avendus on ncc
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India Equity Researc
Construction & Engineerin
July 7, 2011
B U Y NCC
Target Price (INR) 108 A cut above the rest
INITIATING COVERAGE The new segments entered into in the past five years now contribute
33% of NJCC’s order book. The current standalone book‐to‐bill ratio o
2.7x is the highest in the past five years. The company is jointlydeveloping a 2x660MW thermal power plant; leading to INR3.5bn o
pending investments for development projects on hand. We forecast a
three‐year CAGR of 11% in revenue and 9% in PAT without factoring in
orders from the thermal power project. We estimate the fair P/E and
EV/EBITDA for the stock at 7.0x and 5.5x, respectively. Based on the
average of the two methods, and taking INR53/share as the value o
investments, we arrive at our Jun12 TP of INR108. We initiate coverage
with a Buy rating. Sustained high working capital and larger funding
requirement for the power project are the key risks.
New segments aid higher growth; business moves up the value chain
Since 2006, NJCC has entered into five segments that are higher up on the
construction value chain and which today account for c33% of the order book
Without their contribution, the order book would have grown at a CAGR of 15%
over FY07‐FY11, instead of the reported CAGR of 24%. The diversification ha
been achieved without impacting EBITDA margins, which have increased by 70
bp over the past five years, an indication of NJCC’s strong execution capabilities.
Focus on power project development; INR3.5bn investment pending
The five road BOT projects undertaken by NJCC are complete. The pending
equity commitment remains high, at INR3.5bn, on account of the 2x660MW
project being jointly developed in Nelcast Energy. NJCC has significant exposure
to real estate with a stake‐adjusted land bank of c300 acres, with INR7bn o
financial support through equity and loans to subsidiaries. Given the adversemacro conditions, we estimate the return on real estate investments to remain
insignificant.
Forecast three‐year CAGR of 9% in PAT, with more back‐ended growth
The book‐to‐bill ratio of the parent company, at 2.7x, is the highest in the pas
five years, driven by orders in the buildings and power segments. We forecast a
three‐year CAGR of at 8% in order inflows, leading to a CAGR of 11% in
revenue. The three‐year PAT CAGR is forecast at 9%, with a decline in PAT in
FY12, before recovering over FY13‐FY14. With c25% of assets held a
investments, we forecast the RoE in FY14 to remain low, at 8.4%, while core
ROIC is forecast at 12.3%.
Buy with a TP of INR108; investment value‐unlocking holds the key
We estimate NJCC’s standalone fair P/E at 7.0x and EV/EBITDA at 5.5x. Based
on the average of the two methods, estimate the fair value of the standalone
business at end Jun12 at INR55/share. We estimate the value of investments in
subsidiaries at INR53/share using varying P/B multiples. Our Jun12 TP o
INR108 is arrived at based on the SOTP method. We initiate with a Buy. Value
unlocking from investments is a key trigger, while a sustained high working
capital and larger funding requirement for the power project are the key risks.
Last Price (INR) 83.1Bloomberg code
Reuters code
Avg. Vol. (3m)(mn)
Avg. Val.(3m)(INRmn)
52‐wk H/L (INR)
Sensex
MCAP (INRbn/USDmn)
Shareholding (%) 12/10 3/11
Promoters
MFs, FIs, Banks
FIIs
Public
Others
Stock Chart (Relative to Sensex)
Stock Perfm. (%) 1m 6m 1yr Absolute
Rel. to Sensex
Financials (INRmn) 03/11 03/12f 03/13f
Sales
YoY (%)
EBITDA (%)
A.PAT
Sh o/s (diluted)
A.EPS (INR)YoY (%)
D/E (x)
P/E (x)
EV/E (x)
RoCE (%)
RoE (%)
Quarterly Trends 06/10 09/10 12/10 03/11
Sales (INRmn)
PAT (INRmn)
NJCC IN
NGCN.BO
1.08
194 / 74.6
7.5
6
6
13.7
414
10,865
11.7
7.9
7
8
12,013
0.7
209
7.1
0
10
6.9
500
‐15
0.8
11.7
6
9.6
1,824
9.9
1,827
1.2
‐36.0
‐32.2
11
9.8
1,552
229
7
13,355
229
7.1
18
14,504
20.0 20.0
18,727
21.31 / 479
102
15.9
38.4
11.5
18.9
14.2
50,737
‐54.5
‐62.9
‐0.9
‐3.3
422
35.4
13.6
12.1
61,906 55,684
6.0
444
7
50
100
150
200
250
Jul10 Nov10 Mar11 Jul11
Nag. Constructn. Sensex Rebased
Devang Patel, +91 022 66842861
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Construction & Engineering 2
Investment Summary
NJCC’s construction business has been moving up the value chain with the entry into new segments over the past five
years. These segments, accounting for c33% of the current order book, have aided the CAGR of 24% in the order book
over FY07‐FY11. The business has expanded smoothly without impacting EBITDA margins, which have increased by
70‐bp over the period. In its international foray, the company has had its most notable success, as the business
contributed c25% to the FY11 consolidated PAT. Over the next two years, we estimate the bulk of NJCC’s incremental
investments go towards its joint thermal power development project. Assuming the project achieves financial closure
and private equity investment in FY12f, we estimate the pending equity commitment for BOT projects at INR3.5bn.
Domestic orders in the buildings and power sector have been gaining traction, leading to standalone book‐to‐bill ratio
of 2.7x ‐ the highest in the past five years. We forecast a three‐year CAGR of 11% in revenue and 9% in PAT. We
estimate the fair P/E and EV/EBITDA for the stock at 7.0x and 5.5x, respectively. Based on the average of the two
methods, and taking INR53/share as the value of investments, we arrive at our Jun12 TP of INR108. We initiate
coverage with a Buy rating. Sustained high working capital and larger funding requirement for the power project are the
key risks.
EPC moves up the value chain; focus on large thermal power project
NCC (NJCC) has moved its construction business up the value chain by diversifying across segments and
into new geographies. The five segments entered into since 2006 today account for c33% of the order
book and have contributed significantly to the CAGR of 24% in the order book over FY07‐FY11. With its
strong capabilities in construction, the company has managed the transition without any adverse impact
on profit margins—as seen in the 70‐bp improvement in EBITDA margins over the past five years. The
company has also managed significant growth in its international business, which in FY11 contributed 14%
of the order book, 19% of consolidated revenues and c25% of consolidated PAT. NJCC has significant
exposure to real estate with a stake‐adjusted land bank of c300 acres, with INR7bn of financial support
through equity and loans to subsidiaries. However, on account of the adverse macro conditions, the
company has had limited success in unlocking value from the business; it is unlikely to further invest in the
business. In the development business, five road BOT projects are complete and incremental focus is
likely to be on the power sector. We estimate the pending investment commitment at INR3.5bn, most of
which will be for the 2x660MW thermal power project that currently awaits financial closure.
3‐year CAGR in PAT forecast at 9%, more pain in the near term
NJCC’s adjusted book‐to‐bill ratio has been on the rise over the past two years on the back of
improvement in orders in the domestic business—notably in the power and buildings segment. At 2.7x
currently, the book‐to‐bill ratio is at its highest in the past five years. We forecast a CAGR of 8% in
order inflow during FY12f ‐FY14f, implying moderation from the three‐year CAGR of 24% over FY08‐
FY10—without factoring in the inflows from its power development projects. We do not forecast
significant improvement in execution, given the rising share of the buildings and power segments in
the order book. We forecast a three‐year CAGR of 11% in revenue. PAT is forecast to decline in FY12
due to the higher interest cost burden, leading to a three‐year CAGR of 8%. After declining sharply in
FY11, we forecast cash flow generation to improve over FY12‐FY14 on the back of an improving
working capital cycle and declining investment requirement in development projects. With c25% of
assets locked in un‐yielding investments, the RoE is forecast to remain at the low level of 8.4% in FY14,
though core ROIC is forecast to improve by 162‐bp to 12.3% over FY12‐FY14.
