Small Cap : Buy Nagarjuna Construction Company Ltd For Target Rs. 120 - 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.
* Q3FY21 revenue declined by 9.4% YoY due to muted execution & impact of labour availability.
* EBITDA margin improved by 67bps YoY to 12.5% due to fall in employee cost and other expenses.
* Order book remain healthy at Rs39,182cr (5.7x TTM revenue) supported by strong inflow of Rs190bn in 9MFY21 and NCC expect Rs2,000cr of fresh orders in Q4FY21.
* Adj. PAT declined by 47% YoY due to lower volume of turnover and higher tax rate of 38%.
* NCC expect work efficiency will back to normalcy in the coming quarters and guided for Rs7,200cr of revenue (vs earlier Rs7,700cr) FY21E.
* We maintain Buy rating due to strong order book and cheap valuation with a TP of Rs120, based on a P/E of 15x on FY23E earnings.
Execution to pick up pace...
Q3FY21 revenue declined by 9.4% YoY to Rs1,918cr (below our estimate) due to muted construction activity and impact of man power availability. The company has guided for Rs2500 to Rs2800cr revenue in Q4FY21 led by pick up in execution and normalised level of work force. Currently most of the sites are opened and work efficiency has improved and targets to achieve 90% in Q4FY21. The management has guided for Rs7,200cr revenue in FY21 (vs earlier Rs.7,700cr) and expects revenue to surpass Rs10,000cr in FY22E. We therefore, increase FY21E/FY22E revenue estimate by 9%/14% respectively.
Healthy order book ...
NCC’s order book remains healthy at Rs39,182cr (5.7x TTM revenue) supported by strong order inflow of Rs190bn in 9MFY21. NCC currently has Rs4,300cr of orders outstanding from Govt. of Andhra Pradesh, all are under execution. Due to strong momentum in infrastructural verticals, NCC expects Rs2,000cr of fresh orders in Q4FY21 and guided for Rs40,000cr of order book in FY21E. In terms of sector, building (58%), water (17%), roads (6%), irrigation (6%), mining (6%), electrical division (7%) of order book.
Margins improved...
In Q3FY21, EBITDA margin improved by 67bps YoY to 12.5% on account of fall in employee cost (-18.2% YoY) and lower other expenses (-40.2% YoY). Whie gross margin declined by 105bps to 19.5% due to higher construction and sub-contracting expenses. The management highlighted that cost controlling measures, high margin orders and pickup in execution will help to attain a strong margin of 12% in FY21. Adj.PAT de-grew by 47.2% YoY to Rs70cr due to lower volume of turnover and higher tax rate of 38%.
Valuations
NCC’s comfortable order book provides visibility for the coming years. Improving work efficiency and better margin guidelines will support earnings in the coming quarters. We therefore, maintain Buy rating and value NCC at a P/E of 15x on FY23E earnings with a target of Rs120.
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