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Order inflow traction remains strong…

About the stock: NCC is one of the leading construction companies in India with a presence across varied verticals of the infrastructure space such as buildings, roads, water, mining and electrical with order book at | 40,020 crore as on Q2FY23.

* Well-diversified order backlog, robust execution capabilities and strong focus on debt reduction, working capital to characterise NCC over the next few years

Update: NCC has witnessed healthy order inflows in Q3FY23.

* The company has secured orders worth | 5033 crore in Q3FY23, with inflows of ~| 12150 crore in 9MFY23. We note that NCC’s order book at the end of Q2FY23 on a standalone basis was at an elevated level of | 40,020 crore (3.4x order book to TTM bill ratio). The management has guided for ~| 16,000 crore of order inflows during FY23, which is on track

* In terms of execution, the company’s topline guidance is ~30% YoY growth during FY23 (with 45.7% YoY growth reported in H1FY23) to be driven by higher executable order book and improved operating efficiency with margins likely to improve to 10% in H2FY23, up 40 bps from Q2FY23 levels

What should investors do? NCC’s share price has de-grown by 32% over the past five years (from ~| 132 in January, 2018 to ~| 90 levels currently).

* Strong execution and management guidance of continued traction along with margin improvement make us maintain our constructive view and BUY rating on the company

Target Price and Valuation: We value NCC at | 110/share (at 10x FY25 P/E).

Key triggers for future price performance:

* Firmly placed to capitalise on a huge infrastructure pipeline; continued momentum in awarding activities to translate into healthy order inflows

* Strong order book to ensure topline growth (16% CAGR over FY22-25E) with margins stable at ~10%

* Focus on monetisation of non-core subsidiaries to bring in cash flows. Unwinding of receivables to provide liquidity boost; strengthening of balance sheet is likely with a gradual decline in debt

Alternate Stock Idea: Besides NCC, we like PNC Infra in the infra space.

* Quality play on the road segment

* BUY with a target price of | 350/share

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