Magic Compounder: NBCC Ltd.

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When the market is heated up and trading at a high valuation, investors stay in dilemma. If they invest, they stand the chance of losing significantly if market falls, if they dont, they stand chances of missing out on the rally. So, given the situation it makes lot of sense to go for stocks that gives earning visibility. With earning visibility being there investors can get confidence of the business doing well irrespective of the market fluctuations and any fall actually give an opportunity to rake up more stake in it and hence become a magic compounder in their portfolio. We find NBCC is one such stock that gives lots of earning visibility and hence conviction in investing irrespetive of market movement.

About the Company

Formerly known as National Buildings Construction Corporation Limited, NBCC (India) Limited, is a blue-chip Government of India, Navratna Enterprise under the Ministry of Urban Development. Incorporated in the year 1960, the unique business model of the Company has made it stand out as a leader in its own right in the construction sector.

The company has zonal offices in more than 20 cities across the country while also having ventured into the overseas markets of Malaysia, Maldives, Botswana, Iraq and Turkey. The Company has set up three subsidiaries – NBCC Services Limited, NBCC Consultancy and Engineering Limited and NBCC Gulf LLC and one JV Company named Real Estate Development & Construction Corporation of Rajasthan Limited in view of growing business opportunities and business expansion.

Under the dynamic leadership of Dr. Anoop Kumar Mittal, the MD and Chairman, the Company has entered into a new growth trajectory altogether, having signed four MoUs in the previous financial year with overseas agencies based out of Malaysia, Bangladesh and South Korea. To add to it, the Company stands to immensely benefit from the synergy arising out of the recent takeover of HSCL.

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About the Business

An ISO 9001:2008 certified PSU; the company’s present areas of operation are categorized into three main segments:

Project Management Consultancy (PMC)

Under this segment, the Company provides management and consultancy for a range of civil construction projects including Roads, Hospitals and Medical Colleges, Water Supply Systems and Water Storage Solutions, Airports, Bridges, Industrial and Environmental Structures, etc. The focus of the company rests with Re-development projects and it is currently carrying out the redevelopments of institutes like AIIMS and India Trade Promotion Organization (ITPO). In fact, NBCC is the only experienced player in the Redevelopment space. This segment constitutes the core of operations for NBCC, contributing around 85% to 90% of the annual turnover of the company.

Real Estate Development

Under this umbrella, the focus is more towards the development of residential and commercial real estate projects, which are likely to come up at various locations of the Country with huge investments. The Company has land reserves of around 140 acres located at different parts of the country, exclusively for this segment. About 4% to 5% of the annual turnover of the Company is attributable to this segment.

EPC (Engineering Procurement and Construction) Contracting

Infrastructure operations cover chimneys, cooling towers, roads, border fencing, water and sewage treatment plants, and solid waste management systems. Under this segment, the services offered by the company include both concept as well as commissioning. In fact, the company also assists its clients / owners in getting the Governmental clearances. This division contributes to around 5% to 10% of the total revenues of the company.

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Investment Rationale

Strong Fundamentals backed by Strong Performance

Not every day, one comes across a company in the construction sector that is debt free. The Company is extremely cash rich with cash reserves of almost Rs. 1,160 crores as on 31st March, 2016. Besides, the company has more than Rs. 200 crores in the form of liquid mutual funds. What is even more pleasing from the investor perspective is the fact that the management has been consistently maintaining the profitability of the company. In fact the return on equity of the company has been consistently above 20% for the last 5 years. This is primarily because of the strong margins that the company is enjoying. In fact, the net profit of the Company has grown at a CAGR of around 13% in the last 4 years – all this when the real estate sector is considered to be in doldrums! The Company has also been maintaining a healthy dividend payout of close to 30%.

Superior Business Model

The Company boasts of an enviable business model. NBCC has a unique advantage of generating cost free float from its PMC division (which contributes the most of the turnover of the Company) where the revenue is collected upfront from the clients in the form of advances in the beginning of the project itself. On the hand, it gets an extended credit period from contractors. As such, the company enjoys a enviable working capital cycle and strong delivery has ensured a healthy CFO and FCFF over the years.We believe their business model is one of the biggest economic moats of NBCC as compared to its peers in the industry.

Strong Order Book Visibility and a Consistent Order Inflow

For the financial year ended 31st March, 2016, the Company executed work of Rs. 5,915 crores while the work order to the tune of Rs. 29,783 crores remained at the close of the year. However, the order book of the company has seen robust additions – having more than doubled since last year. In the last two months itself, the company has bagged orders worth Rs. 960 crores (This includes a Rs. 270 crore deal from the UGC for a new building complex at the JNU campus in New Delhi). Besides, the Company has also bagged Rs. 120 crore contract from Archaeological Survey of India and signed Memorandum of Agreement (MOA) with Goa Shipyard valued at Rs. 100 crores in August, 2016. In fact, the management of the Company expects the order book by March 2017 to be Rs. 75,000 crores.

Government Initiatives to be new thrust for Growth

NBCC will be a direct beneficiary of the ambitious schemes of the Government like Housing for All and Smart Cities mission aimed at urban development. In fact, NBCC is already implementing a few smart townships like Kidwai Nagar and New Moti Bagh. The Company aims to provide an all-round smart city solution including both, construction and technical (IT/Electronic) services, for which it has, tie ups with IBM and a Malaysian JV firm. Besides, the government has also started focusing on redevelopment of ramshackle buildings and old government colonies in Delhi and across India to build multi-storeyed residential and commercial complexes. NBCC being the most experienced player in the Redevelopment space, has won orders totaling Rs. 25,000 crore as approved by the Cabinet in July this year.

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Concerns

  • Any economic slowdown in the industry is directly going to affect the construction space. However, the fact that the company already boasts of an enviable order book, suggests that the road is not that bumpy for NBCC
  • NBCC  needs to prove its mettle as far as the execution of orders is concerned. Since, for the first time in the history of the Company, it is experiencing such a mammoth inflow of orders, only timely and efficient execution of the orders will take it to the next league.

Final View and Valuations

At the CMP, the stock is trading at 26x FY18E EPS on a standalone basis. Given the healthy order book of the Company in the PMC segment, a cash rich balance sheet and a decent land bank, NBCC’s revenues have grown at a CAGR of 14.0% in FY12-16 despite the challenges encountered by the construction and real estate space. Going ahead, we expect NBCC’s next leg of growth to come from redevelopment of government properties in the country. Hence, as per our calculations  the revenues and the net profit are expected to grow at a sturdy CAGR more than 25% in next few years.

So, with visibility of growth, we believe this is one magic compounder in any portfolio.

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Disclosure: At the time of writing the report the Analyst dont have any investment in the company, but interested in the same, so views might be biased. 

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