NBCC stock falls on concerns of weak execution and earnings growth

NBCC hit its five-year low on Friday on concerns of weak execution and earnings growth. While the company has a strong order book given the project management consultancy (PMC) orders on nomination basis, its recent performance has the Street worried.

The company’s order book at Rs 68,000 crore on the standalone level and Rs 85,000 crore at the consolidated level means more than eight years of revenues visibility. Though the company had guided for 20-25 per cent growth at the standalone level in FY20, it reported a 23 per cent decline in revenues at the standalone level during the June quarter. Analysts at Anand Rathi said with the Delhi colony-redevelopment projects not yet moving, and as railway station-redevelopment projects await re-negotiation of clauses with the client, Q1 was disappointing. Not only had revenues declined steeply, operating profitability was at its weakest, also implying FY20 guidance is unlikely to be met.

Of the standalone portion of orders, the company has awarded Rs 32,000 crore to contractors. The progress on the non-awarded portion, which included Rs 35,000 crore redevelopment projects in Delhi, is slow.  According to analysts, so far, the company has monetised Rs 4,000 crore from the Nauroji Nagar redevelopment project, a pre-requisite to funding the remaining part of work. However, tree cutting approvals and other systemic factors lead to concerns on execution. Among other updates on the two projects (Sarojini and Netaji Nagar) cleared by the court, revised drawings have been submitted for approval.

While the stalled Amrapali project bagged by NBCC is a good opportunity, with a revenue potential pegged at Rs 8,500 crore, including the court-approved 8 per cent project management fee, analysts are watchful about the progress. The subsidiaries, however, continue to see good profitability despite tepid revenue growth.

For the work awarded of Rs 32,000 crore, even the current execution run-rate is unjustified, say analysts at Antique Stock Broking, who add that the incremental work to be awarded is dependent on systemic factors like acceptance of design and fundraising. Not surprising analysts are paring their estimates. On account of the sustained disappointment in revenue growth, margin and real estate monetisation, analysts at Edelweiss have revised down FY20/FY21 earnings estimates by 19/14 per cent, respectively, and PE from 16 times to 12 times.