Avendus on NCC

8/4/2019 Avendus on NCC

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India Equity Researc

Construction & Engineerin

July 7, 2011

B U Y NCC

Target Price (INR) 108 A cut above the rest

INITIATING COVERAGE The new segments entered into in the past five years now contribute

33% of NJCC’s order book. The current standalone book‐to‐bill ratio o

2.7x is the highest in the past five years. The company is jointlydeveloping a 2x660MW thermal power plant; leading to INR3.5bn o

pending investments for development projects on hand. We forecast a

three‐year CAGR of 11% in revenue and 9% in PAT without factoring in

orders from the thermal power project. We estimate the fair P/E and

EV/EBITDA for the stock at 7.0x and 5.5x, respectively. Based on the

average of the two methods, and taking INR53/share as the value o

investments, we arrive at our Jun12 TP of INR108. We initiate coverage

with a Buy rating. Sustained high working capital and larger funding

requirement for the power project are the key risks.

New segments aid higher growth; business moves up the value chain

Since 2006, NJCC has entered into five segments that are higher up on the

construction value chain and which today account for c33% of the order book

Without their contribution, the order book would have grown at a CAGR of 15%

over FY07‐FY11, instead of the reported CAGR of 24%. The diversification ha

been achieved without impacting EBITDA margins, which have increased by 70

bp over the past five years, an indication of NJCC’s strong execution capabilities.

Focus on power project development; INR3.5bn investment pending

The five road BOT projects undertaken by NJCC are complete. The pending

equity commitment remains high, at INR3.5bn, on account of the 2x660MW

project being jointly developed in Nelcast Energy. NJCC has significant exposure

to real estate with a stake‐adjusted land bank of c300 acres, with INR7bn o

financial support through equity and loans to subsidiaries. Given the adversemacro conditions, we estimate the return on real estate investments to remain

insignificant.

Forecast three‐year CAGR of 9% in PAT, with more back‐ended growth

The book‐to‐bill ratio of the parent company, at 2.7x, is the highest in the pas

five years, driven by orders in the buildings and power segments. We forecast a

three‐year CAGR of at 8% in order inflows, leading to a CAGR of 11% in

revenue. The three‐year PAT CAGR is forecast at 9%, with a decline in PAT in

FY12, before recovering over FY13‐FY14. With c25% of assets held a

investments, we forecast the RoE in FY14 to remain low, at 8.4%, while core

ROIC is forecast at 12.3%.

Buy with a TP of INR108; investment value‐unlocking holds the key

We estimate NJCC’s standalone fair P/E at 7.0x and EV/EBITDA at 5.5x. Based

on the average of the two methods, estimate the fair value of the standalone

business at end Jun12 at INR55/share. We estimate the value of investments in

subsidiaries at INR53/share using varying P/B multiples. Our Jun12 TP o

INR108 is arrived at based on the SOTP method. We initiate with a Buy. Value

unlocking from investments is a key trigger, while a sustained high working

capital and larger funding requirement for the power project are the key risks.

Last Price (INR) 83.1Bloomberg code

Reuters code

Avg. Vol. (3m)(mn)

Avg. Val.(3m)(INRmn)

52‐wk H/L (INR)

Sensex

MCAP (INRbn/USDmn)

Shareholding (%) 12/10 3/11

Promoters

MFs, FIs, Banks

FIIs

Public

Others

Stock Chart (Relative to Sensex)

Stock Perfm. (%) 1m 6m 1yr Absolute

Rel. to Sensex

Financials (INRmn) 03/11 03/12f 03/13f

Sales

YoY (%)

EBITDA (%)

A.PAT

Sh o/s (diluted)

A.EPS (INR)YoY (%)

D/E (x)

P/E (x)

EV/E (x)

RoCE (%)

RoE (%)

Quarterly Trends 06/10 09/10 12/10 03/11

Sales (INRmn)

PAT (INRmn)

NJCC IN

NGCN.BO

1.08

194 / 74.6

7.5

6

6

13.7

414

10,865

11.7

7.9

7

8

12,013

0.7

209

7.1

0

10

6.9

500

‐15

0.8

11.7

6

9.6

1,824

9.9

1,827

1.2

‐36.0

‐32.2

11

9.8

1,552

229

7

13,355

229

7.1

18

14,504

20.0 20.0

18,727

21.31 / 479

102

15.9

38.4

11.5

18.9

14.2

50,737

‐54.5

‐62.9

‐0.9

‐3.3

422

35.4

13.6

12.1

61,906 55,684

6.0

444

7

50

100

150

200

250

Jul10 Nov10 Mar11 Jul11

Nag. Constructn. Sensex Rebased

Devang Patel, +91 022 66842861

[email protected]


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India Equity Research NCC

Construction & Engineering 2

Investment Summary

NJCC’s construction business has been moving up the value chain with the entry into new segments over the past five

years. These segments, accounting for c33% of the current order book, have aided the CAGR of 24% in the order book

over FY07‐FY11. The business has expanded smoothly without impacting EBITDA margins, which have increased by

70‐bp over the period. In its international foray, the company has had its most notable success, as the business

contributed c25% to the FY11 consolidated PAT. Over the next two years, we estimate the bulk of NJCC’s incremental

investments go towards its joint thermal power development project. Assuming the project achieves financial closure

and private equity investment in FY12f, we estimate the pending equity commitment for BOT projects at INR3.5bn.

Domestic orders in the buildings and power sector have been gaining traction, leading to standalone book‐to‐bill ratio

of 2.7x ‐ the highest in the past five years. We forecast a three‐year CAGR of 11% in revenue and 9% in PAT. We

estimate the fair P/E and EV/EBITDA for the stock at 7.0x and 5.5x, respectively. Based on the average of the two

methods, and taking INR53/share as the value of investments, we arrive at our Jun12 TP of INR108. We initiate

coverage with a Buy rating. Sustained high working capital and larger funding requirement for the power project are the

key risks.

