Jitendra Kumar Gupta Moneycontrol Research
Despite optimism and management reiterating its confidence about FY19 growth, the NBCC stock continues to tumble. It has corrected about 43 percent from its high of Rs 145 a share in November last year to Rs 83 a share at present. Investors were bullish about its prospects given its strong order book, fuelling valuations to almost 58 times FY19 estimated earnings. Post-correction, valuations have dropped to about 24 times FY20e earnings, which reflect the market’s growing worry about execution of large projects and slow growth in the interim.
Because of adjustments pertaining to the Goods & Services Tax (GST), FY18 sales were impacted to the extent of about 20 percent. NBCC reported a 6.2 year-on-year decline in sales last year. Excluding such adjustments, revenue would have grown about 10 percent and profits would have been higher. In FY18, its profits grew 14.3 percent YoY at Rs 372 crore.
Execution: Key to growth
Of late, the street has been worrying about its execution, in the light of its lacklustre performance, despite a strong order book. NBCC has historically built a strong order book but execution has been lacking compared to pace of growth in the former. The company is sitting on an order book of close to Rs 80,000 crore, or 13 times its sales. This will further increase to about Rs 1 lakh crore after the acquisition of two loss making state-run entities for which it recently bid about Rs 500 crore.
The company will completely acquire Hospital Services Consultancy Company and Engineers Projects India, which is engaged in the construction business. HSCC, which is a debt free company, is sitting on an order book of close to Rs 10,000 crore while the same for EPIL stands at Rs 5,000 crore with a topline of about Rs 1,500 crore.
Given the size of its balance sheet and cash hoard, the acquisition may not look large. Any turnaround in the operation of these companies, particularly in light of its strong order book, would aid overall profitability.
Meanwhile, the management has guided for better execution in the months to come on smooth functioning of the business post-implementation of GST. The management is now executing big ticket projects worth about Rs 30,000 crore, or over 4 times its annual sales of Rs 6,890 crore, which should help in better revenue booking.
A large part of its ongoing projects include redevelopment of colonies. That apart, it also expects to monetise the land bank associated with these projects, thus boosting overall performance. The company is now deploying its resources at a faster pace to improve execution and has been book revenues as initially expected by the Street.
Valuations
During FY19 and FY20, the company is expected to report an earnings per share (EPS) of Rs 2.5 and Rs 3.5, respectively. Based on earnings, at current market capitalisation of Rs 14,800 crore, the stock is currently trading at a price-to-earnings ratio of 33 times FY19 and 24 times FY20 estimated earnings. Valuations are reasonable in the light of growth and strong order book.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
