www.geojit.com

Retail Equity Research (South India Focus)

NCC Ltd Construction & Engineering

BSE CODE : 500294 NSE CODE: NCC

BLOOMBERG CODE: NJCC:IN SENSEX : 39,714

Reduce

12M Investment Period Rating as per Mid Cap

CMP Rs 98 TARGET Rs 90 RETURN -8% (Closing: 01-06-19)

1st JUNE, 2019

EVENT UPDATE

AP project cancellation a near term deterrent… After the formation of new state government in Andhra Pradesh, the government has announced cancellation of some infra projects sanctioned by previous government prior to April 1, 2019. As per government, “It is noted that a number of engineering works were sanctioned earlier by relaxation of FRBM norms, resulting in huge burden on the state exchequer”.

Out of NCC’s Rs41,197cr total order book, nearly Rs15,000cr (36%) worth projects are from Andhra Pradesh. However, the company has not received any official confirmation from the government. But NCC assumes projects worth Rs6,100cr is likely to be cancelled (15% of orders). We are reducing the effective order book position accordingly given the situation, we anticipate 11% and 14% reduc-tion in revenue leading to 22% and 25% cut in PAT, respectively in FY20 & FY21. We downgrade NCC to reduce, changes will be appli-cable given more clarity from the government and management.

Company Data

Market Cap (cr) Rs.5,877

Enterprise Value (cr) Rs.7,614

Outstanding Shares (cr) 60.1

Free Float 81.88%

Dividend Yield 0.87%

52 week high Rs.137

52 week low Rs.63

6m average volume (cr) 0.6

Beta 1.4

Face value Rs2

Shareholding (%) Q2FY19 Q3FY19 Q4FY19

Promoters 18.12 18.12 18.12 FII’s 16.02 15.88 19.86 MFs/Insti 30.51 31.80 29.91

Public 34.35 34.20 32.11

Total 100.0 100.0 100.0

Price Performance 3 month 6 Month 1 Year

Absolute Return 0% 12% 6%

Absolute Sensex 9% 10% 6%

Relative Return* -9% 3% 0%

over or under performance to benchmark index

Standalone (cr) FY19A FY20E FY21E

Sales 12,080 12,156 13,016

Growth (%) 59.8 0.6 7.1

EBITDA 1,423 1,362 1,471

EBITDA Margin(%) 11.8 11.2 11.3

PAT Adj. 623 466 514

Growth (%) 58.3 (25.2) 10.3

Adj.EPS 10.4 7.8 8.6

Growth (%) 58.3 (25.2) 10.3

P/E 9.4 12.6 11.4

P/B 1.3 1.1 1.0

EV/EBITDA 5.4 5.7 5.1

ROE (%) 13.8 9.4 9.5 D/E 0.4 0.4 0.3

Antu Eapen Thomas

Research Analyst

KEY CHANGES: TARGET RATING EARNINGS

Execution is likely to be delayed… As per government, “All the works sanctioned prior to April 1, 2019, but not grounded (work not commenced) are cancelled. In the second case, the works grounded but expenditure is less than 25% of originally estimated value shall be reviewed afresh. No payment will be done in this regard before obtaining orders afresh from appropriate authorities”. Andhra Pradesh contributes Rs15,000cr of NCC’s total order book of which Rs6,100cr is likely to be cancelled due to concern that the orders were granted by relaxing Fiscal Responsibility & Budget Management Act norms (FRBM). Of the balance projects of Rs8,900cr, Rs4,500cr of projects will not be cancelled since it was tendered by the central government under affordable housing scheme, while for the remaining NCC has completed more than 25% of work which will be under review of the new state government. Due to the headwinds we reduce FY20E/FY21E revenue estimate

Valuation & Outlook

NCC’s strong and well diversified order book across different geographies and sectors provide strong visibility over the next two to three years. However, due to lack of clarity regarding execution of 25% of company’s projects, will impact the outlook of the company in FY20E & FY21E. The stock is currently trading at a 1yr fwd P/E of 10.5x which is well below the five year avg P/E of 16x. We downgrade NCC to reduce and value standalone business at a P/E of 10x on FY21E EPS & real estate business at 0.5x P/B with a TP of Rs90.