EPC moves up the value chain; focus on large thermal power project

NCC (NJCC) has moved its construction business up the value chain by diversifying across segments and

into new geographies. The five segments entered into since 2006 today account for c33% of the order

book and have contributed significantly to the CAGR of 24% in the order book over FY07‐FY11. With its

strong capabilities in construction, the company has managed the transition without any adverse impact

on profit margins—as seen in the 70‐bp improvement in EBITDA margins over the past five years. The

company has also managed significant growth in its international business, which in FY11 contributed 14%

of the order book, 19% of consolidated revenues and c25% of consolidated PAT. NJCC has significant

exposure to real estate with a stake‐adjusted land bank of c300 acres, with INR7bn of financial support

through equity and loans to subsidiaries. However, on account of the adverse macro conditions, the

company has had limited success in unlocking value from the business; it is unlikely to further invest in the

business. In the development business, five road BOT projects are complete and incremental focus is

likely to be on the power sector. We estimate the pending investment commitment at INR3.5bn, most of

which will be for the 2x660MW thermal power project that currently awaits financial closure.

3‐year CAGR in PAT forecast at 9%, more pain in the near term

NJCC’s adjusted book‐to‐bill ratio has been on the rise over the past two years on the back of

improvement in orders in the domestic business—notably in the power and buildings segment. At 2.7x

currently, the book‐to‐bill ratio is at its highest in the past five years. We forecast a CAGR of 8% in

order inflow during FY12f ‐FY14f, implying moderation from the three‐year CAGR of 24% over FY08‐

FY10—without factoring in the inflows from its power development projects. We do not forecast

significant improvement in execution, given the rising share of the buildings and power segments in

the order book. We forecast a three‐year CAGR of 11% in revenue. PAT is forecast to decline in FY12

due to the higher interest cost burden, leading to a three‐year CAGR of 8%. After declining sharply in

FY11, we forecast cash flow generation to improve over FY12‐FY14 on the back of an improving

working capital cycle and declining investment requirement in development projects. With c25% of

assets locked in un‐yielding investments, the RoE is forecast to remain at the low level of 8.4% in FY14,

though core ROIC is forecast to improve by 162‐bp to 12.3% over FY12‐FY14.

Initiate with Buy, Jun12 TP of INR108; value unlocking the key

NJCC, adjusted for the value of investments, currently trades at a one‐year forward P/E of 6.6x and

EV/EBITDA of 5.0x. Its discount to the Sensex and Larsen and Toubro’s (LT IN, Hold) one‐year forward

P/E has been widening over the past one year and currently stands at 54% and 70%, respectively. We

estimate the fair P/E for NJCC at 7.0x, supported by a three‐year CAGR of 9% in PAT. We estimate the

fair EV/EBITDA at 5.5x, implying c10% improvement from current levels. Based on the P/E method, we

The five segments entered

into since 2006 today

account for c33% of the

order book

With c25% of assets

locked in un‐yielding

investments, the RoE is

forecast to remain at the

low level of 8.4% in FY14,

though core ROIC is

forecast to improve by

162‐bp to 12.3% over

FY12‐FY14

We initiate coverage with

a Buy rating and a 30%

upside to Jun12 TP of

INR108





estimate the Jun12 fair value of the EPC business at INR53/share, based on Jun13f EPS of INR7.6. Based

on 5.5x EV/EBITDA, we estimate the fair value of the EPC business at INR56/share. We arrive at the fair

value of INR55/share for the standalone EPC business based on the average of the fair values derived

from the P/E and EV/EBITDA methods. Our Jun12 TP of INR108 is arrived at based on the SOTP method,

after adding INR53/share as the value of NJCC’s investments in BOT, real estate and the international

business—arrived at using varying P/B multiples. We initiate coverage with a Buy rating and a 30%

upside. Our DCF‐based value estimate for the construction business is higher, at INR93/share. Pruning

the balance sheet and unlocking value from investments hold the key for further re‐rating in the stock

as c50% of our target price is derived from the value of unlisted investments. Sustained high working


Exhibit 1: One‐year forward P/E and target P/E (x)

‐

10

20

30

Jul08 Apr09 Feb10 Nov10 Sep11 Jun12

1‐year forward P/E Average P/E Target P/E

Target = 7.0x

Average = 13.6x

Source: Company, Bloomberg, Avendus Research

Exhibit 2: Relative premium to Sensex and LT P/E

‐120

‐80

‐40

‐

40

80

Jul08 Feb09 Sep09 Apr10 Nov10 Jul11

Premium to Sensex P/E (%) Premium to LT P/E (%)


Exhibit 3: Valuation summary (standalone)

(INRmn) Net Sales EBITDA Net Profit EPS (INR) P/E^ (x) EV/EBITDA ̂(x) EV/Sales ̂(x) P/B (x)

Mar10 47,778 4,834 1,831 7.1 4.3 3.5 0.3 1.1

Mar11 50,737 4,876 1,780 6.9 4.4 5.1 0.5 0.9

Mar12f 55,684 5,463 1,552 6.0 5.0 5.1 0.5 0.9

Mar13f 61,906 6,136 1,827 7.1 4.3 4.7 0.5 0.9

Mar14f 69,635 6,971 2,314 9.0 3.4 4.2 0.4 0.8

Source: Company, Avendus Research ^Note: Multiples after excluding INR53/share as value of investments





Table of Contents

Investment Summary ........................................................................................................................ 2 EPC moves up the value chain; focus on large thermal power project .................................................2 3‐year CAGR in PAT forecast at 9%, more pain in the near term ..........................................................2 Initiate with Buy, Jun12 TP of INR108; value unlocking the key ..............................................................2

