NBCC: Buy

Shares of state-owned engineering and construction firm National Building Construction Company (NBCC) had a great run last year, increasing six-fold. Investor interest was buoyed by the company’s strong order book growth and expectations of the high-margin property development segment ramping up.

The current stock price of ₹802 discounts the company’s trailing 12-month earnings by 30 times. The valuation is much higher than the earnings multiple of eight-nine times seen in 2012 to 2014. Still, investors with a long-term perspective of two-three years can buy the stock.

For one, the company’s earnings will get a boost from order executions over the next few years. NBCC’s high margin real-estate development business is likely to pick up over the next couple of quarters.

The company’s debt-free status, partnerships to secure overseas projects and sizeable land bank are other positives.

NBCC gets its revenue from consultancy (85 per cent share) and property development. As consultancy fee, the company earns around 10 per cent of project cost for civil works such as commercial buildings, hospitals and educational institutions.

NBCC is the default consultant for various Ministries such as Defence and Home Affairs. Besides working with the Centre, the company also does consultancy work for State Governments of Rajasthan, Odisha and Haryana on housing re-development.

The company’s current order book stands at ₹20,000 crore — nearly five times its 2013-14 annual revenue. Conversion of order book to revenues has taken over two-three years in the past. This is likely to get stretched due to approval delays and release of funds by clients.

That said, the steady addition to order book — nearly ₹6,000 crore during the first nine months of 2014-15 — is a positive.

The management is also hopeful of getting a major share in building the new capital city of Andhra Pradesh at Vijayawada — a sizeable addition to the order book position.

NBCC is also working on securing overseas contracts in Oman and other neighbouring countries through partnerships.

While the margins in the consultancy business are low, the negative working capital (through advances), along with the improving revenue visibility over the next three-four years, are positives.

Growth in the property development segment, where margins are over 20 per cent, will boost earnings. While in the recent December quarter, the company’s revenue share from this business dropped to 10 per cent (from 15 per cent), revival in sales is expected over the next one-two quarters in its existing projects and through new launches.

The management is looking to increase its revenue share from this segment to 20 per cent over the next year or so. So far, the company has delivered 12 residential commercial projects for 2.8 million square feet (msf) and is currently developing five projects for 4.4 msf. It plans to develop 18 projects for 8.1 msf in the next two-three years.

NBCC has 154 acres of land bank in 10 States, including Delhi, Uttar Pradesh and West Bengal. The company is cash-rich with a balance of around ₹1,100 crore as of September 2014 to fund expansions.

Additionally, it plans to tie-up with sick public sector undertakings with land assets including Air India. The company also has a partnership with the National Waqf Development Corporation for developing properties

NBCC’s revenues increased 9 per cent year-over-year to ₹2,897 crore in the nine months of 2014-15. Net profit, however, fell 7 per cent during the same period, dragged down by third quarter drop in profits posted by the property segment.

NBCC paid a dividend of ₹5 per share in 2013-14; and may likely increase in 2014-15. The Government owns 90 per cent shares in the company; as of now, there are no definite plans for divestment stake sale.