Disappointing Q1; pick-up in PMC execution will be key stock driver, besides ability to market projects.
Results highlight slowdown in execution in the core PMC segment. NBCC’s PMC revenue declined 2%, being significantly below our growth estimate of 15%, which led to an overall flat revenue growth in Q1FY18. Such weak growth highlights the delay in pick-up of execution, with start of several large projects potentially delayed into late FY18 or FY19. Improvement in PMC margins to 13.4% against our estimate of 8% is the only positive: PMC Ebit margin was at a record high of 13.4%against our estimate of 8%. We will await clarity from management on the large beat and the possibility of some one-off impacts. However, the rise in unallocable expenses has entirely offset all gains at the overall level. The rise in unallocable could include a significantly higher Expected Credit loss which we may be a one-off. However, the rise in employee costs by 82% y-o-y highlights that overall PMC margin impact could have been in line at best.
Washout in real estate revenue and margins lead weaker mix: Real estate revenues fell to a multi-quarter low of Rs 88m and Ebit margin declined to 18% (down 2600bps), leading to weaker overall Ebit margins despite a significant beat in PMC margins. We do note that real estate revenues are lumpy and while management is not focused on this segment, real estate is not a driver for the stock, in our opinion.
Outlook: NBCC’s flat revenue growth is disappointing against management expectation of 25% for FY18. But improvement in PMC segment is positive, though we require clarity on one-off impacts. We believe execution pick-up in the core PMC segment will be the key driver of the stock, as well as NBCC’s ability to market redeveloped projects in a weak and oversupplied real estate market of the National Capital Region (NCR). We await further details on the numbers at the post-results conference call. We await further details on the numbers at the post-results conference call.Valuation: We value the stock at 20x FY19F EPS of Rs 9.53 to arrive at our target price of Rs 191. The key downside risk is
Valuation: We value the stock at 20x FY19F EPS of Rs 9.53 to arrive at our target price of Rs 191. The key downside risk is delay in commercial monetisation of the vast land bank from redevelopment projects, as it could delay execution and earnings growth. Further order inflows and speedier execution are the key upside risks.