH000000164. Angel or its associates has not been debarred/ suspended by SEBI or any other regulatory authority for accessing
/dealing in securities Market. Angel or its associates including its relatives/analyst do not hold any financial interest/beneficial
ownership of more than 1% in the company covered by Analyst. Angel or its associates/analyst has not received any compensation /
managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. Angel/analyst
has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market making activity
of the company covered by Analyst.
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment
decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should
make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the
companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine
the merits and risks of such an investment.
Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and
trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's
fundamentals.
The information in this document has been printed on the basis of publicly available information, internal data and other reliable
sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this
document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies shall not be in any way
responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.
Angel Broking Pvt. Limited has not independently verified all the information contained within this document. Accordingly, we cannot
testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document.
While Angel Broking Pvt. Limited endeavors to update on a reasonable basis the information discussed in this material, there may be
regulatory, compliance, or other reasons that prevent us from doing so.
This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced,
redistributed or passed on, directly or indirectly.
Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from
or in connection with the use of this information.
Note: Please refer to the important ‘Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the
latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates may
have investment positions in the stocks recommended in this report.
Disclosure of Interest Statement
NBCC
1. Analyst ownership of the stock
No
2. Angel and its Group companies ownership of the stock
No
3. Angel and its Group companies' Directors ownership of the stock
No
4. Broking relationship with company covered
No
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors
Ratings (Based on expected returns
Buy (> 15%)
Accumulate (5% to 15%)
Neutral (-5 to 5%)
over 12 months investment period):
Reduce (-5% to -15%)
Sell (< -15)
November 16, 2015
21