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Analysis: NBCC: A growth cum value play

While valuations look attractive, the fundamentals remain strong

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Even though the stock of National Buildings Construction Corporation (NBCC)--the government owned construction company--has given over 50% returns since its IPO in March 2012, analysts remain upbeat about its future prospects given the attractive valuations and strong order book of the company. The stock, at current price of Rs 153, is trading at about 7 times its FY14 estimated earnings. While valuations look attractive, the fundamentals remain strong.

Unlike most of its peers, the company is debt-free with negative working capital. Other positives are its consistent operating free cash flows, healthy dividend pay-out ratio and high return on equity (RoE) of about 25%. That apart, the company is sitting on cash worth Rs 1,340 crore as on end-September 2012—equivalent to Rs 112 per share, as against the current market of Rs 1,832 crore.

"We believe, current valuations do not factor in the high growth visibility and robust financials of the company, which is attractively priced. Hence, we recommend buy on the stock," says Kalpit Oza who tracks the company at India Infoline.

NBCC, which is formed under the Ministry of Urban Development, undertakes the management and consultancy services for civil and construction work of projects for different government ministries. Backed by the capex formation in different ministries, the company’s order book has grown from about Rs 10,000 crore at the time of IPO to about Rs 15,000 crore currently, which is over four times its FY12 revenue and thus provides strong visibility. This is also a reason that the company is expected to witness healthy revenue growth over the next two years.

Notably, led by its expertise in the construction space and huge cash in the books, the company is now leveraging on its huge land bank, which is around 125.2 acres with saleable and leasable area of about 10.7 million square feet. Analysts are expecting the Okhla Delhi commercial property project and Kidwai Nagar real estate project to start contributing to the company’s revenues from the second half of the current financial year. The company intends to book about 30-40% of the Okhla project in the current financial year at an average realisation of about Rs 25,000 per square feet.

The management had earlier guided to achieve sales turnover of Rs 3,900 crore in the current financial year, which includes revenue of about Rs 200 crore from the real estate business and Rs 60-70 crore contribution to its profits. The contribution from the real estate business will also mean higher operating margins in the coming years, which will drive the earnings higher.

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