Initiate with Buy, Jun12 TP of INR108; value unlocking the key
NJCC, adjusted for the value of investments, currently trades at a one‐year forward P/E of 6.6x and
EV/EBITDA of 5.0x. Its discount to the Sensex and Larsen and Toubro’s (LT IN, Hold) one‐year forward
P/E has been widening over the past one year and currently stands at 54% and 70%, respectively. We
estimate the fair P/E for NJCC at 7.0x, supported by a three‐year CAGR of 9% in PAT. We estimate the
fair EV/EBITDA at 5.5x, implying c10% improvement from current levels. Based on the P/E method, we
The five segments entered
into since 2006 today
account for c33% of the
order book
With c25% of assets
locked in un‐yielding
investments, the RoE is
forecast to remain at the
low level of 8.4% in FY14,
though core ROIC is
forecast to improve by
162‐bp to 12.3% over
FY12‐FY14
We initiate coverage with
a Buy rating and a 30%
upside to Jun12 TP of
INR108
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India Equity Research NCC
Construction & Engineering 3
estimate the Jun12 fair value of the EPC business at INR53/share, based on Jun13f EPS of INR7.6. Based
on 5.5x EV/EBITDA, we estimate the fair value of the EPC business at INR56/share. We arrive at the fair
value of INR55/share for the standalone EPC business based on the average of the fair values derived
from the P/E and EV/EBITDA methods. Our Jun12 TP of INR108 is arrived at based on the SOTP method,
after adding INR53/share as the value of NJCC’s investments in BOT, real estate and the international
business—arrived at using varying P/B multiples. We initiate coverage with a Buy rating and a 30%
upside. Our DCF‐based value estimate for the construction business is higher, at INR93/share. Pruning
the balance sheet and unlocking value from investments hold the key for further re‐rating in the stock
as c50% of our target price is derived from the value of unlisted investments. Sustained high working
capital and larger funding requirement for the power project are the key risks.
Exhibit 1: One‐year forward P/E and target P/E (x)
‐
10
20
30
Jul08 Apr09 Feb10 Nov10 Sep11 Jun12
1‐year forward P/E Average P/E Target P/E
Target = 7.0x
Average = 13.6x
Source: Company, Bloomberg, Avendus Research
Exhibit 2: Relative premium to Sensex and LT P/E
‐120
‐80
‐40
‐
40
80
Jul08 Feb09 Sep09 Apr10 Nov10 Jul11
Premium to Sensex P/E (%) Premium to LT P/E (%)
Source: Company, Bloomberg, Avendus Research
Exhibit 3: Valuation summary (standalone)
(INRmn) Net Sales EBITDA Net Profit EPS (INR) P/E^ (x) EV/EBITDA ̂(x) EV/Sales ̂(x) P/B (x)
Mar10 47,778 4,834 1,831 7.1 4.3 3.5 0.3 1.1
Mar11 50,737 4,876 1,780 6.9 4.4 5.1 0.5 0.9
Mar12f 55,684 5,463 1,552 6.0 5.0 5.1 0.5 0.9
Mar13f 61,906 6,136 1,827 7.1 4.3 4.7 0.5 0.9
Mar14f 69,635 6,971 2,314 9.0 3.4 4.2 0.4 0.8
Source: Company, Avendus Research ^Note: Multiples after excluding INR53/share as value of investments
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Construction & Engineering 4
Table of Contents
Investment Summary ........................................................................................................................ 2 EPC moves up the value chain; focus on large thermal power project .................................................2 3‐year CAGR in PAT forecast at 9%, more pain in the near term ..........................................................2 Initiate with Buy, Jun12 TP of INR108; value unlocking the key ..............................................................2
EPC moves up the value chain, focus on developing power project ................................................. 5 Order book diversification rises without margin compromise..............................................................5 International presence an advantage though growth currently slow ...................................................5 Large real estate land bank of 300 acres, with exposure of INR7bn .....................................................6 Low returns from real estate on poor sales; investments are locked ...................................................7 BOT business focused on roads and power projects.............................................................................7 Estimate pending equity at INR3.5bn for projects under development ..................................................8
Three‐year CAGR in PAT forecast at 9%, more pain in the near term............................................... 9 Steady growth in order book; book‐to‐bill ratio up on domestic orders .................................................9 3‐year CAGR of 8% in order inflow, power segment lends upward bias..................................................9 Execution forecast to remain subdued with a change in composition ...............................................10 Forecast two‐year CAGR of 11% in revenue and 9% in PAT ................................................................11 Working capital cycle up sharply, forecast reversal to FY10 level.......................................................11 Cash flow to improve on better working capital cycle, low investment ................................................11
Initiate with a Buy and Jun12 TP of INR108, value unlocking the key ............................................. 13 Relative discount to LT P/E at close to its highest in the past 3 years.................................................13 Estimate gradual re‐rating on slow earnings recovery; fair P/E at 7x .................................................14 Balance sheet pruning may trigger further P/E re‐rating ....................................................................14 Target EV/EBITDA pegged at 5.5x; 27% discount to 3‐year average...................................................15 Base‐case DCF value of construction business pegged at INR93/share ..............................................15 Jun12 TP of INR108 based on average of P/E and EV/EBITDA methods...................................................16 Initiate coverage with a Buy rating and 30% upside ...........................................................................17 Risk factors ..........................................................................................................................................18
Financials and valuations (standalone)............................................................................................ 19
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EPC moves up the value chain, focus on developing power project
NJCC has moved its construction business up the value chain by diversifying across segments and into new geographies.
The five segments entered into since 2006 today account for c33% of the order book and have contributed significantly to
the CAGR of 24% in the order book over FY07‐FY11. With its strong capabilities in construction, the company has managed
the transition without any adverse impact on profit margins—as seen in the 70‐bp improvement in EBITDA margins over
the past five years. The company has also managed significant growth in its international business, which in FY11
contributed 14% of the order book, 19% of consolidated revenues and c25% of consolidated PAT. NJCC has significant
exposure to real estate with a stake‐adjusted land bank of c300 acres, with INR7bn of financial support through equity and
loans to subsidiaries. However, on account of the adverse macro conditions, the company has had limited success in
unlocking value from the business; it is unlikely to further invest in the business. In the development business, five road
BOT projects are complete and incremental focus is likely to be on the power sector. We estimate the pending investment
commitment at INR3.5bn, most of which will be for the 2x660MW thermal power project that currently awaits financial
closure.
Order book diversification rises without margin compromise
Exhibit 4: Break up of order backlog (%)
23
17
22
1921 24
14 2523
1621 16
36
43
24
158 8
22
11
8
7 5 10
5 4
6
3 5 53
‐ ‐
10
2127 21
35
13
5
11
14
0%
25%
50%
75%
100%
Mar05 Mar06 Mar07 Mar08 Mar09 Mar10 Mar11
Building Water Roads Irrigation ElectricalInternational Power Metals Oil & Gas Mining
Source: Company
The number of segments NJCC operates in has increased from 5 in Mar06 to 10 currently. As a result,
the share of the top three segments in Mar06 has declined from 85% to 63% by Mar11. The company
has managed a large diversification in its business over the past five years and has entered new
segments and verticals. Its diverse order book and sizeable presence showcases its strong capabilities
in the construction sector.
The segments added in Mar06 today account for 33% of the order book and have significantly added to
order book growth. The order book has grown at a five‐year CAGR of 24%. If the new segments are
excluded,
the
order
book
would
have
grown
at
a
five‐
year
CAGR
of
15%.
The company has managed to diversify the business smoothly, without any significant compromise on
profit margins—as is usually the case with the industry. Standalone EBITDA margins have increased by
70‐bp over the past five years, increasing from 8.9% in FY06 to 9.6% in FY11.