EPC moves up the value chain, focus on developing power project ................................................. 5 Order book diversification rises without margin compromise..............................................................5 International presence an advantage though growth currently slow ...................................................5 Large real estate land bank of 300 acres, with exposure of INR7bn .....................................................6 Low returns from real estate on poor sales; investments are locked ...................................................7 BOT business focused on roads and power projects.............................................................................7 Estimate pending equity at INR3.5bn for projects under development ..................................................8

Three‐year CAGR in PAT forecast at 9%, more pain in the near term............................................... 9 Steady growth in order book; book‐to‐bill ratio up on domestic orders .................................................9 3‐year CAGR of 8% in order inflow, power segment lends upward bias..................................................9 Execution forecast to remain subdued with a change in composition ...............................................10 Forecast two‐year CAGR of 11% in revenue and 9% in PAT ................................................................11 Working capital cycle up sharply, forecast reversal to FY10 level.......................................................11 Cash flow to improve on better working capital cycle, low investment ................................................11

Initiate with a Buy and Jun12 TP of INR108, value unlocking the key ............................................. 13 Relative discount to LT P/E at close to its highest in the past 3 years.................................................13 Estimate gradual re‐rating on slow earnings recovery; fair P/E at 7x .................................................14 Balance sheet pruning may trigger further P/E re‐rating ....................................................................14 Target EV/EBITDA pegged at 5.5x; 27% discount to 3‐year average...................................................15 Base‐case DCF value of construction business pegged at INR93/share ..............................................15 Jun12 TP of INR108 based on average of P/E and EV/EBITDA methods...................................................16 Initiate coverage with a Buy rating and 30% upside ...........................................................................17 Risk factors ..........................................................................................................................................18

Financials and valuations (standalone)............................................................................................ 19





EPC moves up the value chain, focus on developing power project

NJCC has moved its construction business up the value chain by diversifying across segments and into new geographies.

The five segments entered into since 2006 today account for c33% of the order book and have contributed significantly to

the CAGR of 24% in the order book over FY07‐FY11. With its strong capabilities in construction, the company has managed

the transition without any adverse impact on profit margins—as seen in the 70‐bp improvement in EBITDA margins over

the past five years. The company has also managed significant growth in its international business, which in FY11

contributed 14% of the order book, 19% of consolidated revenues and c25% of consolidated PAT. NJCC has significant

exposure to real estate with a stake‐adjusted land bank of c300 acres, with INR7bn of financial support through equity and

loans to subsidiaries. However, on account of the adverse macro conditions, the company has had limited success in

unlocking value from the business; it is unlikely to further invest in the business. In the development business, five road

BOT projects are complete and incremental focus is likely to be on the power sector. We estimate the pending investment

commitment at INR3.5bn, most of which will be for the 2x660MW thermal power project that currently awaits financial

closure.

Order book diversification rises without margin compromise

Exhibit 4: Break up of order backlog (%)

23

17

22

1921 24

14 2523

1621 16

36

43

24

158 8

22

11

8

7 5 10

5 4

6

3 5 53

‐ ‐

10

2127 21

35

13

5

11

14

0%

25%

50%

75%

100%

Mar05 Mar06 Mar07 Mar08 Mar09 Mar10 Mar11

Building Water Roads Irrigation ElectricalInternational Power Metals Oil & Gas Mining

Source: Company

The number of segments NJCC operates in has increased from 5 in Mar06 to 10 currently. As a result,

the share of the top three segments in Mar06 has declined from 85% to 63% by Mar11. The company

has managed a large diversification in its business over the past five years and has entered new

segments and verticals. Its diverse order book and sizeable presence showcases its strong capabilities

in the construction sector.

The segments added in Mar06 today account for 33% of the order book and have significantly added to

order book growth. The order book has grown at a five‐year CAGR of 24%. If the new segments are

excluded,

the

order

book

would

have

grown

at

a

five‐

year

CAGR

of

15%.

The company has managed to diversify the business smoothly, without any significant compromise on

profit margins—as is usually the case with the industry. Standalone EBITDA margins have increased by

70‐bp over the past five years, increasing from 8.9% in FY06 to 9.6% in FY11.

International presence an advantage though growth currently slow

The company has grown its international business aggressively over the past five years, eyeing strategic

advantages in terms of geographic de‐risking and opening up new avenues of growth with wider and

larger bidding. Its engineering and construction expertise has helped establish its presence in the Dubai

and Oman markets—where NJCC operates through three subsidiaries.

The order book has grown

at a five‐year CAGR of 24%

but excluding the new

segments, would have

grown at a five‐year CAGR

of 15%





In FY11, the international business contributed 14% to the order book, 19% to consolidated revenues

and c25% of consolidated PAT.

Exhibit 5: International orders booked

Location Scope Value (INRbn)

Oman 66‐km expressway linking Al‐Falaj with Khatmalah 16.0

Dubai

DEWA

Water

Pipeline

7.1Abu Dhabi 588 villas at Al Alin 6.8

Oman Al Batina Coastal Road 18.1

Oman Al Amerat Quriyat Road (70kms) 6.8

Oman Wadi Adai Amerat Road 6.5

Oman 718 villas at Quriyat City 8.9

Oman Water Pipeline, Sohar City 0.8

Source: Company, Avendus Research

After posting a CAGR of 57% in revenues over the past three years, the international business has

currently reached a stage of consolidation and we believe the management is likely to proceed with

caution. Revenues in FY11 are largely flat on a y‐o‐y basis. The segment’s contribution to the order

book has declined from 27% in Mar09 to 14% in Mar11, while on absolute basis the order book has

decreased by 29%.

Large real estate land bank of 300 acres, with exposure of INR7bn

NJCC has significant interests in the real estate development business with total stake‐adjusted current

land bank of 300 acres. The company has been in the business since 1996. A separate entity ‐ NCC

Urban Infrastructure ‐ was carved out in Dec05 to focus on the real estate business. The company owns

80% stake in NCC Urban, while the promoters own the rest. Apart from NCC Urban, there are three

large projects that are being carried out by the parent company or by its direct subsidiaries (Exhibit 6).

