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Andhra Pradesh overhang seems to be largely behind
NCC’s topline declined 34.4% YoY to | 2,117.2 crore on account of the high base and weak execution in Q3FY20. EBITDA margins contracted 36 bps YoY to 11.8%. RPAT declined 31.2% YoY to | 110.3 crore on account of high base but was above our expectation of | 75.8 crore on account of tax credit worth | 38.1 crore booked in Q3FY20. The company booked provisions worth | 22.9 crore in Q3FY20 for impairment of investment in international subsidiary. Adjusting for this, PBT declined 61.7% YoY to | 95.1 crore.
Order book at | 25,049 crore; stalled AP orders removed
NCC’s standalone orderbook (OB) was at | 25,049 crore, 2.7x TTM revenues. This is lower than | 33,173 crore OB reported in Q2FY20 as it has proactively removed certain non-moving orders worth | 7,130 crore pertaining to Andhra Pradesh. With this, NCC’s AP OB is now at | 4,429.3 crore, which is partly under execution. Deriving comfort from external funding of these projects, the company is confident of receiving payment for these orders. The company is L1 in projects worth | 2,000 crore. The management expects | 6,500-7,000 crore order inflow in FY20E. On the execution front, it was lower in Q3FY20 due to: a) slowdown in execution of AP orders; b) slowdown in payments in orders related Telangana, UP, Jharkhand; and c) extended rains resulted in weaker execution in certain regions in Q3FY20. Given weaker execution in 9MFY20 and sluggish order inflow in 9MFY20, revenue guidance has been revised down to | 9,000 crore in FY20E. We note that overhang related to orders in AP could be behind for NCC as it proactively removed total ~| 13,000 crore of non-moving orders in YTD FY20. Moreover, several major executable orders viz. Lucknow airport, Patna airport, three campuses of AIIMS, one defence project, MumbaiNagpur expressway, etc, could drive execution ahead.
Better collections expected to lower debt in Q4FY20E
NCC’s standalone debt increased by | 74 crore QoQ to | 2,362 crore in Q3FY20 mainly due to slowdown in payments from various states like AP, Telangana, Jharkhand and UP. Total | 300-400 crore payments are outstanding in Jharkhand, UP while in Telangana, payments worth | 200- 250 crore for work executed for water projects are pending. The management expects bulk of these payments in Q4FY20E. With this, they expect standalone debt to decline to | 1,800-2,000 crore by FY20E end.
Valuation & Outlook
Stalled projects in AP and payment related issues in certain regions have resulted in a washout FY20 for NCC. Overall, with removal of ~| 7,130 crore AP orders in Q3 (~| 13000 crore in 9MFY20), key overhang related to AP seems to be behind for NCC. Going ahead, execution could improve given large executable orders with the company coupled with expected recovery in ordering activities. NCC is currently trading at attractive 7x FY21E EPS as most of the negatives are priced in. We maintain BUY recommendation on the stock with a target price of | 70/share (5x FY21E EV/EBITDA).
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