International presence an advantage though growth currently slow
The company has grown its international business aggressively over the past five years, eyeing strategic
advantages in terms of geographic de‐risking and opening up new avenues of growth with wider and
larger bidding. Its engineering and construction expertise has helped establish its presence in the Dubai
and Oman markets—where NJCC operates through three subsidiaries.
The order book has grown
at a five‐year CAGR of 24%
but excluding the new
segments, would have
grown at a five‐year CAGR
of 15%
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Construction & Engineering 6
In FY11, the international business contributed 14% to the order book, 19% to consolidated revenues
and c25% of consolidated PAT.
Exhibit 5: International orders booked
Location Scope Value (INRbn)
Oman 66‐km expressway linking Al‐Falaj with Khatmalah 16.0
Dubai
DEWA
Water
Pipeline
7.1Abu Dhabi 588 villas at Al Alin 6.8
Oman Al Batina Coastal Road 18.1
Oman Al Amerat Quriyat Road (70kms) 6.8
Oman Wadi Adai Amerat Road 6.5
Oman 718 villas at Quriyat City 8.9
Oman Water Pipeline, Sohar City 0.8
Source: Company, Avendus Research
After posting a CAGR of 57% in revenues over the past three years, the international business has
currently reached a stage of consolidation and we believe the management is likely to proceed with
caution. Revenues in FY11 are largely flat on a y‐o‐y basis. The segment’s contribution to the order
book has declined from 27% in Mar09 to 14% in Mar11, while on absolute basis the order book has
decreased by 29%.
Large real estate land bank of 300 acres, with exposure of INR7bn
NJCC has significant interests in the real estate development business with total stake‐adjusted current
land bank of 300 acres. The company has been in the business since 1996. A separate entity ‐ NCC
Urban Infrastructure ‐ was carved out in Dec05 to focus on the real estate business. The company owns
80% stake in NCC Urban, while the promoters own the rest. Apart from NCC Urban, there are three
large projects that are being carried out by the parent company or by its direct subsidiaries (Exhibit 6).
Exhibit 6: Summary of real estate projects (INRmn)
Projects City Stake Type of Development Acres Built‐up area
(mn sq. ft.)
Acreage
(Co. Share)
Built‐up area
(mn sq. ft.) (Co share)
Status
NCC Urban 287 11.04192
6.02
Gachibowli Hyderabad 70% Residential 9 1.16 5 0.65 Ongoing
NGHC Ranchi 88% Residential 56 1.75 40 1.23 Ongoing
Meadows Bangalore 60% Residential 8 0.65 4 0.31 Ongoing
Premier Bangalore 55% Residential 2 0.19 1 0.08 Ongoing
Aster Park Bangalore 80% Residential 3 0.31 2 0.20 Ongoing
Maple Heights II Bangalore 100% Residential 2 0.18 2 0.14 Ongoing
Green Valley Cochin 100% Residential 89 0.18 71 0.14 Ongoing
Laurel Cochin 100% Residential 1 0.16 1 0.13 Ongoing
Gajularamaram Hyderabad 25% Residential 38 1.46 8 0.29 Pending
Kompally Villas Hyderabad 100% Residential 37 0.68 30 0.54 Pending
Poppalaguda Hyderabad 100% Residential 9 0.90 7 0.72 Pending
Bachupally Hyderabad 100% Residential 18 1.40 14 1.12 PendingSymphony Apts Chennai 100% Residential 9 0.57 7 0.46 Pending
NCC Harmony Dubai Residential & Commercial 4 1.45 ‐ ‐ Ongoing
NCC 204 17.68 126 10.36
JHLP Hyderabad 25% Residential & Commercial 6 0.90 2 0.23 Pending
Tellapur Technocity Hyderabad 26% Residential & Commercial 100 7.50 26 1.95 Pending
Gajularamaram Hyderabad 75% Residential 4.38 ‐ 3.29 Pending
NCC Vizag Urban Visakhapatnam 100% Residential & Commercial 98 4.90 98 4.90 Pending
TOTAL 491 28.7 318 16.38
Source: Company, Avendus Research
In FY11, the international
business contributed 14%
to the order book, 19% to
consolidated revenues
and c25% of consolidated
PAT
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Construction & Engineering 7
The company’s real estate land bank is spread over six cities. There are 17 projects planned by the
group, of which 12 are currently ongoing. NJCC’s total monetary exposure to real estate stands at
INR7bn, spread evenly in the form of equity infusions and loans to subsidiaries.
Low returns from real estate on poor sales; investments are locked
Exhibit 7: NCC Urban’s financial snapshot
(INRmn) FY07 FY08 FY09 FY10
Revenue 7 322 1,401 1,222
EBITDA N.A. N.A. 540 341
Interest N.A. N.A. 436 460
PAT 0 15 58 ‐132
Net Worth 1,499 1,513 1,570 1,437
Debt N.A. N.A. 4,460 4,892
EBITDA margin (%) 38.5 27.9
PAT margin (%) 4.2 ‐10.8
D/E (x) 2.8 3.4
Interest/Sales (%) 31 38
Source: Company, Avendus Research
With real estate sales remaining lackluster, the group has had limited success in monetizing its land
bank so far. NCC Urban’s performance deteriorated in FY10, with a fall in revenue and margins.
Coupled with a growing debt burden and high interest outgo, the entity reported a loss in consolidated
numbers. The performance improved in FY11 with revenues picking up by 36% to INR1.65bn but the
PAT was just cINR30mn. Nevertheless, the returns from its real estate investments remain poor.
Although the company is not planning to invest further in the business, its existing investments may
remain locked in as the outlook for the business is likely to be impacted in the rising interest rate
scenario.
BOT business focused on roads and power projects
NJCC focuses on development projects in the roads and power spaces. It formed NCC Infrastructure
Holdings in FY06 as a 100% subsidiary to act as the holding company‐cum‐developer for such projects.
NJCC forayed into the BOT space in 2003 with its first BOT‐Annuity project in the road sector.
It currently has a portfolio of five road projects, two hydro projects and one thermal power project—as
consortium partner. Of the five completed road projects, three have been completed in the past six
months (after considerable delays due to land acquisition problems faced by the NHAI).
Exhibit 8: Summary of BOT assets (INRmn)
Project Partner Type Capacity
(km/MW)
Concession
date
Concession
(yrs)
Cost Stake (% ) Equity
share
Pending
Road projects 27,230 3,418 ‐
Bangalore ‐ Madurai Maytas^, KMC Annuity 63 Nov03 16 2,475 33.3 150 ‐
Bangalore Elevated Tollway Maytas, Soma Toll 24 Jan06 20 9,067 35.4 1,203 ‐
Orai‐Bhognipur‐Barah KMC Annuity 63 Apr06 15 5,848 67.9 940 ‐
Meerut‐Muzzafarnagar Maytas, Gayatri Toll 79 Sep05 6,690 30.0 795 ‐
Pondicherry‐Tindivanam Maytas Toll 38 Jul07 30 3,150 49.0 330 ‐
Power projects 97,122 16,764 ‐
Himachal Sorang Maytas 100 Jun07 ‐ 7,522 95.0 1,588 655
Nelcast Energy Gayatri 1,320 ‐ 70,000 55.0 11,550 10,665
Himalayan Green SMEC International 280 ‐ ‐ 19,600 50.0 3,626 3,311
Total 124,352 20,182 14,631
Source: Company, Avendus Research ^Note: Name changed to IL&FS Engineering and Construction Company
NJCC’s total monetary
exposure to real estate
stands at INR7bn
NCC Urban performance
improved in FY11 with
revenues picking up by
36% to INR1.65bn but the
PAT was just cINR30mn
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Construction & Engineering 8
The environmental clearance for the company’s 2x660MW thermal power project at Sompeta,
Srikakulam District in Andhra Pradesh, was withdrawn in Jul10, following which NJCC is considering
shifting the plant to another location. It has incurred pre‐operative expenses of cINR830mn on the
project, including INR450mn on land.