Exhibit 6: Summary of real estate projects (INRmn)

Projects City Stake Type of Development Acres Built‐up area

(mn sq. ft.)

Acreage

(Co. Share)

Built‐up area

(mn sq. ft.) (Co share)

Status

NCC Urban 287 11.04192

6.02

Gachibowli Hyderabad 70% Residential 9 1.16 5 0.65 Ongoing

NGHC Ranchi 88% Residential 56 1.75 40 1.23 Ongoing

Meadows Bangalore 60% Residential 8 0.65 4 0.31 Ongoing

Premier Bangalore 55% Residential 2 0.19 1 0.08 Ongoing

Aster Park Bangalore 80% Residential 3 0.31 2 0.20 Ongoing

Maple Heights II Bangalore 100% Residential 2 0.18 2 0.14 Ongoing

Green Valley Cochin 100% Residential 89 0.18 71 0.14 Ongoing

Laurel Cochin 100% Residential 1 0.16 1 0.13 Ongoing

Gajularamaram Hyderabad 25% Residential 38 1.46 8 0.29 Pending

Kompally Villas Hyderabad 100% Residential 37 0.68 30 0.54 Pending

Poppalaguda Hyderabad 100% Residential 9 0.90 7 0.72 Pending

Bachupally Hyderabad 100% Residential 18 1.40 14 1.12 PendingSymphony Apts Chennai 100% Residential 9 0.57 7 0.46 Pending

NCC Harmony Dubai Residential & Commercial 4 1.45 ‐ ‐ Ongoing

NCC 204 17.68 126 10.36

JHLP Hyderabad 25% Residential & Commercial 6 0.90 2 0.23 Pending

Tellapur Technocity Hyderabad 26% Residential & Commercial 100 7.50 26 1.95 Pending

Gajularamaram Hyderabad 75% Residential 4.38 ‐ 3.29 Pending

NCC Vizag Urban Visakhapatnam 100% Residential & Commercial 98 4.90 98 4.90 Pending

TOTAL 491 28.7 318 16.38


In FY11, the international

business contributed 14%

to the order book, 19% to

consolidated revenues

and c25% of consolidated

PAT





The company’s real estate land bank is spread over six cities. There are 17 projects planned by the

group, of which 12 are currently ongoing. NJCC’s total monetary exposure to real estate stands at

INR7bn, spread evenly in the form of equity infusions and loans to subsidiaries.

Low returns from real estate on poor sales; investments are locked

Exhibit 7: NCC Urban’s financial snapshot

(INRmn) FY07 FY08 FY09 FY10

Revenue 7 322 1,401 1,222

EBITDA N.A. N.A. 540 341

Interest N.A. N.A. 436 460

PAT 0 15 58 ‐132

Net Worth 1,499 1,513 1,570 1,437

Debt N.A. N.A. 4,460 4,892

EBITDA margin (%) 38.5 27.9

PAT margin (%) 4.2 ‐10.8

D/E (x) 2.8 3.4

Interest/Sales (%) 31 38


With real estate sales remaining lackluster, the group has had limited success in monetizing its land

bank so far. NCC Urban’s performance deteriorated in FY10, with a fall in revenue and margins.

Coupled with a growing debt burden and high interest outgo, the entity reported a loss in consolidated

numbers. The performance improved in FY11 with revenues picking up by 36% to INR1.65bn but the

PAT was just cINR30mn. Nevertheless, the returns from its real estate investments remain poor.

Although the company is not planning to invest further in the business, its existing investments may

remain locked in as the outlook for the business is likely to be impacted in the rising interest rate

scenario.

BOT business focused on roads and power projects

NJCC focuses on development projects in the roads and power spaces. It formed NCC Infrastructure

Holdings in FY06 as a 100% subsidiary to act as the holding company‐cum‐developer for such projects.

NJCC forayed into the BOT space in 2003 with its first BOT‐Annuity project in the road sector.

It currently has a portfolio of five road projects, two hydro projects and one thermal power project—as

consortium partner. Of the five completed road projects, three have been completed in the past six

months (after considerable delays due to land acquisition problems faced by the NHAI).

Exhibit 8: Summary of BOT assets (INRmn)

Project Partner Type Capacity

(km/MW)

Concession

date

Concession

(yrs)

Cost Stake (% ) Equity

share

Pending

Road projects 27,230 3,418 ‐

Bangalore ‐ Madurai Maytas^, KMC Annuity 63 Nov03 16 2,475 33.3 150 ‐

Bangalore Elevated Tollway Maytas, Soma Toll 24 Jan06 20 9,067 35.4 1,203 ‐

Orai‐Bhognipur‐Barah KMC Annuity 63 Apr06 15 5,848 67.9 940 ‐

Meerut‐Muzzafarnagar Maytas, Gayatri Toll 79 Sep05 6,690 30.0 795 ‐

Pondicherry‐Tindivanam Maytas Toll 38 Jul07 30 3,150 49.0 330 ‐

Power projects 97,122 16,764 ‐

Himachal Sorang Maytas 100 Jun07 ‐ 7,522 95.0 1,588 655

Nelcast Energy Gayatri 1,320 ‐ 70,000 55.0 11,550 10,665

Himalayan Green SMEC International 280 ‐ ‐ 19,600 50.0 3,626 3,311

Total 124,352 20,182 14,631

Source: Company, Avendus Research ^Note: Name changed to IL&FS Engineering and Construction Company

NJCC’s total monetary

exposure to real estate

stands at INR7bn

NCC Urban performance

improved in FY11 with

revenues picking up by

36% to INR1.65bn but the

PAT was just cINR30mn





The environmental clearance for the company’s 2x660MW thermal power project at Sompeta,

Srikakulam District in Andhra Pradesh, was withdrawn in Jul10, following which NJCC is considering

shifting the plant to another location. It has incurred pre‐operative expenses of cINR830mn on the

project, including INR450mn on land.

