We cut our target price for NCC to R85 from R128 earlier. Our target price cut is driven by our reduced earnings assumptions and lower target multiple to P/E of 8x Sept FY12E from 12x June FY12E on lower than expected order inflows and execution. We downgrade NCC to a Sell (from Buy), as we believe that the stock would remain under pressure unless inflows/execution improves meaningfully, as well as reflecting our cautious view on the sector.
Also, we believe that investments in projects (Dubai, Nelcast) would strain the cashflows of the company and further stretch the balance sheet. We expect the operating environment to remain bleak in the near term and despite the sharp stock correction (41% since January 2011), we believe investors would find better value in IVRCL at current levels (higher earnings growth, more upside potential).
We are cutting our earnings estimates by 20% in FY12E driven by a cut in our revenue estimate (lower inflows/execution assumptions). We have increased our margin assumptions by 20bps/40bps over the next 2 years and are reducing our interest cost assumptions in FY13E on better than expected working capital / debt situation of the company.
NCC reported Q4FY11 recurring PAT of R417mn, down 39% y-o-y and 28% below our expectations. Revenues declined by 5% y-o-y and were 8% below estimates. Ebitda margins declined by 100bps. The company made a provision for R60mn of additional tax liability in this quarter. The company missed consolidated revenues to the tune of R760 crore due to 1) adverse weather in Q2 and Q3FY11; 2) stoppage / slowed down work in some water projects, primarily in Andhra Pradesh on account of delayed payments by the clients; 3) Land acquisition delays; 4) low order booking. The company expects revenue growth of 15%-20% in FY12E.
NCC reported Q4FY11 recurring PAT of R41.7 crore, down 39%y-o-y and 28% below our expectations. Revenues declined by 5%y-o-y and were 8% below estimates. EBITDA margins declined by 100bps to 9%.
We rate NCC shares as Sell/Medium Risk (3M) with a target price of R85. We believe that the stock would remain under pressure unless inflows and execution improve meaningfully.
? Citi