In Jan11, the company bought 55% stake in another project of 2x660MW being developed by Nelcast
Energy, at Krishnapatnam District in Andhra Pradesh. The project is currently in the development stage
with all land and clearances already acquired and is awaiting financial closure.
Estimate pending equity at INR3.5bn for projects under development
The equity commitment for road projects has been fully invested and the projects are already
complete. NJCC is unlikely to be an aggressive bidder for upcoming NHAI projects (as seen in past
bidding). The investment in power projects under development is comparatively larger and is likely to
entail a much larger share of incremental investments by the company.
The company has paid INR1.5bn for its 55% stake in Nelcast Energy. We estimate an additional INR3bn
of equity investment to be required by NJCC, assuming 49% stake is sold in the project to a private
equity investor at a premium of 1.33x P/B.
The
total
equity
commitment
pending
for
all
development
projects
is
estimated
at
INR3.5bn
including
Nelcast Energy and Himachal Sorang project and INR6.5bn including the Himalayan Green project
which is currently under development.
Exhibit 9: NJCC's investment commitment for 55% stake in Nelcast Energy project
(INRmn) Investment stage Total NJCC's share
Capacity (MW) 1320
Project cost 70,000
Project equity (70:30 D:E) 21,000 11,550
Acquisition cost paid On acquisition 2,700 1,485
Equity infusion required for financial closure (30%) 6,300 3,465
Balance equity pending for financial closure On financial closure 4,690 2,580
Equity pending post financial closure 14,700 8,085
Equity value for PE stake sale (1.33x P/B) 27,930 15,362
Equity infusion by PE (49% stake) 13,686 7,527
Promoter equity required excluding PE infusion 7,314 4,023
Balance post FC and PE During construction 1,014 558
Source: Company, Avendus Research
Revocation risk for INR1.2bn guarantee, unless Nelcast Energy up by 2015
Pursuant to the company’s successful tariff ‐based bidding (case 1) with the Karnataka state electricity
board, it has provided a commitment to supply 400MW at INR3.89/unit from 2014, along with a
performance guarantee of INR1.2bn. Unless the Nelcast Energy project is completed by 2015, the
company faces the risk of forfeiting its guarantee.
In Jan11, the company
bought 55% stake in
another power project of
2x660MW being
developed by Nelcast
Energy – currently
awaiting financial closure
We estimate an additional
INR3bn of equity
investment to be required
by NJCC in Nelcast Energy
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Three‐year CAGR in PAT forecast at 9%, more pain in the near term
NJCC’s adjusted book‐to‐bill ratio has been on the rise over the past two years on the back of improvement in orders in
the domestic business—notably in the power and buildings segment. At 2.7x currently, the book‐to‐bill ratio is at its
highest in the past five years. We forecast a CAGR of 8% in order inflow during FY12f ‐FY14f, implying moderation from
the three‐year CAGR of 24% over FY08‐FY10—without factoring in the inflows from its power development projects. We
do not forecast significant improvement in execution, given the rising share of the buildings and power segments in the
order book. We forecast a three‐year CAGR of 11% in revenue. PAT is forecast to decline in FY12 due to the higher
interest cost burden, leading to a three‐year CAGR of 8%. After declining sharply in FY11, we forecast cash flow
generation to improve over FY12‐FY14 on the back of an improving working capital cycle and declining investment
requirement in development projects. With c25% of assets locked in un‐yielding investments, the RoE is forecast to
remain at the low level of 8.4% in FY14, though core ROIC is forecast to improve by 162‐bp to 12.3% over FY12‐FY14.
Exhibit 10: Quarterly order backlog trend
120
140
160
180
Jun09 Sep09 Dec09 Mar10 Jun10 Sep10 Dec10 Mar11
0%
10%
20%
30%Order backlog (INRmn) y‐o‐y (%, RHS)
Source: Company, Avendus Research
Exhibit 11: Book‐to‐bill ratio (x) trend
3.2
3.43.3 3.4
3.2
3.3
3.2
3.4
2.6
2.7
2.7 2.7
2.5
2.7 2.7
2.9
2.0
2.6
3.2
3.8
J un 09 Se p0 9 D ec 09 Ma r1 0 J un 10 Se p1 0 D ec 10 Ma r1 1
Reported BTB ra tio Adjusted BTB ratio
Source: Company, Avendus Research
Steady growth in order book; book‐to‐bill ratio up on domestic orders
NJCC has maintained steady growth in the consolidated order backlog over the past two years, with
growth mostly maintained at over 15% on y‐o‐y basis. The company reports a consolidated order
backlog, which includes the share of international orders, although revenues from the same are not
reflected in standalone results. We have, therefore, computed the adjusted book‐to‐bill ratio as seen in
Exhibit 11.
The international business has slowed down in the past one year, hence the pace of new orders has
declined. In FY11, NJCC only international booked orders worth INR1.7bn—representing 3% of the
consolidated order booking during the period.
The book‐to‐bill ratio in the standalone company has been on the rise during Jun10‐Dec10 on the back
of improvement in orders in the domestic business. Most notably, order inflows have improved in the
buildings and power segments during FY11, leading to the book‐to‐bill ratio improving to 2.7x – a level
matching or higher than that seen in seven of the past eight quarters and the highest in last five year
ends (Exhibit 11 and 13).
3‐year CAGR of 8% in order inflow, power segment lends upward bias
From FY07 to FY10, order inflows grew at a three‐year CAGR of 24%. Growth during the period was
aided by the international and power segments. In FY11, growth in international segment has been
muted, while that in the buildings segment has picked up.
Order inflows have
improved in the buildings
and power segments
leading to 2.7x book‐to‐
bill ratio – highest in last
five year ends
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Exhibit 12: Order inflow forecast
40
60
80
100
FY07 FY08 FY09 FY10 FY11 FY12f FY13f FY14f
‐50
0
50
100Order Inflow (INRbn) y‐o‐y (%, RHS)
24% CAGR 8% CAGR
Source: Company, Avendus Research
Exhibit 13: Book‐to‐bill ratio (x) forecast
1.7
1.9
1.3
2.6
2.2
2.5
1.21.21.2
1.3
2.2
2.6
2.4
2.7 2.72.7
1.0
1.8
2.6
3.4
FY07 FY08 FY09 FY10 FY11 FY12f FY13f FY14f
Order inflow/Revenue (x) B‐T‐B ratio (x)
Source: Company, Avendus Research
We forecast a three‐year CAGR of 8% in order inflows, implying a moderation in growth compared to
the FY07‐FY10 period. We believe the pace of growth in the buildings segment is likely to slow as
interest rate increases may impact the sector. We have not factored in any orders from the
international business, given the uncertainties in the region over the short to medium term.
Our order inflow/revenue assumption of 1.2x over FY12f ‐FY14f is marginally below the average of 1.3x
over FY08‐FY10 as we believe a high base effect may impact the growth rate. The share of power
sector orders has been on the rise. Also, NJCC has been looking to increase its presence in the EPC/BOP
space. The company is looking to book orders worth cINR50bn in FY12f from its own 2x660MW
thermal power development project. We have conservatively not included it in our forecast and it
lends an upward bias to our order inflow assumptions. However, such EPC orders with a longer
execution cycle (four years or more) are unlikely to impact our revenue forecast to the same extent.
Based on our order inflow forecast, the company is likely to maintain a comfortable book‐to‐bill ratio
of 2.6x and above.