In Jan11, the company bought 55% stake in another project of 2x660MW being developed by Nelcast

Energy, at Krishnapatnam District in Andhra Pradesh. The project is currently in the development stage

with all land and clearances already acquired and is awaiting financial closure.

Estimate pending equity at INR3.5bn for projects under development

The equity commitment for road projects has been fully invested and the projects are already

complete. NJCC is unlikely to be an aggressive bidder for upcoming NHAI projects (as seen in past

bidding). The investment in power projects under development is comparatively larger and is likely to

entail a much larger share of incremental investments by the company.

The company has paid INR1.5bn for its 55% stake in Nelcast Energy. We estimate an additional INR3bn

of equity investment to be required by NJCC, assuming 49% stake is sold in the project to a private

equity investor at a premium of 1.33x P/B.

The

total

equity

commitment

pending

for

all

development

projects

is

estimated

at

INR3.5bn

including

Nelcast Energy and Himachal Sorang project and INR6.5bn including the Himalayan Green project

which is currently under development.

Exhibit 9: NJCC's investment commitment for 55% stake in Nelcast Energy project

(INRmn) Investment stage Total NJCC's share

Capacity (MW) 1320

Project cost 70,000

Project equity (70:30 D:E) 21,000 11,550

Acquisition cost paid On acquisition 2,700 1,485

Equity infusion required for financial closure (30%) 6,300 3,465

Balance equity pending for financial closure On financial closure 4,690 2,580

Equity pending post financial closure 14,700 8,085

Equity value for PE stake sale (1.33x P/B) 27,930 15,362

Equity infusion by PE (49% stake) 13,686 7,527

Promoter equity required excluding PE infusion 7,314 4,023

Balance post FC and PE During construction 1,014 558


Revocation risk for INR1.2bn guarantee, unless Nelcast Energy up by 2015

Pursuant to the company’s successful tariff ‐based bidding (case 1) with the Karnataka state electricity

board, it has provided a commitment to supply 400MW at INR3.89/unit from 2014, along with a

performance guarantee of INR1.2bn. Unless the Nelcast Energy project is completed by 2015, the

company faces the risk of forfeiting its guarantee.

In Jan11, the company

bought 55% stake in

another power project of

2x660MW being

developed by Nelcast

Energy – currently

awaiting financial closure

We estimate an additional

INR3bn of equity

investment to be required

by NJCC in Nelcast Energy





Three‐year CAGR in PAT forecast at 9%, more pain in the near term

NJCC’s adjusted book‐to‐bill ratio has been on the rise over the past two years on the back of improvement in orders in

the domestic business—notably in the power and buildings segment. At 2.7x currently, the book‐to‐bill ratio is at its

highest in the past five years. We forecast a CAGR of 8% in order inflow during FY12f ‐FY14f, implying moderation from

the three‐year CAGR of 24% over FY08‐FY10—without factoring in the inflows from its power development projects. We

do not forecast significant improvement in execution, given the rising share of the buildings and power segments in the

order book. We forecast a three‐year CAGR of 11% in revenue. PAT is forecast to decline in FY12 due to the higher

interest cost burden, leading to a three‐year CAGR of 8%. After declining sharply in FY11, we forecast cash flow

generation to improve over FY12‐FY14 on the back of an improving working capital cycle and declining investment

requirement in development projects. With c25% of assets locked in un‐yielding investments, the RoE is forecast to

remain at the low level of 8.4% in FY14, though core ROIC is forecast to improve by 162‐bp to 12.3% over FY12‐FY14.

Exhibit 10: Quarterly order backlog trend

120

140

160

180

Jun09 Sep09 Dec09 Mar10 Jun10 Sep10 Dec10 Mar11

0%

10%

20%

30%Order backlog (INRmn) y‐o‐y (%, RHS)


Exhibit 11: Book‐to‐bill ratio (x) trend

3.2

3.43.3 3.4

3.2

3.3

3.2

3.4

2.6

2.7

2.7 2.7

2.5

2.7 2.7

2.9

2.0

2.6

3.2

3.8

J un 09 Se p0 9 D ec 09 Ma r1 0 J un 10 Se p1 0 D ec 10 Ma r1 1

Reported BTB ra tio Adjusted BTB ratio


Steady growth in order book; book‐to‐bill ratio up on domestic orders

NJCC has maintained steady growth in the consolidated order backlog over the past two years, with

growth mostly maintained at over 15% on y‐o‐y basis. The company reports a consolidated order

backlog, which includes the share of international orders, although revenues from the same are not

reflected in standalone results. We have, therefore, computed the adjusted book‐to‐bill ratio as seen in

Exhibit 11.

The international business has slowed down in the past one year, hence the pace of new orders has

declined. In FY11, NJCC only international booked orders worth INR1.7bn—representing 3% of the

consolidated order booking during the period.

The book‐to‐bill ratio in the standalone company has been on the rise during Jun10‐Dec10 on the back

of improvement in orders in the domestic business. Most notably, order inflows have improved in the

buildings and power segments during FY11, leading to the book‐to‐bill ratio improving to 2.7x – a level

matching or higher than that seen in seven of the past eight quarters and the highest in last five year

ends (Exhibit 11 and 13).

3‐year CAGR of 8% in order inflow, power segment lends upward bias

From FY07 to FY10, order inflows grew at a three‐year CAGR of 24%. Growth during the period was

aided by the international and power segments. In FY11, growth in international segment has been

muted, while that in the buildings segment has picked up.