Projects Orders (Rs cr) Remarks

Total order book 41,197

Total projects in AP 15,000 36% of order book

Project not started 6,100 Likely to be cancelled

Central government project 4,500 No cancellation

Capital city development project (executed more

than 25%) 4,400 Under Review

Adjusted Order Book 30,697 2.5times of FY19 sales

Details of total order book…

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Quarterly Financials (Standalone)

Profit & Loss

Rs cr) Q4FY19 Q4FY18 YoY Growth % H2FY18 H2FY19 YoY Growth %

Sales 3,389 2,395 41.5% 6,615 4,245 55.8%

EBITDA 398 304 30.6% 790 560 41.2%

EBITDA margins 11.7% 12.7% (98)bps 11.9% 13.2% (124)bps

Depreciation 40 31 29.6% 79 61 30.3%

EBIT 357 273 30.7% 711 499 43%

Interest 117.00 99.74 17.3% 241.54 204.06 18.4%

Other Income 36 25 46.2% 56 53 5.5%

Exceptional Items

PBT 265 168 57.5% 514 287 78.7%

Tax 91 65 38.3% 179 84 112.3%

Share of profit from Associate

Minority Interest

Reported PAT 174 103 69.8% 335 203 64.8%

Adjustments 11 30 11 60

Adj PAT 186 133 40.0% 346 263 31.5%

No. of Shares 60.1 60.1 60.1 60.1

EPS (Rs) 3.3 2.4 40.0% 6.2 4.7 31.5%

Old estimates New estimates Change %

Year / Rs cr FY20E FY21E FY20E FY21E FY20E FY21E

Revenue 13,715 15,156 12,156 13,016 (11.4) (14.1)

EBITDA 1,563 1,743 1,362 1,471 (12.9) (15.6)

Margins (%) 11.4 11.5 11.2 11.2 (20)bps (20)bps

Adj. PAT 595 688 466 514 (21.7) (25.3)

EPS 9.9 11.5 7.8 8.6 (21.7) (25.3)

Particulars Value (Rs Cr) Value/Share (Rs) Rationale

Standalone EPC 5,138 86 P/E 10x FY21E EPS

Real Estate 511 4 0.5x P/BV Total Value per share 90

Change in Estimates

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27th December 2018

Standalone Financials

PROFIT & LOSS BALANCE SHEET

RATIOS CASH FLOW

Y.E March (Rs Cr) FY17A FY18A FY19A FY20E FY21E

Sales 7,892 7,559 12,080 12,156 13,016

% change (5) (4) 60 0.6 7

EBITDA 685 855 1,423 1,362 1,471

% change (7) 25 66 (4) 8

Depreciation 112 117 149 205 225

EBIT 573 737 1,274 1,157 1,246

Interest 396 379 451 554 573

Other Income 140 116 118 125 130

PBT 267 368 882 728 803

% change (17) 38 140 (17) 10

Tax 42 81 318 262 289

Tax Rate (%) 16 22 36 36 36

Reported PAT 226 287 564 466 514

Adj.* (50) (107) (59) 0 0

Adj. PAT 175 393 623 466 514

% change (20) 125 58 (25) 10

No. of shares (cr) 56 60 60 60 60

Adj EPS (Rs) 3 7 10 7.8 8.6

% change (20) 125 58 (25) 10

DPS (Rs) 0.2 0.2 0.2 0.2 0.2

Y.E March (Rs Cr) FY17A FY18A FY19A FY20E FY21E

Net inc. + Depn. 379 485 1,031 933 1,028

Non-cash adj. 350 250 140 277 271

Changes in W.C (475) (331) (430) (201) (489)

C.F. Operation 197 447 859 1,134 940

Capital exp. (135) (316) (518) (354) (100)

Change in inv. 0 (76) (37) (56) (59)

Other invest.CF 2 3 (37) 1 36

C.F - Investment 455 (359) (710) (534) (252)

Issue of equity 0 0 0 0 0

Issue/repay debt (317) (538) 573 100 (200)

Dividends paid (40) (27) (49) (49) (49)

Other finance.CF 0 0 19 4 (3)

C.F - Finance (755) (137) 91 (499) (825)

Chg. in cash (103) (50) 240 100 (137)

