NBCC: A PSU you wouldn't want to ignore

Increased focus on urban infra, monopoly in civil works for PSUs and debt-free status key positives

In an era of slow economic growth, National Buildings Construction Corporation (NBCC) has seen no dearth of business. In the last month itself, it received orders of over Rs 5,000 crore. Not surprisingly, it has been a clear outperformer on the bourses yielding gains of 19 per cent since January 2015 at a time when Sensex is down seven per cent. Even in the last one month when markets were down, NBCC has traded flat. NBCC has also been among the better performing PSU stocks in 2015.

The government’s enhanced focus on urban infrastructure, a robust order pipeline and low-cost execution model puts NBCC on track to meet its revenues guidance of Rs 6,000 crore in FY16. For the first half of FY16, NBCC recorded 30 per cent growth in revenues (Rs 2,264 crore), while profits at Rs 112 crore were up 19 per cent.

Given that NBCC gets priority to execute government’s civil contracts, the company has positioned itself as a competitive player in the business. Thus, analysts believe it is a serious contender to execute the Smart Cities project, once these contracts are awarded.

Analysts expect NBCC’s order book (Rs 30,000 crore as on September) to double by FY18. That apart, relatively shorter turnaround period for projects and zero-debt levels also make NBCC a preferred pick in the real estate segment.

Nearly 80 per cent of NBCC’s revenues are driven by project management and consultancy business (of which 30 per cent are redevelopment projects) where operating margins have been historically benign (7.5 per cent in Q2’FY16). With share of revenues from the higher-margin redevelopment projects (11-12.5 per cent) likely to increase to 50 per cent in FY17, margins should expand going forward.

Also, NBCC is also increasing the share of revenues from real estate and EPC business, which accounted for remaining 20 per of its revenues in Q2’FY16 (13 per cent a year ago). Since these businesses earn 17-29 per cent margins, any increase in revenue without significant capital deployment could boost margins and reduce dependence on PMC business.

Diversification of clientele and expanding its focus to states such as Rajasthan, and Odisha, will mitigate concentration risks. That said, Rohit Natarajan of IDBI Capital asserts that urban infrastructure projects are priority to most state governments and, therefore, slowdown may be limited, compared to generic infrastructure projects.

Currently at Rs 945.10, the stock of NBCC trades its FY17 price earnings at 21.7 times.