Order inflows have

improved in the buildings

and power segments

leading to 2.7x book‐to‐

bill ratio – highest in last

five year ends





Exhibit 12: Order inflow forecast

40

60

80

100

FY07 FY08 FY09 FY10 FY11 FY12f FY13f FY14f

‐50

0

50

100Order Inflow (INRbn) y‐o‐y (%, RHS)

24% CAGR 8% CAGR


Exhibit 13: Book‐to‐bill ratio (x) forecast

1.7

1.9

1.3

2.6

2.2

2.5

1.21.21.2

1.3

2.2

2.6

2.4

2.7 2.72.7

1.0

1.8

2.6

3.4


Order inflow/Revenue (x) B‐T‐B ratio (x)


We forecast a three‐year CAGR of 8% in order inflows, implying a moderation in growth compared to

the FY07‐FY10 period. We believe the pace of growth in the buildings segment is likely to slow as

interest rate increases may impact the sector. We have not factored in any orders from the

international business, given the uncertainties in the region over the short to medium term.

Our order inflow/revenue assumption of 1.2x over FY12f ‐FY14f is marginally below the average of 1.3x

over FY08‐FY10 as we believe a high base effect may impact the growth rate. The share of power

sector orders has been on the rise. Also, NJCC has been looking to increase its presence in the EPC/BOP

space. The company is looking to book orders worth cINR50bn in FY12f from its own 2x660MW

thermal power development project. We have conservatively not included it in our forecast and it

lends an upward bias to our order inflow assumptions. However, such EPC orders with a longer

execution cycle (four years or more) are unlikely to impact our revenue forecast to the same extent.

Based on our order inflow forecast, the company is likely to maintain a comfortable book‐to‐bill ratio

of 2.6x and above.

Execution forecast to remain subdued with a change in composition

Exhibit 14: Trend in order backlog execution rate

40

4645

3938

44

46

39

35

40

45

50



We have conservatively

not included INR50bn of

potential power EPC

orders from Nelcast

Energy in our order inflow

forecast





Exhibit 15: Profit margin trend (%)

9.49.0

5.3

10.09.99.89.6

10.110.4

4.7

3.33.53.93.7

2.8 3.0

2.5

5.5

8.5

11.5

FY07 FY08 FY09 FY10 FY11 FY12 f FY13f FY14f

EBITDA margin PAT margin


Exhibit 16: Revenue and PAT growth trend (%)

‐35

0

35

70


Revenue (y‐o‐y) PAT (y‐o‐y)


The FY11 standalone revenue was 13% below the company’s guidance due to:

Extended monsoons impacting execution in the southern region.

Execution stalled due to delay in payments by clients.

Projects affected by delayed clearance and land acquisition problems.

As a result of the above, the execution rate declined significantly in FY11. We believe the delay in

payments and land acquisition‐related problems may persist. Hence, we believe the execution rate

may continue to be impacted. In addition, the average execution cycle of the order book is likely to

increase with the rising share of power segment orders. In the buildings segment, the delay in client

payments may further increase with the tightening liquidity scenario, leading to slower execution of

projects. Taking the above into consideration, we have not forecast only marginal improvement in the

execution rate over FY13‐FY14.

Forecast two‐year CAGR of 11% in revenue and 9% in PAT

Based on our forecasts of a three‐year CAGR of 8% in order inflows, and marginal improvement in the

execution rate, we forecast a three‐year CAGR of 11% in revenue. EBITDA margins were impacted in

FY11 by the slowdown in revenue growth. We forecast EBITDA margins to improve gradually on the

back of a favorable revenue mix, with a high share of the buildings segment.

PAT is likely to decline further in FY12f, due to sliding PAT margins, before recovering at a 2‐year CAGR

of to 22% during FY13‐FY14. PAT margins are forecast to be hurt on account of higher interest costs—

as a result of high working capital and investments in development and real estate projects.

Working capital cycle up sharply, forecast reversal to FY10 level

The net working capital cycle (calculated as days’ sales outstanding) has been on the rise over FY07‐

FY10. In FY11, it has risen further by 28% to 156 days on account of an increase in debtor’s days and

loans and advances.

After stretching in FY11, we believe the management is likely to focus more on improving receivables

and, hence, forecast the working capital cycle in FY14 to revert to the FY10‐level. A higher share of

development projects may lead to further improvement in the working capital cycle.

Cash flow to improve on better working capital cycle, low investment

Cash flow generation has declined significantly in FY11 on account of a decline in margins, increase in

working capital cycle and higher investments in development projects. Operating cash flow generation

The average execution

cycle may increase with

the rising share of power

segment orders

PAT is likely to decline

further in FY12f, due to

sliding PAT margins,

before recovering at a 2‐

year CAGR of to 22%

during FY13‐FY14

The

working

capital

cycle

has risen further in

FY11by 28% to 156 days





is forecast to turn positive over FY12‐FY14 on higher margins and reduction in the working capital

cycle. We have assumed investments of INR2.5bn in FY12f and INR1bn in FY13f for power projects. We

have not assumed any outflow on account of the 280MW hydro project as it is still under development

and is awaiting finalization of its DPR. The capex/revenue is forecast to remain stable at 2.5x, based on

the steady revenue growth forecast over FY12‐FY14.

Exhibit 17: Working capital trend (days' sales outstanding)

166

210 205

52

204

185

215223232

127139148

154

122109

83

40

80

120

160

200

240


Debtors & Advances Net working capital


As a result of the above, free cash flow generation is forecast to remain negative, leading to an

increase in gearing. The net debt/equity ratio is estimated to rise from 0.7x in FY11 to 0.8x in FY14f.

Apart from a high working capital cycle, c25% of assets are locked up as investments in subsidiaries,

which is higher than that for peers, and may increase further with large investments in the thermal

power project under development. As a result, the ROCE is forecast to decline to 6.2% in FY12f and

improve marginally by 85‐bp over FY12‐FY14 on higher profit margins and the improving working

capital cycle. The ROE is forecast to remain at low level of 8.4% in FY14f through core ROIC is forecast

to improve by 162‐bp over FY12‐FY14 to 12.3%.

