Recovery in Sight albeit with a Lag; Maintain BUY
IndAS 115 Adjustments Impact Net Worth by ~Rs5bn
As NBCC drives >98% of revenue from PMC (including re-development) and realty segments, a significant impact of IndAs 115 related adjustment was expected. We note that Ind AS 115 requires revenue to be recognised when an entity transfers the control of goods or services to a customer at an amount to which the entity expects to be entitled. The cumulative revenue effect under old accounting standard in term of uncompleted contracts as on April 01, 2018 stood at ~Rs11bn. Hence, NBCC has made a transitional adjustment of Rs5bn due to IndAs 115, which was on account of resultant change in assets and liabilities. However, NBCC has created one Amalgamation Adjustment Deficit Account worth Rs2.8bn (with no special mention or separate note) in its consolidated balance sheet and adjusted it with retained earnings in line with adjustments for IndAs 115. Therefore, consolidated net worth declined by Rs5.6bn YoY to Rs16.6bn and Rs2.6bn YoY decline in standalone net worth to Rs15.6bn.
Cash Generation Remains Intact;
WC Capital Remains Intact Unlike other infrastructure companies, asset light model of NBCC continues to bode well for the Company over the years. We note NBCC generated negative FCF only two times in the last nine years and aggregate FCF for last nine years stands at strong Rs7.3bn. Notably, its debtor cycle is maintained in the range of 90-120 days over the years, while its net working capital cycle has witnessed a considerable decline in the last three years to ~40-50 days currently. NBCC, with having PWO status, has been successful in getting orders (specially PMC works) at its own terms without any adverse effect on its working capital over the years.
We further note that the Company’s aggregate sum of earnest money, security deposit and advances from the clients have been clocking 11% CAGR as against revenue CAGR of 10% over the last nine years. Therefore, its working capital cycle has been maintained over the years.
Decent Traction in Recently Acquired Entities with Healthy Dividend Pay-out
Whilst the concerns over acquisition of sick government entities involved in EPC/PMC related activities remained an overhang for sometimes, acquisition of two entities in last two years is considered to be prudent considering the investment value and profit. NBCC acquired HSCL (51% stake) and HSCC (100%) with zero debt at balance sheet and at an aggregate investment cost of Rs3.2bn. While these companies operate at net margin of 2.5-5.5%, they maintain a healthy dividend payout ratio as well. Total order book of both the companies currently stands at Rs170bn (6.3x of FY19 aggregate revenue), which offers a strong revenue visibility. We expect these companies to generate >Rs550mn (adjusted with stake) annual dividend for NBCC in ensuing years.
Mammoth Order Book of Rs680bn misleads as Redevelopment Orders form >60%
There has never been any dearth of order backlog for NBCC and its order book to sales at 9.4x FY19 revenue continues to remain superior to the industry over the years. However, its order book off-late was dominated by the redevelopment orders, which currently are in the range of Rs426bn out of total order book of Rs680bn. As progress on key redevelopment projects is in slow lane, we are factoring in only Rs2.5bn and Rs4.2bn revenue from the redevelopment projects for FY20E and FY21E, respectively. Notably, PMC and EPC orders stand at Rs254bn (3.5x of FY19 revenue), which will essentially contribute to revenue in the ensuing quarters. Further, its total order inflow stood at Rs124bn (PMC orders) in FY19 and the Company had earlier guided for similar kind of order inflow for the current fiscal.
Outlook & Valuation
Over the last two years, indiscriminate delays in key redevelopment projects and likely foray into asset development business have been the major drags for the stock. While it is still difficult to ascertain about likely revenue booking from redevelopment projects, we believe sizeable opportunity in PMC business is sufficient enough to witness healthy traction, going ahead. Further, unlike other infrastructure companies, strong balance sheet, decent return ratios and sustained cash flow generation augur well for the Company. We trim down our revenue estimates by 16%/17% for FY20E/FY21E mainly to factor in prolonged delay in key redevelopment orders. However, we broadly maintain our earnings estimates for FY20E/ FY21E post factoring in lower corporate tax rate. Current valuations at 17.7x/14x for FY20E/ FY21E earnings appear to be attractive. The stock is currently trading at par valuations of the industry as against premium valuations it commanded over the years. We reiterate our BUY recommendation on the stock with an unrevised SOTP-based Target Price of Rs45
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