FY19/20F EPS cut 34/37% to account for delay in projects; downgraded to ‘Neutral’ with TP reduced to Rs 82 from Rs 129.
NBCC had a large order book of `800 bn at end-Q1FY19 (12x book: bill on FY18 revenues) which provides revenue and growth visibility for multiple years. However, in the near term we are witnessing execution and work front-related issues which impact on the outlook for FY19F/20F.
Three key redevelopment projects face NGT imposed restrictions on site over tree-cutting The redevelopment of three government colonies (Netaji Nagar, Sarojini Nagar and Nauroji Nagar) has stalled after protests over tree cutting. This had led to the NGT (National Green Tribunal) delaying execution of these projects. Even if the situation were to resolve we do not expect execution in FY19F (against management estimate of Rs 17-20 bn).
Progress on other projects has been slow as well NBCC has so far awarded contracts for Rs 350 bn. However, except for the East Kidwai Nagar and ITPO projects, progress has been slower than expected.
Longer term, a large orderbook and government clientele provide comfort on revenues and growth While FY19/20F may witness muted execution, a large orderbook of `800 bn from the government coupled with a robust business model (sustainable margins) provide visibility on the longer term growth on revenues and earnings for the company.
Valuation: Trading at 22x FY20F EPS
Despite the correction (40% YTD), we think the share price reflects underlying concerns on execution. We continue to value NBCC at 25x FY20F EPS of Rs 3.3 to account for long-term growth visibility and arrive at a TP of Rs 82, implying 13% upside, and hence we downgrade to Neutral; we prefer L&T (LT IN Buy). Key upside risk is resolution of stalled projects while further slippage in execution and commercial monetisation are downside risks.
Progress on key projects like redevelopment of GPRA halted by NGT orders The redevelopment of GPRA (General Pool Residential Accommodation) colonies in Delhi, namely Netaji Nagar, Nauroji Nagar and Sarojini Nagar, is among the key projects that we estimated would be driving NBCC’s revenues in the near term. With a total execution value of `250 bn, these projects account for a substantial share of the overall orderbook of `800bn at the end of Q1FY19.
However, this project has become involved in controversy over tree-cutting, which has led to protests from civil society and NGOs. The NGT has stayed the treefelling and execution of the project, despite NBCC’s claims that the company was losing `2.5 mn/day in delays. The situation was compounded by the the Public Accounts Committee (PAC) of the Delhi Assembly alleging “serious irregularities” in the redevelopment of three colonies in the national capital.