Small Cap : Buy Nagarjuna Construction Company Ltd For Target Rs. 100 - Geojit Financial
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Strong order book provides visibility...
NCC Limited (NCC) is one of the largest well diversified construction companies in India with a foothold in every segment of construction sector.
* Q4FY21 revenue grew by 20% YoY led by ramp up in execution on account of better availability of workforce.
* EBITDA margin declined by 179bps YoY to 11.1% due to higher input costs and higher sub-contracting expenses (54% YoY).
* Order book remain healthy at Rs37,911cr (5.2x FY21 revenue) supported by strong inflow of Rs18,953 in FY21.
* As per company, the second wave of Covid is expected to impact execution in Q1FY22, but the impact to be lower than the last year.
* Due to uncertainty NCC has not given any guidance for revenue & margin, but remain positive on long term outlook.
* We maintain Buy rating due to strong order book, increased Govt’s infra spending. We value at a P/E of 14x on FY23E EPS with a TP of Rs100.
Lockdown to impact Q1FY22 revenue...
Q4FY21 revenue increased by 20% YoY to Rs2,618cr (above our estimate) due to ramp up in execution driven by better availability of workforce. The company expects the second wave of Covid to impact Q1FY22 execution due to lockdown announced by many state governments, however, the impact to be lower than last year.
The management has refrained from giving any guidance for revenue, margin and order inflow target for FY22. The labour availability and operational efficiency across project sites have been impacted and stands 10% to 15% below pre-covid level in April– May 2021. However, NCC remain positive on long term outlook. We reduce FY22E/FY23E revenue estimate by 5%/4% respectively due to uncertainty over near term execution.
Robust order book...
NCC’s order book remains robust at Rs37,911cr (5.2x FY21 revenue) supported by strong order inflow of Rs18,953cr in FY21. The robust order book provides revenue visibility for three to four year. The management expects more orders from Jal Jeevan mission and affordable housing segment. In FY21 the company received Rs4,000cr of orders from Jal Jeevan. The company has reduced its exposure to Andhra Pradesh to 11% of order book.
Higher input cost impacted margins...
In Q4FY21, EBITDA margin declined by 179bps YoY to 11.1% on account of higher input cost and increase in sub-contracting expenses (54% YoY). The management highlighted that 65% to 70% of its orders are covered by cost escalation clause and expects margin to improve once the work efficiency across sites improves. Adj. PAT grew by 11% YoY to Rs115cr in Q4FY21.
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 14x on FY23E earnings with a target of Rs100.
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