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Margin recovery on cards

NCC Ltd (NCC) is one of the largest, well diversified construction companies in India, with a foothold in every segment of the construction sector.

• NCC’s Q3FY23 revenue grew 23% YoY, backed by its strong order book and robust execution of Jal Jeevan Mission projects. • Order book remains robust at 3.6x TTM revenue (incl L1), providing strong revenue visibility in the coming years. • EBITDA margin was at 10.5% in Q3FY23 (up 92bps QoQ, down 30bps YoY), supported by easing commodity prices. NCC expects margins to improve by 10 to 20bps in Q4FY23, led by better gross margin. • With a strong order book, the company has guided for revenue growth of 30% in FY23, with a margin of 10%. • NCC expects order inflow to increase further and has raised the order inflow target to Rs 20,000cr (earlier Rs 16,000cr) for FY23. • Given the strong order book, pick up in execution and benign input prices, we increase FY23/FY24/FY25 earnings estimate by 10%/6%/3% respectively. • We maintain Buy rating and value the stock at a P/E of 9x on FY25E EPS with a TP of Rs.107.

Execution to pick up...

NCC’s Q3FY23 revenue grew by 23% YoY to Rs 3,313cr, led by strong order book and robust execution in Jal Jeevan Mission projects (JJM). During 9MFY23, the top-line grew by 37% YoY to Rs9,275cr. The company expects top-line growth of 30% YoY for FY23 as execution to pick up pace in the coming quarters. JJM project execution is underway; 25% of the work has been completed as of 9MFY23, and the company expects to complete Rs 800 cr in Q4FY23.

Benign raw material prices to support margins

Sequentially, EBITDA margin improved by 92bps Yoy to 10.5% (down 30bps YoY) supported by benign raw material prices. With the recent contraction in key raw material prices, the management expects the EBITDA margin to be in the range of 9.5% to 10% in FY23. Adj. PAT increased by 35% YoY to Rs150cr in Q3FY23.

Order book at 3.6x book to sales..

NCC’s order book remains at an elevated level of Rs 44,862cr (incl Rs 3,000cr LI order), which is 3.6x TTM revenue and provides revenue visibility. Order inflow during the quarter increased by 10% YoY to Rs 5,495cr and the management further increased the order inflow target for FY23 to Rs 20,000cr vs earlier Rs 16,000cr. Andhra Pradesh contributes Rs 5,000cr to the overall order book. NCC witnessed improvement in collections from AP projects, in 9MFY23, the company received Rs 325cr. The gross debt during Q3FY23 declined by Rs 39cr to Rs1,946cr, led by pick up in collection. Going forward, NCC expects its debt to be reduce to Rs 1,600cr to Rs 1,700cr by March’23.

Valuations

We maintained our FY23 revenue estimate and improved our EBITDA margin estimate by 20bps to 10% to factor in the benign commodity prices. We maintain BUY rating on the stock and value NCC at a P/E of 9x FY25E earnings with a target price of Rs 107.

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