Maintain BUY on NCC - Execution recovery awaited - HDFC Securities

Ms. Parikshit D Kandpal, Institutional Research Analyst, HDFC Securities.

NCC (Q4FY20 Results Review): Margin recovery holds the key. Maintain ADD

NCC Ltd. reported 4QFY20 PAT at Rs 1.1bn, down 36% YoY. Adjusting for exceptional items, APAT stood at Rs 1.0bn, beating our estimate by 27%. Although revenue missed our estimates, beat on PAT was largely driven by a) EBITDA margin expansion on favourable mix of projects b) lower depreciation, interest cost and taxes. FY20 revenue stood at Rs 82bn, down 32% YoY on back of removal AP works from order book. Order inflow also remained tepid in FY20 falling 63% YoY. We expect slower execution to continue in FY21 given Covid-19 led lockdown in 1QFY21. We maintain BUY with SOTP of Rs 48/sh as current valuation already price in weak execution.

Covid-19 slows down execution further: During 4QFY20, NCC recorded revenue of Rs 21bn, taking FY20 total at Rs 82bn (vs Rs120bn in FY19 and flattish guidance for FY20, later revised to Rs 90bn in 3QFY20). Covid-19 led lockdown impacted execution in the second half of Mar-20 and NCC expects 1QFY21 to also be severely impacted. Although management shied away from providing revenue guidance, NCC was able to start work on 90% of the projects as they had retained labor force at key construction sites. We remain conservative and build in Rs 70bn of revenue in FY21 factoring in slower execution. EBITDA margin expanded by 75bps in FY20 despite slower execution on back of favorable mix of higher margin road, water and mining projects. We expect EBITDA margin to contract by 142 bps in FY21 on fixed cost absorption on lower revenue base.

Orderbook at Rs265bn: NCC had Rs 265bn of order backlog as of FY20 end (ex. slow moving/cancelled AP orders, AP - Rs 45bn order book). About 50% of the order book is in buildings and 17% in water. Rest is distributed among road, electrical, irrigation, mining, international and others. Management believes ordering activity to pick up from 2QFY21 as govt. tries to kick start economy. We build in Rs 60/100bn orders for FY21/FY22.

Balance sheet position comfortable: Although receivables reduced to Rs 26bn from Rs32bn YoY, debtors days increased to 107 days from 92 days on tepid execution. NWC increased from 107 to 157 on low rev base. Debt stood at Rs 20bn with D/E ratio of 0.37x which we believe is comfortable. NCC has not availed loan moratorium relief as of now, but has shown interest in doing so as interest on term loan created would be low and this would also help in cashflow management.

We maintain BUY on NCC with TP of Rs 48/sh as 1) current valuation more than factors in weak execution 2) improved visibility on net executable order book after removal / descoping of AP orders and 3) positive surprise on order wins as NCC looks to replenish the order book. Key risks to our estimates 1) Deterioration in NWC days & 2) Weak real estate monetization.

Shares of NCC Limited was last trading in BSE at Rs.25.6 as compared to the previous close of Rs. 23. The total number of shares traded during the day was 3378666 in over 4959 trades.

The stock hit an intraday high of Rs. 26.9 and intraday low of 23.9. The net turnover during the day was Rs. 88048555.

Source : Equity Bulls

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