Buy NCC; target of Rs 120: AnandRathi

AnandRathi’s research report on NCCNCC reported strong Q2 FY16 bottom-line growth, aided by a betteroperational performance, the sale of land and lower interest cost. Weestimate 16%/48% CAGRs in revenue/PAT over FY16-18 following thehealthy order inflows and lower leverage. We maintain our Buy call,with a sum-of-parts target of `120Revenue growth dips due to high base: Q2 FY16 revenue dipped 6.6%yoy (though up 21.7% qoq) due to the greater proportion of revenue from itspower project in Q2 FY15. Following the strong order inflow in FY16, weexpect revenue over FY16-18 to come at a 16% CAGR.On asset sales, EBITDA margin expands: The EBITDA margin rose70bps yoy to 8.8% (8.1% a year ago, 9.2% the previous quarter), supported bythe high revenue growth and sale of some of its real-estate assets.Management expects to hold to an EBITDA margin of ~8.75–9% (incl. realestate land sale) in FY16/17.Profitability soars: Net profit came at `550m, rocketing 148% and driven bysuperior execution and a steep drop in interest cost (17% down yoy) aided byreduced debt and a revised credit rating (to BBB+). We expect a similarreduction in H2 FY16.Order-book steady: The order book (on 31st Sep’15) was `174.9bn, backed byorders of ~`22.9bn in H1 Y16. Besides, last month orders of ~`20.6bn werebagged, taking the order book to `195.45bn (2.3x TTM revenue). For FY16 NCCis aiming at fresh orders of ~`80bn. It faces less competition in bidding forbuilding projects than for roads, and is geared up for fresh orders.Outlook and ValuationsAt the ruling market price, the stock trades at a core PE of 7.2xFY18e earnings. We have a Buy rating on it, with a sum-of-parts price target of`120 based on 1x book value of all assets (`23/share) and `97 for the corebusiness at a PE of 12x FY18e EPS. Risks. Rise in interest rates, slowdown inorder inflows.

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