Moneycontrol Research
The market completely ignored the 40 percent growth in standalone sales reported by NBCC as it was worried about its falling operating margin and consolidation-related issues pertaining to its recently acquisition -- HSCL. And the company’s intention to bid for Jaypee Infra's assets only added fuel to the fire.
During Q2FY19, HSCL, which has an annual sales turnover of around Rs 1,500 crore, faced internal challenges related to employees, because of which accounts were not available for consolidation. NBCC indicated that these issues are now sorted and it hopes to consolidate these accounts in Q3FY19.
This is one of the key reasons for why the consolidated sales number has fallen and is not comparable. That apart, the project management (PMC) segment, which accounts for close to 90 percent of the company's sales, witnessed a 900 basis-point drop in profit before interest and tax (PBIT) margin. The management explained that its margin in this segment has dropped because of a change in accounting norms.
Earlier, NBCC used to recognize the advances made by clients as revenue, but this is now reported as advances and is only booked in revenue when the projects are commissioned, in the case of real estate projects. While the margin looks lower on the books of accounts, there should not be any correction considering it will be booked fully when sales are concluded. This drop in margin also impacted overall profitability. During the quarter under review, the company reported 16 percent growth in standalone profit.
Revenue visibility
The company's management has maintained its 35 percent revenue growth guidance for the current financial year, largely because of its strong order book of close to Rs 80,000 crore. The project pipeline remains strong and the company is also working to sort out issues pertaining to Delhi redevelopment projects and to start work on other real estate projects.
These projects are expected to witness traction in the second half of the current fiscal year, considering NBCC is able to obtain the necessary approvals. That apart, profit should improve by Q4FY19 as the impact of deferred revenue recognition eases.
Valuations
The stock has corrected by around 8 percent after the company's Q2FY19 results, and is currently trading at Rs 60 a share, or at around 18 times its estimated earnings for FY20. While the valuation is reasonable, investors would need clarity on sticky issues such as progress on real estate projects, operating margins, consolidation of HSCL, and utilization of cash.
NBCC is sitting on cash and cash equivalent of around Rs 1,400 crore. In a conference call with analysts, the management indicated that the company is evaluating various ways, including buyback, to utilize the cash on its books. Cash can be also preserved for real estate projects and bidding for Jaypee Infratech, which could be a big deal from NBCC’s point of view. Jaypee Infratech has a land bank of around 3,000 acres and over 25,000 apartments and villas that are yet to be delivered.
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