Exhibit 18: Cash flow/revenue (%) trend and composition

‐16

‐8

0

8

16


OCF/Revenue Capex/Revenue Investments/Revenue


Exhibit 19: Net D/E and profitability trend

6

9

12

15

18

FY07 FY08 FY09 FY10 FY11 FY12 f FY1 3f FY14f

0.0

0.3

0.6

0.9

1.2

ROIC (%) ROE (%) Net D/E (x, RHS)


Operating cash flow

generation is forecast to

turn positive over FY12‐

FY14

Free cash flow generation

is forecast to remain

negative, leading to an

increase in gearing





Initiate with a Buy and Jun12 TP of INR108, value unlocking the key

NJCC, adjusted for the value of investments, currently trades at a one‐year forward P/E of 6.6x and EV/EBITDA of 5.0x.

Its discount to the Sensex and Larsen and Toubro’s (LT IN, Hold) one‐year forward P/E has been widening over the past

one year and currently stands at 54% and 70%, respectively. We estimate the fair P/E for NJCC at 7.0x, supported by a

three‐year CAGR of 9% in PAT. We estimate the fair EV/EBITDA at 5.5x, implying c10% improvement from current levels.

Based on the P/E method, we estimate the Jun12 fair value of the EPC business at INR53/share, based on Jun13f EPS of

INR7.6. Based on 5.5x EV/EBITDA, we estimate the fair value of the EPC business at INR56/share. We arrive at the fair

value of INR55/share for the standalone EPC business based on the average of the fair values derived from the P/E and

EV/EBITDA methods. Our Jun12 TP of INR108 is arrived at based on the SOTP method, after adding INR53/share as the

value of NJCC’s investments in BOT, real estate and the international business—arrived at using varying P/B multiples.

We initiate coverage with a Buy rating and a 30% upside. Our DCF‐based value estimate for the construction business is

higher, at INR93/share. Pruning the balance sheet and unlocking value from investments hold the key for further re‐

rating in the stock as c50% of our target price is derived from the value of unlisted investments. Sustained high working


Relative discount to LT P/E at close to its highest in the past 3 years

Exhibit 20: Relative premium to Sensex and LT P/E

‐120

‐80

‐40

‐

40

80


Premium to Sensex P/E (%) Premium to LT P/E (%)


Exhibit 21: One‐year forward EV/Sales and EV/Invested Capital

0.1

0.4

0.7

1.0

1.3

1.6


EV/Sales (x) EV/Invested Capital (x)






NJCC currently trades at a discount of 54% and 70% to the Sensex and LT’s P/E, respectively. This is

significantly lower than the average of the past three years’ discount of 12% and 41% to the Sensex

and LT’s P/E, respectively. Between Oct09 and Aug10, NJCC has traded at a premium to the Sensex.

However, the relative discount since then has considerably widened—a result of deteriorating

fundamentals. The current EV of the company is lower than the invested capital with the EV/Invested

Capital ratio at 0.76x compared to past three‐year average of 1.06x. The low EV/IC ratio is not

reflecting the comparatively higher core construction ROIC of the company of 11.5% in FY11.

We have used the adjusted P/E for NJCC ‐ computed after reducing the value of investments from its

price on rolling basis. The investments have historically been valued at a P/B basis including real estate

valued at a discount to book value; leading to a blended multiple of 0.9x.

Estimate gradual re‐rating on slow earnings recovery; fair P/E at 7x

NJCC is currently trading at a one‐year forward adjusted P/E multiple of 6.6x compared to the average

P/E of 13.6x over the past three years. Given our forecast of a comparatively slower earnings growth

and lower ROIC compared to its past averages, NJCC is unlikely to trade at its average historical P/E.

We estimate the fair one‐year forward P/E for NJCC at 7.0x, supported by our forecast three‐year CAGR

in PAT of 9%. Based on FY13f EPS growth, our target P/E implies a PEG ratio of 0.4. However, we

believe a further re‐rating in the stock is likely to be constrained by the low average RoE of 7.3% over

FY12f ‐FY14f.

Our fair target P/E for NJCC implies its discount to LT is likely to reduce from the current 70% to 62% to

our implied target P/E of 18x for LT.

Accordingly, based on the Jun13 EPS forecast of INR7.6, we estimate the fair value of the construction

business (standalone) based on the P/E method at INR53/share.

Exhibit 22: One‐year forward P/E and target P/E (x)

‐

10

20

30

Jul08 Apr09 Feb10 Nov10 Sep11 Jun12

1‐year forward P/E Average P/E Target P/E

Target = 7.0x

Average = 13.6x


Balance sheet pruning may trigger further P/E re‐rating

Apart from a high working capital cycle, c25% of NJCC’s total assets are estimated to be locked up in

the form of investments in its various subsidiaries and development projects, resulting in low asset

turns and RoE. Divestment of stake in development projects and faster payback on real estate

investments are likely to help improve the RoE and trigger a further re‐rating. On the other hand, the

increasing share of own BOT projects in the order book is likely to further depress the RoE, besides

increasing gearing and raising the dilution risk.

