Angel Broking neutral on NCC

Angel broking’s research report on NCCFor 2QFY2016, NCC reported a favorable standalone earnings performance, reflecting better than expected execution, and lower yoy interest expenses owing to decline in debt.On the top-line front, NCC (standalone) reported a 6.6% yoy decline to `2,096cr.On a sequential basis, the top-line grew 21.7%. Stronger execution seen acrossWater, Environment & Railways (WER) and the Buildings and Roads (B&R) segment, and sale of a land parcel (worth `29.9cr), contributed to the better-than expected 2QFY2016 revenues. NCC reported a 72bp yoy EBITDA margin improvement to 8.8%, owing to 21.3% yoy decline in raw material expenses and real estate transaction. Expansion in EBITDA margin on yoy basis coupled with lower yoy interest expenses led to PAT coming in at `55cr for the quarter as against `22cr in 2QFY2015. NCC’s outstanding order book as of 2QFY2016 stands at `17,487cr (exc.international business, order book to LTM sales ratio stands at 1.8x), indicating a 14.3% yoy decline.Outlook and valuationNCC’s stock price has run-up by 36.9% 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 `200-300cr through proceeds of stake sale. However stretched working capital cycle will likely inhibit the company from cutting down its debt in FY2016E. 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 working capital cycle. Since we estimate this to happen in FY2017E only, we assign a 14.0x P/E multiple to the standalone EPC business, which in-turn has restricted the target price at `90/share. Given that all positives re captured in the current market price, we assign a Neutral rating on the stock.

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