NBCC - Diwali Picks 2012 - IIFL

Debt-free PSU + large cash balance + positive OCF

Majority of the companies operating in the real estate/infra sector are loaded with substantial debt which depresses their profitability during revenue slowdown. Debt-free status for National Building Construction Company (NBCC) has helped the company to expand its size significantly over a period of time and leaves scope for leveraging as and when required. That apart, the company has large cash balance of Rs13bn, including Rs7bn advances from clients. Excluding advances, the cash on books is 35% of its current market capitalization. Further, unlike most peers, NBCC has been generating positive operating cash flows, highlighting its impressive operating efficiency.

Robust order book provides revenue visibility

NBCC's huge order book of Rs149.8bn, 4.3x FY12 revenues, provides strong revenue growth visibility for the next 2-3 years. Over the years, the company has developed expertise in three segments viz. a) project management consultancy, b) civil infrastructure for power sector and c) real estate development. This lends a better revenue profile through order book diversification and reduces dependency risk. Furthermore, under PMC segment, NBCC plans to diversify geographically by undertaking overseas projects. This, we believe, will help the company capture significant growth opportunities present in the overseas market.

We expect the company to witness 14% revenue CAGR over FY12-14 aided by the sale of 0.22msf Okhla (Delhi) commercial property from H2 FY13 and revenue recognition of Kidwai Nagar real estate development from H1 FY14. Management has guided for revenue of Rs39bn for FY13, 12.5% growth over FY12.

Multiple levers to profitability expansion

We like the company's strategy of focusing on high value orders (Rs 1bn or above) in PMC and civil infrastructure for power segment. Stringent prequalification requirements coupled with high financial barriers in these high value projects ensure limited competition. Besides, projects having a high order value have a smaller percentage of overhead cost offering a higher profit margin. Further, margin expansion over the next two years will be driven by higher contribution from high margin real estate division. We expect OPM to expand by 100bps over the next two years, translating into 15.5% earnings CAGR over FY12-14.

Attractive valuation in view of sound fundamentals

NBCC, unlike many peers, has strong set of financials with a) Negative net debt, b) 20%+ return ratios, c) negative working capital cycle and d) consistent positive free cash flow generation for the past 5 years. We believe, current valuations do not factor in the high growth visibility and robust financials of the company and is attractively priced. Hence we recommend BUY.

Source : Equity Bulls

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