* Acquisition to be EPS accretive from FY2018 itself:
NBCC India completed the acquisition of Hindusthan Steelworks Construction Ltd (HSCL) for Rs35 crore (for a 51% stake) on April 1, 2017. HSCL is a debt-free company and has an order backlog of Rs8,000 crore (60% PMC and 40% EPC) as of the start of FY2018. In FY2016, HSCL had revenues of Rs1,347 crore, while the Operating Profit Margin (OPM) was at ~3% and the net profit stood at Rs30 crore. The NBCC management expects HSCL’s topline to grow by ~12-15% in the next two years. Further, it has indicated that its primary focus would be to expand HSCL’s OPM and bring it to NBCC’s level of 6-7% through various cost-control measures like rationalisation of employee cost (45 permanent and 1,000 contract employees) and other administration cost. Going forward, HSCL would benefit from the merger synergies, as it operates in the same line of businesses as NBCC, and the margins in its PMC and EPC businesses are expected to expand. Therefore, NBCC’s management is confident that the merger would be EPS accretive from FY2018 itself.
* Mammoth order book to drive revenues:
NBCC is currently sitting on a massive order book of Rs 88,000 crore (15x its FY2016 revenue), including the HSCL order backlog of Rs8,000 crore. The NBCC management expects execution to pick up in FY2018 in DDA project, redevelopment of Pragati Maidan and AIIMS projects. We expect the company’s earnings to grow at a 33% CAGR during FY2016-FY2019E, as its strong order book offers a clear visibility on future growth prospects.
* Merger of more loss-making companies on the cards:
The NBCC management has indicated that the company is looking to acquire 2-3 loss-making companies out of the four companies that the Government of India plans to merge with strong companies. The NBCC management has indicated that this process may be completed in the next six months.
* Revise earnings estimates and reiterate Buy:
We have revised our earnings estimates to factor in the robust order backlog and improvement in consolidated margins, translating into a 33% CAGR in earnings during FY2016-FY2019E. Backed by a strong visibility on earnings, a lean balance sheet, high return ratios and its quasi-monopoly position, we reiterate our ‘Buy’ recommendation on NBCC with a revised price target of Rs245.
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