Ambit_NCC_3QFY12 Results-Despite Dismal Performance, Asset Ambitions Remain High_7Feb2012

8/3/2019 Ambit_NCC_3QFY12 Results-Despite Dismal Performance, Asset Ambitions Remain High_7Feb2012

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NCC: 3QFY12 Results-Despite dismal performance, asset ambitions remain high

Ambit Capital Pvt Ltd 7 February 2012, Page 1

NCC: 3QFY12 Results-Despite dismal performance, asset ambitionsremain high(NJCC IN, mcap US$318mn, TP `42, SELL, 32% downside)

Analyst: Nitin Bhasin, [email protected], Tel: +91 22 3043 3241Analyst: Chhavi Agarwal, [email protected], Tel: +91 22 3043 3203

Our view of the results: In 3QFY12, NCC reported poorer-than-expected performance on all parameters:Standalone revenues declined 5% YoY and were 10% below our expectations, EBITDA margin of 6.1% was down341bps YoY and 285bps below our expectations and the company reported net losses of`95mn v/s net profit of`404mn in 3QFY11 and our net profit estimate of R228mn for 3QFY12. Net losses would have been higher, if thecompany had not provided for a low effective tax rate of ~20% (in 2QFY12 also NCC reported a low tax rate of19%, however, NCC had never posted such a low effective taxation rate in the last 5 years). NCC 's EBITDA marginof 6.1% is the lowest ever reported in the last 5-6 years and the management highlighted that such a sharp declinein EBITDA margin was due to: (a) time and cost overruns in a few large infrastructure projects; (b) revenue decline

on a YoY basis (due to low order booking in last 12 months and execution delays in the existing projects) resultingin under-absorption of fixed overheads; and (c) additional provisioning of `150mn for doubtful debts leading to57% YoY increase in other expense.

Low EBITDA margin coupled with a sharp increase in interest expenses (58% YoY) on account of an increase in debtlevels and interest rates (~300bps YoY), resulted in losses to the PBT. However, the interest costs declined (2%lower) on a sequential basis and was 6% lower than our estimates, as the company reduced its debt to `24bn in3QFY12 compared to `26bn in 2QFY12 (debt equity of 1.0x at December 2011 v/s 1.1x at September 2011). Thedecline in debt was due to financial jugglery by the NCC, as it replaced working capital debt from the advances(`7bn) that NCC received from its Power asset subsidiary NCC Infra, which achieved financial closure andawarded the project of`52bn to NCC. The order book at the end of December 2011 was `220bn (`165bn at end ofMarch 2011), which represents a book-to-bill (TTM) ratio of 4.3x. Whilst including the captive power project, order

flow in 3QFY12 is`

68bn, excluding it, the order flow in 3QFY12 is only`

17bn (40% YoY decline). For 9MFY12,NCC has only received orders worth `47bn from external clients compared with `58bn received in 9MFY11 (17%YoY decline).

Where do we go from here? We have been continuously highlighting that NCCs low order booking andexecution slippages will lead to low revenue growth for FY12E, and EBITDA margin will remain under pressure dueto increasing raw material/subcontractor expenses and under-absorption of fixed overheads. Therefore, for FY12E,

we had modelled YoY revenue growth of only 5% and EBITDA margin of 9.3%. However, in 9MFY12, theperformance has been below our expectations, as the revenues have declined 3% YoY and company has posted anEBITDA margin of a mere 8.1%. We believe that in 4QFY12 as well, NCC shall post revenue decline/muted growthand an EBITDA margin of ~8%. We will have to lower our FY12E revenue estimates by another 5%-8% and ourEBITDA estimates by 15%-16%. However, we will have to increase our interest expenses estimates by ~10% onaccount of a decrease in debt levels. All the above changes will lead to 12%-13% decline in our core constructionbusiness FY12E EPS of`3.7. For FY13E we presently maintain our estimates for revenue growth at 14% and forEBITDA margin at 9%.

Valuation and recommendation: Whilst NCCs stock price has rallied in the last one month, we expect that thedecline in interest rates will not materially improve the business performance of NCC, as it will continue to remaincapital starved for growth and PBT margins will remain low due to high debt:equity. Our SOTP-based valuation is`60/share (`42/share for the core construction business (Indian and international) and `18/share for the embeddedvalue). NCCs stock (ex-embedded value) is trading at 8x FY13 EPS of`4.7 for the construction business (Indian andinternational business). We maintain our SELL recommendation as the value of the core construction business(`42/share) remains lower than the CMP. Moreover, we believe the embedded value (`18/share) could see furthererosion on account of: (a) continuing poor performance of most of the operational BOT assets (roads mainly, as

visible from the current results); and (b) inevitable equity dilution needs at the subsidiary levels. Considering the

losses in most of the operational BOT assets and non linkage/PPA for NCCs power asset under construction, we failto see any meaningful value even closer to the equity invested in NCC Infra.


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Other key takeaways from the conference call:

Subsidiaries continue to post poor performance: On a consolidated basis, in 3QFY12, NCC has postedrevenues of`15bn (4% YoY decline) and PBT losses of`148mn (v/s PBT profit of`816mn in 3QFY11). Whilst therevenues of subsidiaries (consolidated less standalone) grew by 5% YoY, the company reported a loss of`31mnin PBT as against a profit of`130mn in 3QFY11. Lower profitability of the BOT assets (housed under NCC infra

and standalone SPVs) due to lower-than-expected traffic growth and high interest expenses was the mainreason for the decline in the PBT margin of the subsidiaries. In the international business, NagarjunaInternational Muscat reported revenue of`1.8bn and a PBT margin of only 3% and Nagarjuna ContractingCompany reported a low turnover of`130mn and PBT of only`1mn.