Execution forecast to remain subdued with a change in composition
Exhibit 14: Trend in order backlog execution rate
40
4645
3938
44
46
39
35
40
45
50
FY07 FY08 FY09 FY10 FY11 FY12f FY13f FY14f
Source: Company, Avendus Research
We have conservatively
not included INR50bn of
potential power EPC
orders from Nelcast
Energy in our order inflow
forecast
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Exhibit 15: Profit margin trend (%)
9.49.0
5.3
10.09.99.89.6
10.110.4
4.7
3.33.53.93.7
2.8 3.0
2.5
5.5
8.5
11.5
FY07 FY08 FY09 FY10 FY11 FY12 f FY13f FY14f
EBITDA margin PAT margin
Source: Company, Avendus Research
Exhibit 16: Revenue and PAT growth trend (%)
‐35
0
35
70
FY07 FY08 FY09 FY10 FY11 FY12f FY13f FY14f
Revenue (y‐o‐y) PAT (y‐o‐y)
Source: Company, Avendus Research
The FY11 standalone revenue was 13% below the company’s guidance due to:
Extended monsoons impacting execution in the southern region.
Execution stalled due to delay in payments by clients.
Projects affected by delayed clearance and land acquisition problems.
As a result of the above, the execution rate declined significantly in FY11. We believe the delay in
payments and land acquisition‐related problems may persist. Hence, we believe the execution rate
may continue to be impacted. In addition, the average execution cycle of the order book is likely to
increase with the rising share of power segment orders. In the buildings segment, the delay in client
payments may further increase with the tightening liquidity scenario, leading to slower execution of
projects. Taking the above into consideration, we have not forecast only marginal improvement in the
execution rate over FY13‐FY14.
Forecast two‐year CAGR of 11% in revenue and 9% in PAT
Based on our forecasts of a three‐year CAGR of 8% in order inflows, and marginal improvement in the
execution rate, we forecast a three‐year CAGR of 11% in revenue. EBITDA margins were impacted in
FY11 by the slowdown in revenue growth. We forecast EBITDA margins to improve gradually on the
back of a favorable revenue mix, with a high share of the buildings segment.
PAT is likely to decline further in FY12f, due to sliding PAT margins, before recovering at a 2‐year CAGR
of to 22% during FY13‐FY14. PAT margins are forecast to be hurt on account of higher interest costs—
as a result of high working capital and investments in development and real estate projects.
Working capital cycle up sharply, forecast reversal to FY10 level
The net working capital cycle (calculated as days’ sales outstanding) has been on the rise over FY07‐
FY10. In FY11, it has risen further by 28% to 156 days on account of an increase in debtor’s days and
loans and advances.
After stretching in FY11, we believe the management is likely to focus more on improving receivables
and, hence, forecast the working capital cycle in FY14 to revert to the FY10‐level. A higher share of
development projects may lead to further improvement in the working capital cycle.
Cash flow to improve on better working capital cycle, low investment
Cash flow generation has declined significantly in FY11 on account of a decline in margins, increase in
working capital cycle and higher investments in development projects. Operating cash flow generation
The average execution
cycle may increase with
the rising share of power
segment orders
PAT is likely to decline
further in FY12f, due to
sliding PAT margins,
before recovering at a 2‐
year CAGR of to 22%
during FY13‐FY14
The
working
capital
cycle
has risen further in
FY11by 28% to 156 days
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is forecast to turn positive over FY12‐FY14 on higher margins and reduction in the working capital
cycle. We have assumed investments of INR2.5bn in FY12f and INR1bn in FY13f for power projects. We
have not assumed any outflow on account of the 280MW hydro project as it is still under development
and is awaiting finalization of its DPR. The capex/revenue is forecast to remain stable at 2.5x, based on
the steady revenue growth forecast over FY12‐FY14.
Exhibit 17: Working capital trend (days' sales outstanding)
166
210 205
52
204
185
215223232
127139148
154
122109
83
40
80
120
160
200
240
FY07 FY08 FY09 FY10 FY11 FY12f FY13f FY14f
Debtors & Advances Net working capital
Source: Company, Avendus Research
As a result of the above, free cash flow generation is forecast to remain negative, leading to an
increase in gearing. The net debt/equity ratio is estimated to rise from 0.7x in FY11 to 0.8x in FY14f.
Apart from a high working capital cycle, c25% of assets are locked up as investments in subsidiaries,
which is higher than that for peers, and may increase further with large investments in the thermal
power project under development. As a result, the ROCE is forecast to decline to 6.2% in FY12f and
improve marginally by 85‐bp over FY12‐FY14 on higher profit margins and the improving working
capital cycle. The ROE is forecast to remain at low level of 8.4% in FY14f through core ROIC is forecast
to improve by 162‐bp over FY12‐FY14 to 12.3%.
Exhibit 18: Cash flow/revenue (%) trend and composition
‐16
‐8
0
8
16
FY07 FY08 FY09 FY10 FY11 FY12f FY13f FY14f
OCF/Revenue Capex/Revenue Investments/Revenue
Source: Company, Avendus Research
Exhibit 19: Net D/E and profitability trend
6
9
12
15
18
FY07 FY08 FY09 FY10 FY11 FY12 f FY1 3f FY14f
0.0
0.3
0.6
0.9
1.2
ROIC (%) ROE (%) Net D/E (x, RHS)
Source: Company, Avendus Research
Operating cash flow
generation is forecast to
turn positive over FY12‐
FY14
Free cash flow generation
is forecast to remain
negative, leading to an
increase in gearing
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Construction & Engineering 13
Initiate with a Buy and Jun12 TP of INR108, value unlocking the key
NJCC, adjusted for the value of investments, currently trades at a one‐year forward P/E of 6.6x and EV/EBITDA of 5.0x.
Its discount to the Sensex and Larsen and Toubro’s (LT IN, Hold) one‐year forward P/E has been widening over the past
one year and currently stands at 54% and 70%, respectively. We estimate the fair P/E for NJCC at 7.0x, supported by a
three‐year CAGR of 9% in PAT. We estimate the fair EV/EBITDA at 5.5x, implying c10% improvement from current levels.
Based on the P/E method, we estimate the Jun12 fair value of the EPC business at INR53/share, based on Jun13f EPS of
INR7.6. Based on 5.5x EV/EBITDA, we estimate the fair value of the EPC business at INR56/share. We arrive at the fair
value of INR55/share for the standalone EPC business based on the average of the fair values derived from the P/E and
EV/EBITDA methods. Our Jun12 TP of INR108 is arrived at based on the SOTP method, after adding INR53/share as the
value of NJCC’s investments in BOT, real estate and the international business—arrived at using varying P/B multiples.
We initiate coverage with a Buy rating and a 30% upside. Our DCF‐based value estimate for the construction business is
higher, at INR93/share. Pruning the balance sheet and unlocking value from investments hold the key for further re‐
rating in the stock as c50% of our target price is derived from the value of unlisted investments. Sustained high working
capital and larger funding requirement for the power project are the key risks.
Relative discount to LT P/E at close to its highest in the past 3 years
Exhibit 20: Relative premium to Sensex and LT P/E
‐120
‐80
‐40
‐
40
80
Jul08 Feb09 Sep09 Apr10 Nov10 Jul11
Premium to Sensex P/E (%) Premium to LT P/E (%)
Source: Company, Bloomberg, Avendus Research
Exhibit 21: One‐year forward EV/Sales and EV/Invested Capital
0.1
0.4
0.7
1.0
1.3
1.6
Jul08 Feb09 Sep09 Apr10 Nov10 Jul11
EV/Sales (x) EV/Invested Capital (x)
Source: Company, Bloomberg, Avendus Research
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NJCC currently trades at a discount of 54% and 70% to the Sensex and LT’s P/E, respectively. This is
significantly lower than the average of the past three years’ discount of 12% and 41% to the Sensex
and LT’s P/E, respectively. Between Oct09 and Aug10, NJCC has traded at a premium to the Sensex.
