NBCC: Buy

Stock investors typically shy away from the real estate sector due to perceived risks in the business.

But National Building Construction Corporation (NBCC), a state-owned engineering and construction firm, is unlike most other players in this sector. The company is the preferred consultant for ministries such as Defence and Home Affairs and institutions such as IIT. The company’s strong order book from the Government, planned expansions in the property development segment, and strong financials set NBCC a cut above other construction consultants and developers.

Although the stock had a slow start since its listing in March 2012, it has shot up by as much as three times in the last four months, boosted by expansion plans and being conferred with the Navratna status.

After the run-up to ₹394, the stock trades at 18 times its 2013-14 earnings. While this is higher than the eight-nine times it had traded in the past, improved revenue and margin growth prospects justify the premium. The company’s re-rating to the higher multiple is likely to stay, as it should be a key beneficiary from higher Government spending in infrastructure and the expected turnaround in the construction segment.

Investors with a long term perspective can take this bet. NBCC’s cash-rich balance sheet, Government orders and its good execution track record are positives.

Good revenue visibility NBCC derives revenues primarily from two sources — project management consultancy (PMC) and property development. PMC accounts for over 80 per cent of revenue and 75 per cent of the company’s profit.

NBCC acts as a consultant for a range of civil construction projects for the Centre, and earns a fee of 10 per cent of the project cost for its services. There is no capital employed and with upfront payments, the segment uses no working capital.

The company’s order book as on March 31, 2014 had ₹14,200 crore in ongoing projects and ₹2,800 crore in future projects — about four times its 2013-14 revenue.

NBCC’s strong execution record has aided a 30 per cent year-on-year increase in its order book, with 54 orders for ₹3,042 crore awarded in the last six months of 2013-14.

Contracts to redevelop old Government housing societies are also in various stages of approval. The company’s order book is expected to grow to ₹20,000 crore in 2014-15. Also, being the implementation agency for Government programmes such as JNNURM, higher Government spending on infrastructure should translate into a surge in orders in the next few years.

Profitability to rise The company’s property development business is expected to increase its contribution.

Construction revenue of ₹625 crore in 2013-14 accounts for 15 per cent of the company’s total sales. But thanks to a higher margin of around 16 per cent, this segment brought in 30 per cent of profits.

NBCC has completed 12 residential and commercial projects, and has five projects of 4.4 million square feet (msf) under execution.

It plans to develop 18 projects (8.1 msf) in the next three years. NBCC’s current land bank of 154 acres in 10 states and its plans to tie up with many public sector companies with land assets will aid sales growth of 25 per cent and margin target of about 20 per cent. Also, land acquisition with an investment of ₹300-400 crore is planned for 2014-15.

Financial performance NBCC’s revenue increased 20 per cent year-on-year to ₹4,008 crore in 2013-14, while its net profit increased over 20 per cent last year to ₹247 crore. The management expects that over the next six years, revenue and profit could grow at an annual rate of 30 per cent and 40 per cent, respectively.

The company is debt-free with a cash balance of ₹600 crore as of March 2014. The Central Government owns 90 per cent stake in the company and there are plans to divest equity during the second half of 2014-15, likely increasing liquidity in the stock.