Closing cash 109 59 299 399 262

Y.E March FY17A FY18A FY19A FY20E FY21E

Profitab & Return

EBITDA margin (%) 8.7 11.3 11.8 11.2 11.3

EBIT margin (%) 7.3 9.8 10.5 9.5 9.6

Net profit mgn.(%) 2.2 5.2 5.2 3.8 3.9

ROE (%) 5.2 10.2 13.8 9.4 9.5

ROCE (%) 5.5 8.1 11.7 9.8 9.9

W.C & Liquidity

Receivables (days) 159.7 202.6 118.5 107.4 113.5

Inventory (days) 86.9 95.9 40.6 30.9 41.6

Payables (days) 216.6 270.3 211.6 234.3 230.4

Current ratio (x) 1.8 1.7 1.7 1.7 1.7

Quick ratio (x) 1.0 0.9 0.5 0.6 0.6

Turnover &Leverage

Gross asset T.O (x) 6.3 5.3 6.7 5.4 5.3

Total asset T.O (x) 0.9 0.8 1.0 0.9 0.9

Int. covge. ratio (x) 1.4 1.9 2.8 2.1 2.2

Adj. debt/equity (x) 0.45 0.3 0.37 0.4 0.3

Valuation

EV/Sales (x) 1.0 1.1 0.7 0.6 0.6

EV/EBITDA (x) 11.6 9.4 6.1 5.7 5.1

P/E (x) 36.5 17.5 11.1 12.6 11.4

P/BV (x) 1.9 1.5 1.3 1.1 1.0

Y.E March (Rs Cr) FY17A FY18A FY19A FY20E FY21E

Cash 109 59 299 399 262

Accounts Receivable 3,703 4,689 3,154 3,997 4,101

Inventories 1526 1696 513 1,177 1,257

Other Cur. Assets 1,848 2,382 6,741 5,595 6,347

Investments 1,029 1,024 1,119 1,175 1,234

Gross Fixed Assets 1,307 1,550 2,060 2,410 2,510

Net Fixed Assets 590 748 1,109 1,257 1,134

CWIP 1 23 14 10 10

Intangible Assets 2 2 1 1 1

Def. Tax (Net) 135 179 173 187 200

Other Assets 0 0 37 36 0

Total Assets 8,944 10,801 13,159 13,835 14,548

Current Liabilities 3,879 5,202 6,314 6,516 6,959

Provisions 37 44 62 60 664

Debt Funds 1,537 1,164 1,736 1,836 1,636

Other Liabilities 49 149 290 250 250

Equity Capital 111 120 120 120 120

Reserves & Surplus 3,331 4,122 4,637 5,053 5,518

Shareholder’s Fund 3,442 4,242 4,757 5,174 5,638

Total Liabilities 8,944 10,801 13,159 13,835 14,548

BVPS 62 76 86 93 101

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Source: Bloomberg, Geojit Research.

27th December 2018

Dates Rating Target 25th January 2017 BUY 94

26th May 2017 Accumulate 97 26th February 2018 Accumulate 138

30th May 2018 BUY 146 3rd September 2018 BUY 120

22nd November 2018 BUY 106 22nd February 2019 BUY 107

28th May 2019 BUY 142 1st June 2019 Reduce 90

Large Cap Stocks; Buy - Upside is above 10%. Hold - Upside is between 0% - 10%. Reduce - Downside is more than 0%. Neutral - Not Applicable

Mid Cap and Small Cap; Buy - Upside is above 15%. Accumulate - Upside is between 10% - 15%. Hold - Upside is between 0% - 10%. Reduce/Sell - Downside is more than 0%. Neutral - Not Applicable

To satisfy regulatory requirements, we attribute ‘Accumulate’ as Buy and ‘Reduce’ as Sell. The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being up-graded to BUY or downgraded to a HOLD, REDUCE or SELL. Neutral- The analyst has no investment opinion on the stock under review

General Disclosures and Disclaimers

Recommendation Summary (Last 3 years)

Investment Criteria

CERTIFICATION

I, Antu Eapen Thomas, author of this Report, hereby certify that all the views expressed in this research report reflect our personal views about any or all

of the subject issuer or securities. This report has been prepared by the Research Team of Geojit Financial Services Limited, hereinafter referred to as

Geojit.

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27th December 2018

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