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Retail Equity Research (South India Focus)

NCC Ltd Construction & Engineering

BSE CODE : 500294 NSE CODE: NCC

BLOOMBERG CODE: NJCC:IN SENSEX : 35,898

BUY

12M Investment Period Rating as per Mid Cap

CMP Rs85 TARGET Rs107 RETURN 27% (Closing: 21-02-19)

22nd February,2019

Q3FY19 RESULT UPDATE

Strong execution... NCC Limited (NCC) is one of the largest well diversified construction companies in India with a foothold in every segment of construction sector.

Q3FY19 revenue grew by 74% YoY supported by strong execution in road, building and electrical division.

EBITDA margin stands at 12.2% YoY due to surge in execution of high margin electrical division orders while adj. PAT grew by 23% YoY .

Order book remain robust at Rs34,185cr (3.1x TTM revenue) and management has raised inflow guidance of Rs20,000cr for FY19E (vs 14,000cr).

We increase FY19E/20E PAT estimate by 14%/8% respectively due to ramp up in execution & higher margins.

We roll over our valuation to FY21E earnings and value standalone business at a PE of 10x and real estate at 0.5xP/B and reiterate BUY rating .

Company Data

Market Cap (cr) Rs.5,087

Enterprise Value (cr) Rs.6,651

Outstanding Shares (cr) 60.1

Free Float 81.88%

Dividend Yield 1.18%

52 week high Rs.137

52 week low Rs.63

6m average volume (cr) 0.6

Beta 1.4

Face value Rs2

Shareholding (%) Q1FY19 Q2FY19 Q3FY19

Promoters 18.12 18.12 18.12 FII’s 16.44 16.02 15.88 MFs/Insti 31.99 30.51 31.80

Public 33.45 34.35 34.20

Total 100.0 100.0 100.0

Price Performance 3 month 6 Month 1 Year

Absolute Return 27% 14% -32%

Absolute Sensex 5% -7% 6%

Relative Return* 23% -7% -38%

over or under performance to benchmark index

Standalone (cr) FY19E FY20E FY21E

Sales 12,233 13,376 14,816

Growth (%) 61.8 9.3 10.8

EBITDA 1419 1471 1674

EBITDA Margin(%) 11.6 11.0 11.3

PAT Adj. 559 539 620

Growth (%) 42.0 (3.5) 14.9

Adj.EPS 9.3 9.0 10.3

Growth (%) 42.0 (3.5) 14.9

P/E 9.1 9.4 8.2

P/B 1.0 0.9 0.8

EV/EBITDA 4.7 4.7 4.3

ROE (%) 12.5 10.9 11.3 D/E 0.3 0.4 0.4

Antu Eapen Thomas

Research Analyst

KEY CHANGES: TARGET RATING EARNINGS

Ramp up in execution...

Q3FY19 revenue grew by 74% YoY to Rs3,226cr which is above our estimate as strong execution in road, building and electrical division stimulated the growth. While 9MFY19 revenue grew by 68% YoY to Rs8,691cr. Management has raised revenue guidance to over Rs11,000cr for FY19 with an EBITDA margin of 11.5% to 12%. Execution is likely to pick up as the company has received clearances for large portion of road & building projects. We therefore increase FY19E/20E revenue estimate by 12%/10%.

Order book @ 3.1x TTM revenue...

Order book remain strong at Rs34,185cr (3.1x TTM revenue) and management has raised order inflow target of Rs20,000cr for FY19 (vs Rs14,000cr earlier) due to strong order pipeline. The core segment (building & road) order book grew by 84% YoY and is comprising 66% of total order book. We expect order book to grow at a CAGR of 19% over FY18-FY21E.

Adj. Margins improved…

Adj. EBITDA margin improved by 56bps YoY to 12.16% supported by strong execution and higher gross margin earned from electrical division. However, management stated that higher gross margin from electrical division may not be sustained and has guided margins to stabilise between 11.5% to 12% for FY19E. Adj. PAT grew by 23% YoY to Rs160cr, which was offset by higher depreciation(31% YoY) and lower other income(-30% YoY). We expect margin to stabilize at 11% to 11.5% over the next two years on account of pick up in execution and accordingly we increase FY19E/20E PAT estimate by 14%/8%.

Valuations

Order book remain strong and execution is picking up as ~90% of order book has received regulatory clearances. On the other hand, working capital borrowing is likely to increase due to increase in order book. We introduce FY21 estimates and value standalone business at a PE of 10x FY21E earnings and real estate business at 0.5x P/B and arrive at SOTP price target of Rs107 and reiterate BUY rating .

