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Ltd (NBCC)
CMP : Rs 125
Action: ACCUMULATION
April 1, 2013
Executive Summary
This is a tactical call. We currently have a 1 year view on the company and recommend a BUY. We
do not view it as a long term compounding story at present.
Minimum 50% returns expected.
This can be a sizable allocation in the portfolio. At present, a 10% allocation of the overall
portfolio is recommended.
We are leaving some space to add more shares at lower prices, if the opportunity presents itself.
Basic Data
CMP Rs.
Market
cap
Rs.cr
EV Rs.cr
FY12 Dividend
Rs.
TTM
125.55 Rs.cr
1430
130
3.5
revenue
3372
15
195/73
90%
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Business
NBCC is a PSU, with 90% Government holding. The company operates in basically 3 business segments
Biggest and most stable division. Accounts for over 90% of the total revenues.
Government ministries and departments have their own construction requirements, such as
constructing a new office building, constructing new staff quarters etc. By law, they are not
allowed to approach private sector entities for this construction. They requisition the Public
Works Department (PWD) to undertake this construction.
NBCC has been given PWD status by the Government. Hence, such ministries and departments
can also approach NBCC, instead of the overworked PWD to get their work done. This law
protects NBCCs business. Since no other entity is allowed to get into this business, there is
virtually no competition.
After getting orders, NBCC does not undertake any construction on its own, but outsources it to
private parties on tender basis. It merely supervises and manages the construction work and acts
as the nodal authority. For this, it charges a fee, ranging from 5% to 10% of the total contract
Malhar Complex, Dumas Road, Ichchanath, Surat 395007. Tel (0261) 305 5555, www.jainam.in, research.report@jainam.in
value. This business model ensures extremely low pressure on cash-flows, stable and steady
business and a clean balance sheet.
NBCC is not liable for any substandard / delayed work done by the contractor. The liability is of
the contractor. Similarly, NBCC passes any escalation in the contract work to the contractor,
ensuring fair terms for the contractor.
Currently, this division has an order book of Rs.16000 cr, which is more than 4x TTM revenues,
giving good visibility. It recently won a Rs.4200 cr project to redevelop Government housing
colonies in Delhi.
In this division, the company provides engineering and construction services to the power sector.
The services include design and execution of civil and structural works, cooling towers and
chimneys.
In this division too, NBCC does not carry out any work itself, but subcontracts the work after
getting orders on a tender basis.
Currently the division contributes negligible portion of NBCCs revenues.
NBCC has a real estate division, which operates in both residential and commercial segments.
The company has a land bank of more than 130 acres, spread across various cities predominantly
in North India. The land is a mix of owned land and that acquired on lease from the Government.
Currently, the company has two ongoing residential projects in Gurgaon and a large commercial
project in Okhla. The company expects to book Rs.100 cr revenues and Rs.33 cr profits on the
Gurgaon projects in the present quarter.
The commercial project in Okhla has 2 lakh sq ft salable area. Since the company follows
completed contract method of accounting, no revenues or profit from this project have been
booked till now. On this project alone, there is potential to earn more than Rs.400 cr revenue and
Rs.150 cr profit. These are expected to be booked in FY14 and will act as a big trigger to the stock.
The company recently purchased 3 additional parcels of land measuring a total of 10 acres for
Rs.100 cr.
As more and more projects take off, this division will contribute substantially to the fortunes of
the company, although its performance will not be consistent due to the inherent nature of the
business.
Malhar Complex, Dumas Road, Ichchanath, Surat 395007. Tel (0261) 305 5555, www.jainam.in, research.report@jainam.in
The pseudo monopoly position of NBCC makes it a relatively recession and cycle-proof business,
with stable revenues and cash flows.
Advances that the company receives give them a tremendous float. On a market cap of Rs.1430
cr, the company carries cash of Rs.1300 cr. Out of this, Rs.350 cr is NBCCs own cash, while the
rest is advances received. The company generates more than Rs.200 cr of operating cashflow
every year.
While the main PMC business gives stability to the company, the real estate business gives an
additional kicker to the profitability. NBCC has been intelligently investing the cash-flows
generated out of the PMC business into its real estate business and reaping the profitability out
of the same, due to their continuous cash float.
The management has guided PAT of Rs.225-250 cr for FY14. If full revenues and profit of the
Okhla project are booked, the actual PAT will be far higher. At the current market cap of Rs.1430
cr, with Rs.350 cr of net cash, the company therefore looks highly attractively priced. We believe
that a market cap of Rs.2400 cr + (10x FY14 PAT) is easily possible, given the performance of the
company and the real estate revenue booking in FY14.
As a PSU, the company has to distribute minimum 20% of its profits as dividend. NBCC distributes
25%. Given the high profitability for FY14, a dividend of Rs.5-6 is very much possible. High
dividend gives good floor and support to stock price even in unfavourable markets .
Malhar Complex, Dumas Road, Ichchanath, Surat 395007. Tel (0261) 305 5555, www.jainam.in, research.report@jainam.in
Final advice
NBCC is a company which has become a pseudo monopoly due to Government regulations, which
will not change in the near future. The company has healthy revenue visibility, excellent business
model, healthy cash flow and dividend and highly attractive financials and valuations.
We advise investors to buy the stock at CMP, with a 1 year view. Post booking of the Okhla
project revenues, we anticipate a good run-up in price. We would extend our holding when we
review the stock in future, depending on the circumstances.
Investors should be prepared to see a slide in stock price if an OFS is declared by the
Government. Instead of panicking, such a slide should be used to buy more shares.
Malhar Complex, Dumas Road, Ichchanath, Surat 395007. Tel (0261) 305 5555, www.jainam.in, research.report@jainam.in
Research Team
Tejas Jariwala
Research Analyst
tejas.jariwala@jainam.in
0261-3087016
Sahil Modi
Research Analyst
Sahil.modi@jainam.in
0261-3082016
Yagnesh Patel
Research Executive
yagnesh.patel @jainam.biz
0261-3082015
Nirav Kansariwala
Research Executive
nirav.kansariwala@jainam.biz
0261-3082014
Result Update
IPO/FPO Analysis
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