NBCC’s Q3FY19 revenue rose 29% y-o-y to Rs 15.8bn while Ebitda margin slid 160bps y-o-y to 2.9%.
NBCC’s Q3FY19 revenue rose 29% y-o-y to Rs 15.8bn while Ebitda margin slid 160bps y-o-y to 2.9%. The order book is robust at Rs 850bn, but its execution is contingent on the pace of real estate monetisation in the ‘self-revenue generation’ projects (50% of order book), which has been lacklustre and, in our view, unlikely to pick up in the near term.
Based on the latter, lack of confidence on margin trajectory and a potential uptick in risk profile (potential bid for Jaypee Infra), we are trimming FY19E/FY20E earnings by 39%/31%, cutting the PE to 16x (from 19x), and valuing cash separately as we roll forward the numbers to June 2020E. We are downgrading the stock to ‘Reduce’ with a revised TP of `45 (from `69 earlier).
While top line improved 29% y-o-y to ~Rs 24.3bn, Ebitda margin slid 160bps y-o-y to 2.9%, which, according to management, is due to accounting and other issues at the subsidiaries. It guided that these issues would be ironed out over the next one–two quarters. Margins were also impacted by non-resumption of work on the Delhi colonies redevelopment projects. Management is confident of building up margins to 4.5–5% over FY20 (which would still be lower than 6.1% in FY18). The margin trajectory is a key catalyst in our view.
Management indicated that the Netaji Nagar and Sarojini Nagar colonies have received court clearances and the work thereof would resume by March 2019. In the Nauroji Nagar project, the next hearing is scheduled for March. Management is confident of a timely resolution. Despite the suspension of these projects, top-line growth has been 34% y-o-y in 9MFY19, which is a key positive. Early resumption of work on these projects is critical to sustaining growth in our view.
Burgeoning opportunities in building construction are driving significant order accretion for NBCC. However, declining margins and its uncertain trajectory, haze over execution of the Delhi redevelopment projects and slow real estate monetisation forced us into trimming FY19E/FY20E earnings and downgrading to ‘Reduce’.