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Quarterly Financials (Standalone)

Profit & Loss

Rs cr) Q3FY19 Q3FY18 YoY Growth % 9MFY18 9MFY19 YoY Growth %

Sales 3226 1851 74.3 5165 8691 68.3

EBITDA 392 255 28.9 550 1025 86.3

EBITDA margins 13.8 12.16 (162)bps 10.7 11.8 114bps

Depreciation 39 30 31.0 86 109 26.3

EBIT 373 253 47.2 555 999 79.8

Interest 125 104 19.4 279 334 19.7

Other Income 20 28 (30.2) 91 82 (9.8)

Exceptional Items - -30 - (77) (48) (38.0)

PBT 249 119 108.6 200 617 209.1

Tax 88 19 370.4 15 227 1369.7

Share of profit from Associate

Minority Interest

Reported PAT 160 100 59.7 184 390 111.6

Adjustments - 30 - 101 48 (53.2)

Adj PAT 160 130 22.9 261 437 67.7

No. of Shares 60.1 60.1 60.1 60.1

EPS (Rs) 2.9 2.3 22.9 4.7 7.9 67.7

Old estimates New estimates Change %

Year / Rs cr FY19E FY20E FY19E FY21E FY19E FY20E FY20E

Revenue 10,899 12,202 12,233 14,816 12.2 9.6 13,376

EBITDA 1,242 1,342 1,419 1,674 14.3 9.6 1,471

Margins (%) 11.4 11.0 11.6 11.3 20bps 0bps 11.0

Adj. PAT 490 501 559 620 14.0 7.6 539

EPS 8.2 8.3 9.3 10.3 14.0 7.6 9.0

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

Standalone EPC 6,196 103 PE 10x FY21E EPS

Real Estate 511 4 0.5x P/BV Total Value per share 107

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 FY19E FY20E FY21E

Sales 7,892 7,559 12,233 13,376 14,816

% change (5) (4) 62 9 11

EBITDA 685 855 1,419 1,471 1,674

% change (7) 25 66 4 14

Depreciation 112 117 161 184 193

EBIT 573 737 1,258 1,288 1,482

Interest 396 379 470 531 604

Other Income 140 116 105 120 130

PBT 267 368 845 876 1,007

% change (17) 38 130 4 15

Tax 42 81 334 337 388

Tax Rate (%) 0 0 0 0 0

Reported PAT 226 287 511 539 620

Adj.* (50) (107) (48) 0 0

Adj. PAT 175 393 559 539 620

% change (20) 125 42 (4) 15

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

Adj EPS (Rs) 3 7 9 9 10

% change (0.2) 1.1 0.4 0.0 0.1

DPS (Rs) 0.2 0.2 0.2 0.2 0.2

Y.E March (Rs Cr) FY17A FY18A FY19E FY20E FY21E

Net inc. + Depn. 379 485 1006 1060 1200

Non-cash adj. 350 250 140 198 221

Changes in W.C (475) (331) (445) (763) (859)

C.F. Operation 197 447 806 616 692

Capital exp. (135) (316) (407) (105) (100)

Change in inv. 0 (76) (51) (54) (56)

Other invest.CF 2 3 0 0 0

C.F - Investment 455 (359) (563) (279) (286)

Issue of equity 0 0 0 0 0

Issue/repay debt (317) (538) 400 300 300

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

Other finance.CF 0 0 13 9 (1)

C.F - Finance (755) (137) (107) (272) (355)

Chg. in cash (103) (50) 136 65 51

Closing cash 109 59 195 260 312

Y.E March FY17A FY18A FY19E FY20E FY21E

Profitab & Return

EBITDA margin (%) 8.7 11.3 11.6 11.0 11.3

EBIT margin (%) 7.3 9.8 10.3 9.6 10.0

Net profit mgn.(%) 2.2 5.2 4.6 4.0 4.2

ROE (%) 5.2 10.2 12.5 10.9 11.3

ROCE (%) 5.5 8.1 10.6 9.8 10.0

W.C & Liquidity

Receivables (days) 159.7 202.6 155.0 160.2 162.0

Inventory (days) 86.9 95.9 71.2 78.9 81.1

Payables (days) 216.6 270.3 220.7 233.9 228.9

Current ratio (x) 1.8 1.7 1.6 1.7 1.7

Quick ratio (x) 1.0 0.9 0.8 0.8 0.9

Turnover &Leverage

Gross asset T.O (x) 6.3 5.3 7.0 6.7 7.1

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

Int. covge. ratio (x) 1.4 1.9 2.7 2.4 2.5

Adj. debt/equity (x) 0.45 0.3 0.33 0.36 0.38

Valuation

EV/Sales (x) 0.8 0.8 0.5 0.5 0.5

EV/EBITDA (x) 9.1 7.3 4.7 4.7 4.3

P/E (x) 26.7 12.8 9.0 9.4 8.2

P/BV (x) 1.4 1.1 1.0 0.9 0.8

Y.E March (Rs Cr) FY17A FY18A FY19E FY20E FY21E

Cash 109 59 195 260 312

Accounts Receivable 3703 4689 5697 6047 7104

Inventories 1526 1696 2174 2536 2795

Other Cur. Assets 1848 2382 2949 3372 3653

Investments 1029 1024 1075 1129 1185

Gross Fixed Assets 1307 1550 1950 2050 2150

Net Fixed Assets 590 748 989 907 816

CWIP 1 23 15 10 10

Intangible Assets 2 2 2 2 1

Def. Tax (Net) 135 179 176 171 166

Other Assets 0 0 0 0 0

Total Assets 8,944 10,801 13,273 14,433 16,042

Current Liabilities 3879 5202 6795 7159 7891

Provisions 37 44 60 66 73

Debt Funds 1537 1164 1564 1864 2164

Other Liabilities 49 149 150 150 150

Equity Capital 111 120 120 120 120

Reserves & Surplus 3331 4122 4584 5073 5644

Shareholder’s Fund 3442 4242 4704 5194 5764

Total Liabilities 8,944 10,801 13,273 14,433 16042

BVPS 62 76 85 93 104

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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

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

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PRICE HISTORY

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27th December 2018

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