NBCC: Weak margins, muted pace of real estate monetisation key overhangs

The stock has already corrected by almost half in the last one year (a third since January highs). But, as the outlook remains weak, it could continue to lag

NBCC — a public sector company with a strong order book of Rs 70,000 crore, which provides almost nine years of revenue visibility — appears to be well placed for strong growth. But, the challenges in project execution are keeping concerns elevated. The stock has already corrected by almost half over the past year (a third since January highs). And as the outlook remains weak, it may continue to lag.

The execution concerns have increased, looking at the headwinds of poor labour availability and a weak economy. These are likely to present challenges in monetising assets in the “self-revenue generation” projects, where NBCC has to sell land to raise money for funding the respective project.

NBCC gets a majority of its orders in the project management and consultancy (PMC) services on a nomination basis from government and its agencies. Though the order flow has remained strong, more than half the order book now comprises of “self-revenue generation” projects, where the poor pace of realty monetisation will restrict execution, say analysts.

During the March quarter, NBCC’s revenues declined 17 per cent year-on-year (YoY), and Ebitda (earnings before interest, taxes, depreciation, and amortization) margin fell 300 basis points YoY to 2 per cent.

The impact is expected to be bigger in the June quarter and FY21. Of the order book, Rs 46,000 crore worth of projects shall be under execution by end-FY21. But, analysts say, currently, activity levels are at 40 per cent of the pre-Covid-19 level, with only 18,000 labourers available at sites against the required 40,000.

 

 

Against this backdrop, all eyes will be on the Nauroji Nagar project, for which NBCC, after a long gap, received the go-ahead (in February) from the Delhi High Court to resume work. 

The company is said to have monetised real estate worth Rs 2,500 crore. However, reaching the target of Rs 12,000 crore at Nauroji Nagar remains crucial for future revenues.

What’s more challenging is funding uncertainty associated with new big-ticket order inflows, say analysts. For the much-talked-about Amrapali project order, financing continues to be tricky as NBCC requires Rs 8,500 crore to complete 46,575 residential units in 36 months. NBCC plans to raise the money by completing and selling unsold inventory, sale of unused FSI and from the payment of remaining amount by the existing homebuyers. While NBCC is confident of meeting the deadline, the progress is weak, say analysts at Antique Stock Broking, besides pointing out that the capital structure to fund Jaypee assets is unknown.

Analysts at Edelweiss, in light of the pandemic and weakness in the realty market, have cut their FY21 and FY22 earnings estimates by 3 per cent and 15 per cent per cent. Those at Antique expect earnings to fall 13 per cent annually until FY22.