However, the relative discount since then has considerably widened—a result of deteriorating
fundamentals. The current EV of the company is lower than the invested capital with the EV/Invested
Capital ratio at 0.76x compared to past three‐year average of 1.06x. The low EV/IC ratio is not
reflecting the comparatively higher core construction ROIC of the company of 11.5% in FY11.
We have used the adjusted P/E for NJCC ‐ computed after reducing the value of investments from its
price on rolling basis. The investments have historically been valued at a P/B basis including real estate
valued at a discount to book value; leading to a blended multiple of 0.9x.
Estimate gradual re‐rating on slow earnings recovery; fair P/E at 7x
NJCC is currently trading at a one‐year forward adjusted P/E multiple of 6.6x compared to the average
P/E of 13.6x over the past three years. Given our forecast of a comparatively slower earnings growth
and lower ROIC compared to its past averages, NJCC is unlikely to trade at its average historical P/E.
We estimate the fair one‐year forward P/E for NJCC at 7.0x, supported by our forecast three‐year CAGR
in PAT of 9%. Based on FY13f EPS growth, our target P/E implies a PEG ratio of 0.4. However, we
believe a further re‐rating in the stock is likely to be constrained by the low average RoE of 7.3% over
FY12f ‐FY14f.
Our fair target P/E for NJCC implies its discount to LT is likely to reduce from the current 70% to 62% to
our implied target P/E of 18x for LT.
Accordingly, based on the Jun13 EPS forecast of INR7.6, we estimate the fair value of the construction
business (standalone) based on the P/E method at INR53/share.
Exhibit 22: One‐year forward P/E and target P/E (x)
‐
10
20
30
Jul08 Apr09 Feb10 Nov10 Sep11 Jun12
1‐year forward P/E Average P/E Target P/E
Target = 7.0x
Average = 13.6x
Source: Company, Bloomberg, Avendus Research
Balance sheet pruning may trigger further P/E re‐rating
Apart from a high working capital cycle, c25% of NJCC’s total assets are estimated to be locked up in
the form of investments in its various subsidiaries and development projects, resulting in low asset
turns and RoE. Divestment of stake in development projects and faster payback on real estate
investments are likely to help improve the RoE and trigger a further re‐rating. On the other hand, the
increasing share of own BOT projects in the order book is likely to further depress the RoE, besides
increasing gearing and raising the dilution risk.
The low EV/IC ratio is not
reflecting the
comparatively higher core
construction ROIC of the
company of 11.5% in FY11
Our fair target P/E for
NJCC implies its discount
to LT is likely to reduce
from the current 70% to
62% to our implied target
P/E of 18x for LT
Divestment of stake in
development projects and
faster payback on real
estate investments are
likely to help improve the
RoE and trigger a further
re‐rating
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Construction & Engineering 15
Target EV/EBITDA pegged at 5.5x; 27% discount to 3‐year average
Exhibit 23: One‐year forward EV/EBITDA, target EV/EBITDA and ROIC
2
5
8
11
Jul08 Apr09 Feb10 Nov10 Sep11
2
8
14
20
EV/EBITDA (x) Target EV/EBITDA (x) ROIC (%, RHS)
Average = 6.8xTarget = 5.5x
Source: Company, Bloomberg, Avendus Research
NJCC is currently trading at a one‐year forward EV/EBITDA of 5.0x, a discount of 19% to its past three‐
year average of 6.8x. We believe the EV/EBITDA is unlikely to revert to its mean as the forecast ROIC is
lower than its past average. We forecast the core construction ROIC of 11.5% in FY11 to remain stable
at the same level on average over FY12‐FY14—significantly lower than the average of 18.1% over FY07‐
FY10. The forecast CAGR in EBITDA over FY12‐FY14 is likely to be higher, at 12.7%, compared to 10.7%
over the past three years.
We estimate the fair EV/EBITDA for Jun12f at 5.5x, assuming c10% improvement from current levels
and a c10% premium to peers such as Simplex Infrastructure (SINF IN, Buy) and IVRCL Infrastructures
(IVRC IN, Buy), considering (i) NJCC’s comparatively higher historical multiple, (ii) higher growth
prospects on account of orders from its own power project and (iii) a comparatively more diversified
order book. We estimate the fair value of the construction business based on the EV/EBITDA at
INR56/share.
Base‐case DCF value of construction business pegged at INR93/share
We have estimated the base‐case fair value of NJCC’s construction business at INR93/share using the
three‐stage DCF method. The key assumptions are:
The first stage in the DCF uses our explicit forecasts during FY12‐FY14.
In the second stage, we have assumed 10% revenue growth till FY25f, assuming a prolonged
consolidation phase amongst the large players in the industry. We have assumed EBIT margins to
remain similar to that in FY13f. We have assumed the working capital cycle to improve to 120 days
– similar to its peer and the level seen in FY10; this is likely to lead to an increase in the average
ROIC to 15.5%.
In the third stage, revenue growth is assumed at 5% and EBIT margins are estimated to fall further,
till the ROIC converges with the WACC.
For the WACC calculations, we have assumed a beta of 1.5x, based on beta (as per Bloomberg data) for
the past five years. We have assumed a leverage of 1:1 as a stable rate.
We estimate the fair
EV/EBITDA for Jun12f at
5.5x, assuming c10%
improvement from
current levels and a c10%
premium to peers
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Exhibit 24: DCF assumptions and summary
Key parameters ‐‐‐‐‐‐‐‐‐‐ Stage‐I: 3 years explicit ‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐‐ Stage‐II: 12 years ‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐‐ Stage‐III: 10 years ‐‐‐‐‐‐‐‐‐‐
Year FY12f FY13f FY14f Over stage I FY15f FY26f Over stage II FY27f FY36f Over stage III
Revenue growth (%) 9.8 11.2 12.5 11.1 CAGR 10.0 10.0 10.0 CAGR 5.0 5.0 5.0 CAGR
EBIT margins (%) 8.5 8.6 8.7 8.6 Average 8.7 8.7 8.7 Average 8.4 5.9 7.1 Average
Tax rate (%) 33.0 33.0 33.0 33.0 Average 33.0 33.0 33.0 Average 33.0 33.0 33.0 Average
Gross
asset
turnover
(x)
5.1
5.0
4.9
5.0
Average
4.9
4.9
4.9
Average
4.9
4.9
4.9
AverageWCAP (days sales) 147.7 138.7 127.4 137.9 Average 126.8 120.0 123.4 Average 120.0 120.0 120.0 Average
ROIC (%) 10.7 11.4 12.3 11.5 Average 12.9 15.5 14.4 Average 14.9 12.5 13.9 Average
DCF value as on Mar11 (INRmn) % of EV WACC assumption (%) Sensitivity analysis
Explicit period cash flows 5,398 14 Risk‐free rate 8.00 WACC (%)
Stage‐II cash flows 14,552 36 Mkt. Risk Prem. 6.00 11.5 12.5 13.5
Stage‐III cash flows 11,384 28 Beta (x) 1.50 4.0 114 88 69
Terminal value 8,635 22 Cost of equity 17.0 5.0 121 93 71
Total EV 39,969 100 Cost of debt 13.0 T e r m i n a l g r o w t h
( % )
6.0 130 99 75
Less: Gross debt 25,148 Debt/Total capital 50.0
Add: Investments & Cash 8,093 WACC 12.8
Equity value 22,913 Terminal growth 5.0
No of shares (mn) 257
Value/share (INR) (Mar12) 89
Value/share (INR) (Jun12) 93
Source: Company, Avendus Research
Exhibit 25: DCF model – free cash flow and ROIC forecast
0
4
8
12
16
FY1 2f FY1 4f FY1 6f FY1 8f FY2 0f FY2 2f FY2 4f FY2 6f FY2 8f FY3 0f FY3 2f FY3 4f FY3 6f
8
10
12
14
16
Free Cash Flow (INRbn) ROIC (%,RHS) WACC (%,RHS)
Source: Avendus Research
Jun12 TP of INR108 based on average of P/E and EV/EBITDA methods
We estimate the fair value of NJCC’s EPC business at INR55/share. This is based on the average of the
fair values derived using the P/E and the EV/EBITDA methods. Our Jun12 target price is based on the
sum‐of ‐the‐parts method and includes the value of NJCC’s interests in three other businesses. The
multiples used for valuations are assumed on the following considerations:
NCC Infrastructure currently has few operational projects, with a significant history of operations
and indications of profitability. For NCC Infrastructure we have assumed a value lower than that for
other listed holding companies, assuming a certain discount for illiquidity.
