NBCC stock: With construction gaining pace, earnings will increase

NBCC has seen its market capitalisation erode by almost a third since its share price hit new highs in November last year. A strong and growing order book was the key reason for the rally, leading the stock to trade at rich valuations. But, as execution didn’t keep pace, the stock corrected, analysts said. They said reports of alleged corruption against the company’s top management also led to an overhang.
 
However, after the steep correction, valuations have become reasonable. But more importantly, execution of projects is gaining pace and should lead to higher revenues.
 
Analysts at Kotak Securities, on Wednesday, said execution will pick up pace in 2018-19. The top management getting a clean chit would be sentimentally positive and would end the overhang on the stock, they said.
 
The NAVRATNA public sector company undertakes project management consultancy (PMC) works for various government firms and bags about 80 per cent of the works on a nomination-basis (rest 20 per cent on competitive bidding).
 
NBCC has seen strong increase in its order book. The company’s order book at Rs 800 billion has grown fourfold in the 2015-18 period. However, revenues have grown by less than 1.5 times during the period, analysts said, indicating execution hasn’t kept pace.

This is where things are changing. With projects clearances increasing and the company awarding execution contracts (to sub-contractors) in the recent past, analysts expect the  pace of execution to pick up, thereby translating into higher revenues.
 
For 2018-19, revenue growth is expected to be strong, as most of the redevelopment projects would contribute meaningfully. The management, in a post-results concall last month, had highlighted that work on the Rs 25 billion Pragati Maidan project will be completed by October 2019. Nauroji Nagar project, too, had a similar timeline. Further, construction for the Rs 10 billion irrigation project in Maharashtra had also commenced.
 
Analysts said, NBCC had received good response in real estate sale at Nauroji Nagar and has sold over Rs 20 billion of properties in the first nine months of 2017-18. It plans to begin work on Sarojini Nagar and Netaji Nagar in 2018-19. These projects are expected to contribute Rs 60 billion to revenues.
 
Analysts’ estimates indicate NBCC’s revenues will rise from Rs 65-71 billion in 2017-18 to Rs 106-108 billion in 2018-19. While Kotak Securities estimates a 35.6 per cent compounded annual growth in revenue during 2017-20 (15.6 per cent during FY14-17), analysts at IDBI Capital say revenue will grow by 58 per cent annually over 2018-20. Net profit is seen growing at 64 per cent annually over the next two financial years, IDBI Capital said.