Lower-than-expected traffic growth in the operational road BOT projects: Management highlighted thatin its recently started Pondicherry-Trivandrum road project, the average toll collection is `0.5mn/day, which islower than the management expectations of`0.8mn/day. Similarly, in the Bangalore Elevated Tollway project(which started tolling ~18 months ago) average toll collection is `2.2mn/day, which is lower than managementexpectations of`2.5mn/day. In an earlier media article it was highlighted that NCC plans to raise funds eitherby listing or by selling a part of its equity stake in the BOT subsidiary NCC Infra. The article also mentionedthat NCC has assigned a value of`25bn for its subsidiary, NCC Infra. We believe that given the continuouspoor performance of its existing operational BOT road projects, it will be difficult for NCC to attract investors to

its BOT project portfolio at such premium valuations.

Order flow momentum remains weak due to lack of availability of funds at the clients end.Management highlighted that some clients are facing delays in achieving financial closure for their project andtherefore, not awarding the EPC contract to the construction companies. Further, even if the developers haveawarded the EPC contract to any construction company for which financial closure has not been achieved, theconstruction companies have not started any works, as they have not received the mobilization advances. NCChas also received few projects for which financial closure has not been achieved and the company has notreceived mobilization advances, therefore, NCC has not included those orders in its current order book.

Though the management maintains FY12E order flow guidance, it reduces the FY12E revenue growthand EBITDA margin guidance: Management maintains its order flow guidance of `140bn (including thecaptive power order of`52bn) but reduces its FY12E standalone revenue guidance to `52bn from `56bn and its

EBITDA margin guidance to 8.5%.from ~9.5%. However, given that NCC has only booked orders worth `99bn(71% of its guidance) in 9MFY12 and given the poor order flow momentum, we believe that order flowguidance of`140bn is highly optimistic. Similarly, revenues have declined by 3% YoY in 9MFY12, NCC will haveto post revenue growth of ~17% in order to meet its guidance, which we believe is challenging in the currentenvironment.

Absence of PPA agreement in the Nelcast power project raises concerns: Management had earlierhighlighted that the PPA agreement with the Karnataka state Government for supply of 400mW of power wascancelled and the company is looking at signing new PPA agreements with various other state Governments.Until date, NCC does not have any PPA agreement. As per the terms of the financial closure agreement, NCC isrequired to sign a PPA agreement for at least 990mW (70% of the power capacity of the Nelcast power plant)

within one year of achieving financial closure (i.e November 2012). We have been highlighting for a year nowthat this power project has no potential to generate meaningful returns given the lack of funds with both the

promoter, no coal linkage and lastly, no PPA.


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Institutional Equities Team

Saurabh Mukherjea, CFA Head of Equities (022) 30433174 [email protected]

Research

Analysts Industry Sectors Desk-Phone E-mail

Aadesh Mehta Banking / NBFCs (022) 30433239 [email protected]

Anand Mour FMCG (022) 30433169 [email protected]

Ankur Rudra, CFA Technology / Telecom / Education (022) 30433211 [email protected]

Ashvin Shetty Automobile (022) 30433285 [email protected]

Bhargav Buddhadev Power / Capital Goods (022) 30433252 [email protected]

Chandrani De, CFA Metals & Mining (022) 30433210 [email protected]

Chhavi Agarwal Construction / Infrastructure (022) 30433203 [email protected]

Dayanand Mittal Oil & Gas (022) 30433202 [email protected]

Gaurav Mehta Derivatives Research (022) 30433255 [email protected]

Hardik Shah Technology / Education Services (022) 30433291 [email protected] ASV Banking (022) 30433205 [email protected]

Nitin Bhasin Construction / Infrastructure / Cement (022) 30433241 [email protected]

Pankaj Agarwal, CFA NBFCs (022) 30433206 [email protected]

Parita Ashar Metals & Mining / Media / Telecom (022) 30433223 [email protected]

Puneet Bambha Power / Capital Goods (022) 30433259 [email protected]

Rakshit Ranjan, CFA Mid-Cap (022) 30433201 [email protected]

Ritika Mankar Mukherjee Economy (022) 30433175 [email protected]

Ritu Modi Cement (022) 30433292 [email protected]

Shariq Merchant Consumer (022) 30433246 [email protected]

Sales

Name Regions Desk-Phone E-mail

Deepak Sawhney India / Asia (022) 30433295 [email protected]

Dharmen Shah India / Asia (022) 30433289 [email protected]

Dipti Mehta India / Europe (022) 30433053 [email protected]

Pramod Gubbi, CFA India / Asia (022) 30433228 [email protected]

Sarojini Ramachandran UK +44 (0) 20 7614 8374 [email protected]

Production

Sajid Merchant Production (022) 30433247 [email protected]

Kausalya Vijapurkar Editor (022) 30433284 [email protected]

Praveen Mascarenhas Database (022) 30433251 [email protected]


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Explanation of Investment Rating

Investment Rating Expected return(over 12-month period from date of initial rating)

Buy >5%

Sell

Ambit_NCC_3QFY12 Results-Despite Dismal Performance, Asset Ambitions Remain High_7Feb2012

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