The returns on the real estate investment have been poor and at the risk of falling further, given the
adverse headwinds for the sector. NCC Urban reported a large loss in FY10 and managed a PAT of
just INR31mn in FY11. Hence, we have assumed a discount on P/B basis.
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From the international subsidiaries, the company has earned a RoE of c40% in FY10, albeit on a low
asset base. We refrain from assigning a P/E multiple, given the limited resource commitment to the
business. Instead, we use a more conservative P/B method. Assuming a normal RoE and factoring in
a holding company discount for illiquidity, we assign a P/B of 1.0x for the business.
Exhibit 26: Sum‐of ‐the‐parts target price computation
Business Investment Valuation approach Value (INRmn) Price/share % of TPParent EPC business 7.0x P/E 13,612 53 49
Parent EPC business 5.5x EV/E 14,383 56 52
Average for EPC business 13,997 55 51
BOT investments 9,986 1x P/B 9,986 39 36
Real estate investments 3,838 0.5x P/B 1,919 7 7
International subsidiaries 1,596 1x P/B 1,596 6 6
Value of investments 15,419 13,500 53 49
SOP target 27,498 108 100
Source: Avendus Research
Initiate coverage with a Buy rating and 30% upside
We initiate coverage on NJCC with Jun12 target price of INR108 and a Buy rating. Our target price is at
a 30% upside from the current price. At our target price, the stock would trade at 6.2x P/E and 5.1x
EV/E on FY13f. Value un‐locking from BOT assets may improve NJCC’s cash flows and trigger further
upsides in the company supported by improving PAT growth trajectory forecast over FY13f ‐FY14f.
At the current price, excluding the value of investments, NJCC is trading at 5.1x and 4.3x FY12f and
FY13f, respectively. This implies a 4% discount to IVRC on FY12f and is in line with the lower ROE of the
company.
Exhibit 27: Peer valuation comparison (%)
CMP ‐‐‐‐‐ P/E (x)^ ‐‐‐‐‐ ‐‐‐‐‐ EV/EBITDA (x)^ ‐‐‐‐‐ EBITDA margin PAT margin ROIC ROE 3‐year forecast growth
(INR) FY12f FY13f FY14f FY12f FY13f FY14f FY12f FY12f FY12f FY12f Revenue EBITDA PAT
IVRC 71.5 5.3 4.8 4.1 4.4 4.3 4.1 9.8 3.1 12.4 9.1 11.2 11.6 8.0
SINF 267.9 10.7 8.8 6.8 5.7 5.0 4.3 9.7 2.3 9.0 10.9 12.2 12.2 16.2
Peer weighted average 7.5 6.4 5.2 4.9 4.6 4.2 9.8 2.8 11.0 9.8 11.6 11.8 11.4
NJCC 83.1 5.0 4.3 3.4 5.1 4.7 4.2 9.8 2.8 10.7 6.4 11.1 12.7 9.2
Source: Bloomberg, Avendus Research ^Note: Excluding value of investments (VOI) of INR34 for IVRC and INR53 for NJCC
We initiate coverage on
NJCC with a 30% upside to
our Jun12 target price of
INR108 and a Buy rating
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Risk factors
Risks to execution: The changing order book composition raises fresh execution challenges. Sector‐
wide problems such as delays in land acquisition and financial closures may impact segments such
as power, roads and buildings, which together constitute c50% of the order book. The working
capital cycle has increased by 28% in FY11 to 156 days and may impact the pace of execution going
forward.
Delay in power project execution: Delays in financial closure or private equity investment in the
Nelcast Energy project may increase the capital commitment from NJCC and adversely impact cash
flows and return ratios.
High gearing and low promoter stake limits room for dilution: The gross/debt equity is forecast to
remain at over 1.1x over FY12‐FY14; at this level, it is likely to raise the need for dilution in the
future. However, at 20%, the promoter holding is low, which may restrict the firm’s financial
flexibility in raising fresh capital; thus, affecting growth.
Exposure to real estate: Rising interest rates and tightening liquidity are likely to most affect
execution in the buildings segment. The buildings segment accounts for the largest share of the
company’s order book. It may also strain the financials of NCC Urban, and which may require
further support from NJCC in the form of loans. Of our estimated target price, 7% is contributed by
the company’s investments in real estate projects.
Sharp increase in interest rates: A sharp increase in interest rates is likely to impact the growth of
new orders. It may also adversely impact the working capital cycle and directly impact profitability
through higher cost of debt. Buildings and industrials are two of the key constituents of the order
book that are most likely to be impacted by higher interest rates.
Risk to margins on account of raw material prices and entry into new segments: The company has
entered new segments where it is yet to establish a significant market share. Due to this, the
company may face low pricing power. Also, adverse raw material price movement may have a
significant impact on margins, especially for long gestation projects.
Large exposure to state government projects; higher exposure to political factors: A significant
share of orders comes from various governments and their enterprises. The receivables may be
adversely affected by the fiscal health of these governments. Growth in orders from the sector may
slow down, leading to higher competition.
