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Arbitration order ends a saga; INR 2bn cash inflow a positive

NCC has received arbitration order in the Sembcorp dispute which gives a net award of INR 2bn in its favour. Though the award amount is below management's expectations of INR 6- 7bn it is nevertheless positive for the stock as no cash inflow expectations are built-into the stock price in our view. Following are the details:-

* NCC and Sembcorp (Indian arm of Singapore based utility) have been involved in an arbitration for many years in respect of delays in commissioning of Sembcorp's power plant in AP whose EPC was being done by NCC.

* NCC had raised claims of INR 14.5bn against Sembcorp (for unpaid dues and BG encashment) and Sembcorp had a counter claim of INR 10.7bn against NCC for delays in commissioning and loss of profits.

* The arbitration panel has allowed NCC's claims related to BG encashment and on some other counts including accrued interest. However it did not allow NCC's claim related to recovery of retention payments withheld by Sembcorp. The arbitration panel allowed Sembcorp's claim of LD against NCC besides allowing it to forfeit the retention money among other things.

* Overall, as against net receivables from Sembcorp of INR 6.1bn in NCC's books (net of provisions already made) NCC has been allowed consideration of INR 2bn.

* If Sembcorp challenges the award (90 days to decide), it will need to deposit INR 1bn (50% of the total amount) with the court, which can be drawn by NCC against a BG.

* NCC may also separately decide to pursue its claim of c.INR 3.5bn towards retention money withheld (without staying the implementation of the current order).

* Implications: Positive implication: At least, a partial vindication of NCC's stand on the matter and cash inflow of INR 2bn. Negative implication: Potential provision/write-off of up to INR 4bn of net receivables (Net receivables of INR 6.1bn - claims allowed of INR 2bn). This would be 6.3% of NCC had standalone networth of INR 63.2bn as on Mar-23.

* Stock not factoring any cash receipts from arbitration; cash inflow of INR 2bn a positive; Upgrade to BUY: The prolonged arbitration with Sembcorp has been an overhang on the stock and an unrequired distraction which shadows the impressive turnaround in the company's operating performance. In our view the stock does not factor any expectation of cash inflow from this arbitration. Hence a cash inflow of INR 2bn, though lower than the management's expectation of INR 6-7bn, is still a positive. The potential write-off of up to INR 4bn (to be decided based on legal opinions received and view of auditors) will be a one-time impact and should marginally improve return ratios by removing unproductive capital from the balance sheet. In our view the arbitration outcome should be taken positively. Stock trades at 12.4x/11.1x FY24E/25E earnings and valuations have room to improve with the overhang over Sembcorp arbitration addressed. We upgrade to BUY with price target of INR 180 based on 14x Sept-25E core EPS.

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CIN Number : L67120MH1986PLC038784