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Execution back to normalcy...

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

* Q2FY22 revenue grew by 43% YoY (better than estimate) as construction back to normalcy and sites are operating at precovid levels.

* However, EBITDA margin declined by 286bps YoY to 10.8% due to higher commodity prices and higher sub-contracting expenses (45% YoY).

* Order book remain healthy at Rs39,112cr (4.5x TTM revenue) supported by a strong inflow of Rs5,611cr in H1FY22.

* NCC targets to add Rs14,000cr of fresh orders in FY22 due to robust order pipeline.

* Due to covid led uncertainty NCC has not given any guidance for FY22 but expects execution to pick up in H2FY22.

* We maintain Buy rating due to strong order book, increased Govt’s infra spending. We value at a P/E of 11x on FY23E EPS with a TP of Rs103.

Execution to pick up in H2FY22...

Q2FY22 revenue increased by 42.7% YoY to Rs2,199cr (above our estimate) as execution back to normalcy and sites is operating at precovid levels. Due to covid led uncertainty the company has not provided any guidance for FY22 but expects strong execution in H2FY22. The labour availability and operational efficiency across project sites have been picked up. However, the management remains conservative and guided 20% to 25% revenue growth in FY22 and 15% to 20% growth in FY23. We expect FY22 revenue to register a growth of 30% YoY due to the strong order book and pick–up in execution.

Robust order book...

NCC’s order book remains robust at Rs39,112cr (4.5x TTM revenue) supported by a strong order inflow of Rs5,611cr in H1FY22. The robust order book provides revenue visibility for three to four years. The management expects more orders from Jal Jeevan mission and the affordable housing segment. The order book is diversified across segments, 57% of the order backlog is from building division, 22% from water, environment & railways, 6% each from mining, electrical, irrigation, and 3% from roads.

Higher commodity prices impacted margins...

In Q2FY22, EBITDA margin declined by 286bps YoY to 10.8% on account of higher input cost and an increase in sub-contracting expenses (45% YoY). The management expects margins to improve in coming quarters due to pick up in execution and targets 11% EBITDA margin in FY22 (vs 11.75% to 12% targeted earlier). The management also indicated that ~72% of its orders are covered by the cost escalation clause and largely protected against input cost inflation. Adj. PAT grew by 25% YoY to Rs73cr in Q2FY22.

Valuations

NCC’s comfortable order book and focus on deleveraging balance sheet provides visibility for the coming years. We therefore, maintain Buy rating and value NCC at a P/E of 11x on FY23E earnings with a target of Rs103.

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