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Construction & Engineering 19
Financials and valuations (standalone)
Income statement (INRmn)Fiscal year ending 03/10 03/11p 03/12f 03/13f 03/14f
Gross sales 47,778 50,737 55,684 61,906 69,635
Less: Excise duty 0 0 0 0 0Net sales 47,778 50,737 55,684 61,906 69,635
Other operating income 0 0 0 0 0
Total operating income 47,778 50,737 55,684 61,906 69,635
Total operating expenses 42,944 45,861 50,221 55,771 62,664
Net materials 18,070 17,564 19,829 21,890 24,797
Other direct costs 22,063 24,657 26,570 29,677 33,102
Personnel 1,841 2,438 2,560 2,816 3,239
SG&A 969 1,201 1,261 1,388 1,526
R&D ‐ ‐ ‐ ‐ ‐
EBITDA 4,834 4,876 5,463 6,136 6,971
Other income 48 146 70 82 96
Depreciation 525 685 798 914 1,043
EBIT 4,357 4,337 4,735 5,304 6,025
Interest 1,322 1,682 2,419 2,578 2,571
Recurring PBT 3,035 2,656 2,316 2,726 3,454
Net extra ordinary items 496 ‐ ‐ ‐ ‐
PBT (reported) 3,530 2,656 2,316 2,726 3,454
Total taxes 1,204 876 764 900 1,140
PAT (reported) 2,326 1,780 1,552 1,827 2,314
Add: Share of earnings of associate ‐ ‐ ‐ ‐ ‐
Less: Minority interest ‐ ‐ ‐ ‐ ‐
Prior period items ‐ ‐145 ‐ ‐ ‐
Net income (reported) 2,326 1,635 1,552 1,827 2,314
Avendus net income 1,831 1,780 1,552 1,827 2,314
Dividend + Distribution tax 389 299 270 329 419
Shares outstanding (mn) 256.8 256.8 256.8 256.8 256.8
Avendus diluted shares (mn) 256.8 256.8 256.8 256.8 256.8
Avendus EPS (INR) 7.1 6.9 6.0 7.1 9.0
Growth ratios (%)
Total operating income 15.1 6.2 9.8 11.2 12.5
EBITDA 29.4 0.9 12.0 12.3 13.6
EBIT 34.3 ‐0.5 9.2 12.0 13.6
Recurring PBT 33.0 ‐12.5 ‐12.8 17.7 26.7
Avendus net income 19.0 ‐2.8 ‐12.8 17.7 26.7
Avendus EPS 6.1 ‐2.8 ‐12.8 17.7 26.7
Operating ratios (%)
EBITDA margin 10.1 9.6 9.8 9.9 10.0
EBIT margin 9.1 8.5 8.5 8.6 8.7
Net profit margin 3.8 3.5 2.8 2.9 3.3
Other income/PBT 1.6 5.5 3.0 3.0 2.8
Effective Tax rate 34.1 33.0 33.0 33.0 33.0
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Construction & Engineering 20
Balance sheet (INRmn)Fiscal year ending 03/10 03/11p 03/12f 03/13f 03/14f
Equity capital 513 513 513 513 513
Preference capital ‐ ‐ ‐ ‐ ‐
Reserves and surplus 21,943 23,274 24,556 26,053 27,948
Net worth 22,457 23,787 25,069 26,566 28,461
Minority
interest‐ ‐ ‐ ‐ ‐
Total debt 15,302 24,841 27,591 28,591 29,591
Deferred tax liability 255 308 354 408 478
Total liabilities 38,013 48,935 53,014 55,566 58,530
Gross block 7,561 9,489 10,881 12,428 14,169
less: Accumulated depreciation 2,023 2,708 3,506 4,420 5,463
Net block 5,538 6,781 7,374 8,008 8,707
CWIP 434 434 434 434 434
Goodwill ‐ ‐ ‐ ‐ ‐
Investments 9,412 12,008 14,508 15,508 16,508
Cash 1,997 1,397 1,129 708 824
Inventories 7,539 8,960 9,834 10,386 11,099
Debtors 12,995 14,536 15,554 16,860 18,017
Loans and advances 18,552 24,562 25,592 26,985 28,699
less: Current liabilities 17,497 19,031 20,626 22,382 24,583
less: Provisions 957 712 785 943 1,175
Net working capital 22,629 29,712 30,697 31,615 32,881
Total assets 38,013 48,935 53,014 55,565 58,530
Cash flow statement (INRmn)Fiscal year ending 03/10 03/11p 03/12f 03/13f 03/14f
Net profit 2,326 1,635 1,552 1,827 2,314
Depreciation 525 685 798 914 1,043
Deferred tax 99 53 46 55 69
Working capital changes ‐3,552 ‐5,683 ‐919 ‐987 ‐780
Less: Other income 48 146 70 82 96
Cash flow from operations ‐650 ‐3,456 1,408 1,725 2,550
Capital expenditure ‐1,481 ‐1,928 ‐1,392 ‐1,548 ‐1,741
Strategic investments purchased ‐2,009 ‐2,596 ‐2,500 ‐1,000 ‐1,000
Marketable investments purchased ‐ ‐ ‐ ‐ ‐
Change in other loans and advances ‐1,219 ‐2,000 ‐335 ‐352 ‐369
Goodwill paid ‐ ‐ ‐ ‐ ‐
Other income 48 146 70 82 96
Cash flow from investing ‐4,661 ‐6,378 ‐4,157 ‐2,817 ‐3,014
Equity raised ‐ ‐ ‐ ‐ ‐
Change in borrowings 2,863 9,539 2,750 1,000 1,000
Dividends paid (incl. tax) ‐389 ‐299 ‐270 ‐329 ‐419Others 3,489 ‐5 0 0 0
Cash flow from financing 5,963 9,234 2,480 671 581
Net change in cash 652 ‐600 ‐269 ‐421 117
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Construction & Engineering 21
Key RatiosFiscal year ending 03/10 03/11p 0 3/12f 03/13f 03/14f
Valuation ratios (x)
P/E (on Avendus EPS) 11.7 12.0 13.7 11.7 9.2
P/E (on basic, reported EPS) 11.7 12.0 13.7 11.7 9.2
P/CEPS 9.1 8.7 9.1 7.8 6.4
P/BV 0.9 0.9 0.9 0.8 0.7
Dividend yield (%) 1.6 1.2 1.1 1.3 1.7
Market cap. / FCF ‐18.6 ‐6.4 15.2 12.4 8.4
Market cap. / Sales 0.4 0.4 0.4 0.3 0.3
EV/Sales 0.6 0.8 0.7 0.7 0.6
EV/EBITDA 6.2 7.9 7.5 6.9 6.1
EV / FCF ‐11.5 ‐7.3 2,611.4 237.6 53.0
EV / Total Assets 0.8 0.8 0.8 0.8 0.7
Net Cash / Market cap. 31.4 37.9 38.2 37.9 40.2
Per share ratios (INR)
Avendus EPS 7.1 6.9 6.0 7.1 9.0
EPS (Basic, reported) 9.6 6.4 6.0 7.1 9.0
Cash EPS 9.2 9.6 9.2 10.7 13.1
Book Value 87.4 92.6 97.6 103.4 110.8
Dividend per share 1.3 1.0 0.9 1.1 1.4
ROE Decomposition (%)
EBIT margin 9.1 8.5 8.5 8.6 8.7
Asset turnover (x) 1.4 1.2 1.1 1.1 1.2
Interest expense ratio 3.9 3.9 4.7 4.7 4.5
Tax retention ratio 65.9 67.0 67.0 67.0 67.0
ROA 5.4 4.1 3.0 3.4 4.1
Total assets / equity (x) 1.7 1.9 2.1 2.1 2.1
ROE 9.3 7.7 6.4 7.1 8.4
Return ratios (% )
EBIT / Capital Employed 12.9 10.0 9.3 9.8 10.6
ROCE 8.0 6.7 6.2 6.5 7.1
ROIC 8.5 7.0 6.4 6.7 7.2
FCF / IC ‐8.3 ‐12.7 0.0 0.3 1.4
OCF/Sales ‐2.4 ‐6.5 2.5 2.8 3.7
FCF/Sales ‐5.5 ‐10.3 0.0 0.3 1.2
Turnover ratios (x)
Gross turnover 6.3 5.3 5.1 5.0 4.9
Net turnover 8.6 7.5 7.6 7.7 8.0
Revenue / IC 1.5 1.2 1.1 1.2 1.2
Inventory / Sales (days) 57.4 59.3 61.6 59.6 56.3
Receivables (days) 88.8 99.0 98.6 95.6 91.4
Payables (days) 150.2 157.9 156.0 152.2 148.0
Working capital cycle (ex‐cash) (days) 108.2 135.1 144.7 135.8 125.4
Solvency ratios (x)
Gross debt to equity 0.7 1.1 1.1 1.1 1.1
Net debt to equity 0.4 0.7 0.8 0.8 0.8
Net debt to EBITDA 3.2 5.1 5.1 4.7 4.2
Interest Coverage (EBIT / Interest) 3.3 2.6 2.0 2.1 2.3
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Construction & Engineering 22
Analyst Certification
I, Devang Patel, PGDFA, research analyst and author of this report, hereby certify that all of the views expressed in this document accurately reflect our personal views about the
subject company/companies and its or their securities. We further certify that no part of our compensation was, is or will be, directly or indirectly related to specific
recommendations or views expressed in this document.
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Disclosure of Interest Statement (as of July 7, 2011)
Analyst ownership
of the stock
Avendus or its associate company’s
ownership of the stock
Investment Banking mandate with
associate companies of Avendus
Gayatri Projects No No No
IL&FS Engineering and Construction Company No No No
IVRCL
Infrastructures
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Larsen and Toubro No No No
NCC No No No
Simplex Infrastructures No No No
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