Accumulate NCC; target of Rs 90: Angel

Angel Broking's report on NCC

For 1QFY2016, NCC reported a favorable standalone earnings performance, reflecting better execution, improvement in margins and lower yoy interest expenses owing to decline in debt. On the top-line front, NCC (standalone) reported a 15.6% yoy growth to Rs 1,723cr. On sequential basis top-line declined 22.1%. Stronger execution across Water, Environment & Railways (WER), and Buildings and Roads (B&R) segments and sale of land parcel at Hyderabad (worth Rs 24.6cr), contributed to higher 1QFY2016 revenues.

NCC reported an 188bp yoy EBITDA margin improvement to 9.2%, owing to 13.3% yoy decline in other expenses. Expansion in EBITDA margin on yoy basis coupled with lower yoy interest expenses led to PAT coming in at Rs 41cr for the quarter as against a loss of Rs 3cr in 1QFY2015. NCC’s outstanding order book as of 1QFY2016 stands at Rs 18,727cr (2.2x LTM revenues, inc. International business), indicating a 5.7% yoy decline.

Outlook and valuation: "NCC’s stock price has run-up by 89.3% in the last 12 months, mainly owing to the balance sheet de-leveraging exercise pursued by the company. NCC aims to repay debt by around Rs 200-300cr through proceeds of stake sale. However stretched working capital cycle will likely inhibit the company from cutting down its debt in FY2016. We are of the view that the next leg of re-rating in the stock would come from improvement in the EBITDA margin, and further compression in the working capital cycle. Since we estimate this to happen in FY2017 only, we assign 14.0x P/E multiple to the standalone EPC business, which in-turn has restricted the target price at Rs 90/share. Given that all positives are captured in the current market price and potential upside is limited, we assign Accumulate rating on the stock", says Angel Broking research report.

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