Buy NCC; target Rs 61: AnandRathi

AnandRathi's research report on NCC

NCC's order inflows in FY13 were Rs 48.1bn (after deducting a Rs 8.5bn power order), less than the work executed, resulting in an order-book drop from Rs 202bn a year ago to Rs 185.5bn in 4QFY13 (3.2x TTM revenue). Of this, buildings, roads and power comprise 57 percent. NCC aims at order inflows of ~Rs 60bn in FY14.

BOT project update. NCC is seeking to exit its two road BOT projects (Bangalore Elevated, Western UP) and some of its real-estate projects. So far, it has been successful in selling real estate worth Rs 1bn and has signed a termssheet for the sale of its Western UP toll project. It has also exited its Himachal Sorang project. NCC Power has been short-listed by Andhra Pradesh to supply 500 MW. NCC is participating in bidding for PPA in UP and aims to tie up for 990 MW by Mar'14.

Balance-sheet improvement. Sales of real estate, Himachal Sorang and reduced working capital have enabled the company to repay debt of ~Rs 3bn in 4QFY13; the benefit is likely to flow in during FY14. It aims to further lower debt by ~Rs 3bn by Mar'14, to below Rs 20bn. Its focus on lowering working capital has led reducing debtors to 70 days in FY13, from 88 days in FY12.

Revenue growth guidance of 15 percent. The company aims at 15 percent revenue growth in FY14. We expect it to maintain its ~8 percent EBITDA margin in FY14/15 supported by the higher proportion of the NCC power project to revenue (mainly through the low-margin BTG component).

Our take. "During the quarter, debt has been reduced by Rs 3bn through the sale of real-estate projects and reducing debtors, thereby lowering its leverage to 0.9x. We retain our Buy call, with a sum-of-parts target of Rs 61, based on 8x PE of the FY14e construction business (Rs 28) and 1x/0.5x/0.8x P/BV for its road BOT (Rs 16)/ power (Rs 10) and real-estate (Rs 7) businesses. Risks. Rise in interest rates, slowdown in order inflows," says AnandRathi research report.

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