Buy NBCC (India) Ltd For Target Rs.26.3 - HDFC Securities
NBCC (India) is a ‘Navratna’ public sector undertaking (PSU) in the construction space. It has decades of experience of Project management & consultancy (PMC) services for a range of civil construction, residential & commercial projects, including re-development of government colonies. NBCC has a strong market position in the PMC segment which enables it to secure orders from the central and state government organisations on a nomination basis, rather than through competitive bidding. Its timely execution and strong market hold have enabled it to receive repeat orders. Government’s high priority projects like Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and Pradhan Mantri Gram Sadak Yojana (PMGSY) has designated NBCC as an implementing agency.
Honourable Supreme Court has appointed NBCC as Project Management Consultant to complete the various projects of Amrapali Group. Jaypee Infratech went into insolvency in August 2017 - NBCC’s acquisition of Jaypee Infratech (JIL) is sub-judice.
COVID 19 related challenges continue to pose risk during FY21, impact of which could be seen in the FY22 earnings as well. Labour availability issues, project execution delays, weak real estate scenario, overall slow pick-up in demand, unfinished projects, pending approvals, altogether could spoil FY21 earnings estimates of NBCC. Although, the management expects a flattish revenue growth during FY21, workforce continuity and newer additions to it, is expected to improve by the end of Oct 2020 which will lead to fasten the pace of work. Further, the company is also hurrying the stalled projects at Jaypee Infratech Ltd (JIL) which also remain a key monitorable. However, strong order book of Rs 70,000cr (with half in PMC projects and half in re-development projects; to be carried out in five years time), and expectation of pick-up in execution resulting from the unlocking processes should manage to stabilize the situation.
Almost half of the orders of Rs.70,000cr order book pertain to ‘self revenue generating projects’ where muted conditions of realty industry is likely to constrain execution. The meeting of guidance for FY21 (20% growth) looks difficult (Management has expressed doubts due to Covid related delays) and would largely depend upon the macro-economic scenario resulting from COVID 19 implications and how fast the economy gathers itself. Q1FY21 standalone revenue was down by 65.3% Y-o-Y, with EBITDA falling by 1547.7% Y-o-Y, and PAT dropping by 69%, led by the after-effect of lockdown, with work starting from the month of June 2020. Thus, the gap created thereafter is carried forward and is expected to have its resultant effects in the coming quarters as well, unless things pick up real fast.
Valuations and Recommendations:
We forecast NBCC to script a smart turnaround in its standalone operations over the next few years. We expect NBCC’s Revenues/EBIDTA/PAT to grow at a CAGR of 5.3%/263.8%/92.8% over FY20-FY22E. Uncertainty regarding COVID -19 related challenges continue to pose risk to company’s prospects. Resolution of Jaypee Infratech acquisition matter and requirements of funds to complete Amrapali projects add one more layer of uncertainty for the company’s consolidated financials. We feel high risk takers can look to invest in NBCC on dip to Rs. 21.5 and average it at Rs. 19 , with a base case target of Rs. 24.0 (14.5xFY22E) and bull case target of Rs. 26.3 (15.9xFY22E) in next two quarters.
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