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Strong execution in Q2; to remain robust ahead…

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

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

Q2FY23 Results: NCC’s performance was marked by superior execution.

* Standalone revenue improved 36.6% YoY to | 3,003.7 crore backed by its strong order book position and pick-up in execution

* Operating margin was at 9.6% (down 115 bps YoY) with impact of higher raw material prices. Effectively, EBITDA at | 288.2 crore, was up 22.1% YoY

* Reported PAT improved 16.8% YoY to | 121.8 crore. However, adjusted to exceptional item in Q2FY22, PAT improved 66.6% on YoY basis

What should investors do? NCC’s share price has de-grown by 30% over the past five years (from ~| 103 in November 2017 to ~| 72 levels in November 2021)

* Strong execution and management guidance of continued traction along with margins improvement prompt us to raise our earnings estimates and upgrade our rating on the stock from HOLD to BUY

Target Price and Valuation: We value NCC at | 90/share (at 10x FY24 P/E)

Key triggers for future price performance:

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

* Strong order book to ensure topline growth (18.6% CAGR over FY22-24E) 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 likely with gradual decline in debt

Alternate Stock Idea: Besides NCC, we like PSP Projects in infra space.

* Quality play on building segment with strong execution/robust b/s

* BUY with a target price of | 720/share

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