NBCC: On a strong wicket - Hold

While investors in many public sector companies had to be contentwith dividends and not stock price appreciation, State-owned engineering and construction firm NBCC (India) has been a bright spot. The stock has been on fire since 2014. From the split-adjusted price of ₹30 per share, it has increased to ₹253 currently.

The company’s order growth has been enviable. It increased from ₹14,000 crore in 2013-14 to ₹70,000 crore currently. This is thanks to it being the preferred choice by the Central and many State governments as well as public sector enterprises. Revenue rose from ₹4,008 crore in 2013-14 to ₹5,838 crore in 2015-16; net profit increased from ₹247 crore to ₹311 crore in the same period.

The stock, which always trades at a premium, is not cheap. The current stock price discounts the company’s trailing 12-month earnings by about 47 times, much higher than the earnings multiple of 35 times in the last three years.

However, investors with a perspective of two to three years can hold the stock, as the company is on a strong wicket. Its sizeable order book — over 11 times its annual revenue — provides good revenue visibility. Its order book is expected to grow, aided by various government redevelopment and new construction projects and should help sustain annual revenue growth, north of 25 per cent. The company has proven project execution capabilities, sizeable cash balance and land bank to steer growth.

NBCC’s mainstay for revenue is project management consultancy (PMC) that accounts for over 90 per cent share. Other revenue segments include real estate development and engineering contracts for civil works. The company is the vendor of choice for various ministries such as Defence and Home Affairs. It has also won orders from the State governments of Rajasthan, Odisha and Haryana on housing and other re-development.

Its order book has seen robust additions — more than doubling in the last year. In the last two months, NBCC bagged orders worth ₹960 crore. This includes a ₹270-crore deal from the University Grants Commission for a new building complex at the Jawaharlal Nehru University campus in New Delhi. The company’s management expects the order book by March 2017 to be ₹75,000 crore. With more re-development orders — a key strength of NBCC — likely, the order growth is expected to be robust.

Conversion of order book to revenues has taken about three years in the past; time lines are likely to be stretched as the company is taking on larger projects.

The management expects revenue to grow 25-30 per cent annually over the next two to three years.

In the June 2016 quarter, NBCC’s revenue increased 17 per cent year-on-year to ₹1,273 crore; net profit increased 16 per cent to ₹46 crore. Margin in the PMC segment remained stable, at about 6 per cent, aiding overall margin. Growing share of larger projects should aid overall margin, after six-eight quarters when execution starts.

However, growth in the high-margin property development segment has not been keeping pace. From accounting for 7 per cent of revenue in the June 2015 quarter, the segment’s share shrank to 1.4 per cent in the June 2016 quarter. Operating margin in this segment shrank from 50 per cent in the June 2015 quarter to 43 per cent this year. NBCC has 180 acres of land in 30 different locations on which it plans to do property development.

The government plans to divest 15 per cent of its stake (of 90 per cent) to meet the SEBI requirement of 75 per cent promoter holding. This can affect NBCC’s stock price in the near term. One, stake sales typically happen at a discount to market price. Two, NBCC’s stock had a low float and improved liquidity may lower the scarcity premium.

The company is also acquiring 51 per cent stake in Hindustan Steelworks Construction which is primarily into steel-plant construction. NBCC hopes to utilise synergies in the PMC segment as well as the know-how on using steel in construction of buildings. The company is a regular dividend payer and the amount has been increasing over the years; the current dividend yield is 0.8 per cent.