The low EV/IC ratio is not

reflecting the

comparatively higher core

construction ROIC of the

company of 11.5% in FY11

Our fair target P/E for

NJCC implies its discount

to LT is likely to reduce

from the current 70% to

62% to our implied target

P/E of 18x for LT

Divestment of stake in

development projects and

faster payback on real

estate investments are

likely to help improve the

RoE and trigger a further

re‐rating





Target EV/EBITDA pegged at 5.5x; 27% discount to 3‐year average

Exhibit 23: One‐year forward EV/EBITDA, target EV/EBITDA and ROIC

2

5

8

11

Jul08 Apr09 Feb10 Nov10 Sep11

2

8

14

20

EV/EBITDA (x) Target EV/EBITDA (x) ROIC (%, RHS)

Average = 6.8xTarget = 5.5x


NJCC is currently trading at a one‐year forward EV/EBITDA of 5.0x, a discount of 19% to its past three‐

year average of 6.8x. We believe the EV/EBITDA is unlikely to revert to its mean as the forecast ROIC is

lower than its past average. We forecast the core construction ROIC of 11.5% in FY11 to remain stable

at the same level on average over FY12‐FY14—significantly lower than the average of 18.1% over FY07‐

FY10. The forecast CAGR in EBITDA over FY12‐FY14 is likely to be higher, at 12.7%, compared to 10.7%

over the past three years.

We estimate the fair EV/EBITDA for Jun12f at 5.5x, assuming c10% improvement from current levels

and a c10% premium to peers such as Simplex Infrastructure (SINF IN, Buy) and IVRCL Infrastructures

(IVRC IN, Buy), considering (i) NJCC’s comparatively higher historical multiple, (ii) higher growth

prospects on account of orders from its own power project and (iii) a comparatively more diversified

order book. We estimate the fair value of the construction business based on the EV/EBITDA at

INR56/share.

Base‐case DCF value of construction business pegged at INR93/share

We have estimated the base‐case fair value of NJCC’s construction business at INR93/share using the

three‐stage DCF method. The key assumptions are:

The first stage in the DCF uses our explicit forecasts during FY12‐FY14.

In the second stage, we have assumed 10% revenue growth till FY25f, assuming a prolonged

consolidation phase amongst the large players in the industry. We have assumed EBIT margins to

remain similar to that in FY13f. We have assumed the working capital cycle to improve to 120 days

– similar to its peer and the level seen in FY10; this is likely to lead to an increase in the average

ROIC to 15.5%.

In the third stage, revenue growth is assumed at 5% and EBIT margins are estimated to fall further,

till the ROIC converges with the WACC.

For the WACC calculations, we have assumed a beta of 1.5x, based on beta (as per Bloomberg data) for

the past five years. We have assumed a leverage of 1:1 as a stable rate.

We estimate the fair

EV/EBITDA for Jun12f at

5.5x, assuming c10%

improvement from

current levels and a c10%

premium to peers





Exhibit 24: DCF assumptions and summary

Key parameters ‐‐‐‐‐‐‐‐‐‐ Stage‐I: 3 years explicit ‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐‐ Stage‐II: 12 years ‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐‐ Stage‐III: 10 years ‐‐‐‐‐‐‐‐‐‐

Year FY12f FY13f FY14f Over stage I FY15f FY26f Over stage II FY27f FY36f Over stage III

Revenue growth (%) 9.8 11.2 12.5 11.1 CAGR 10.0 10.0 10.0 CAGR 5.0 5.0 5.0 CAGR

EBIT margins (%) 8.5 8.6 8.7 8.6 Average 8.7 8.7 8.7 Average 8.4 5.9 7.1 Average

Tax rate (%) 33.0 33.0 33.0 33.0 Average 33.0 33.0 33.0 Average 33.0 33.0 33.0 Average

Gross

asset

turnover

(x)

5.1

5.0

4.9

5.0

Average

4.9

4.9

4.9

Average

4.9

4.9

4.9

AverageWCAP (days sales) 147.7 138.7 127.4 137.9 Average 126.8 120.0 123.4 Average 120.0 120.0 120.0 Average

ROIC (%) 10.7 11.4 12.3 11.5 Average 12.9 15.5 14.4 Average 14.9 12.5 13.9 Average

DCF value as on Mar11 (INRmn) % of EV WACC assumption (%) Sensitivity analysis

Explicit period cash flows 5,398 14 Risk‐free rate 8.00 WACC (%)

Stage‐II cash flows 14,552 36 Mkt. Risk Prem. 6.00 11.5 12.5 13.5

Stage‐III cash flows 11,384 28 Beta (x) 1.50 4.0 114 88 69

Terminal value 8,635 22 Cost of equity 17.0 5.0 121 93 71

Total EV 39,969 100 Cost of debt 13.0 T e r m i n a l g r o w t h

( % )

6.0 130 99 75

Less: Gross debt 25,148 Debt/Total capital 50.0

Add: Investments & Cash 8,093 WACC 12.8

Equity value 22,913 Terminal growth 5.0

No of shares (mn) 257

Value/share (INR) (Mar12) 89

Value/share (INR) (Jun12) 93


Exhibit 25: DCF model – free cash flow and ROIC forecast

0

4

8

12

16

FY1 2f FY1 4f FY1 6f FY1 8f FY2 0f FY2 2f FY2 4f FY2 6f FY2 8f FY3 0f FY3 2f FY3 4f FY3 6f

8

10

12

14

16

Free Cash Flow (INRbn) ROIC (%,RHS) WACC (%,RHS)

Source: Avendus Research

Jun12 TP of INR108 based on average of P/E and EV/EBITDA methods

We estimate the fair value of NJCC’s EPC business at INR55/share. This is based on the average of the

fair values derived using the P/E and the EV/EBITDA methods. Our Jun12 target price is based on the

sum‐of ‐the‐parts method and includes the value of NJCC’s interests in three other businesses. The

multiples used for valuations are assumed on the following considerations:

NCC Infrastructure currently has few operational projects, with a significant history of operations

and indications of profitability. For NCC Infrastructure we have assumed a value lower than that for

other listed holding companies, assuming a certain discount for illiquidity.

The returns on the real estate investment have been poor and at the risk of falling further, given the

adverse headwinds for the sector. NCC Urban reported a large loss in FY10 and managed a PAT of

just INR31mn in FY11. Hence, we have assumed a discount on P/B basis.





From the international subsidiaries, the company has earned a RoE of c40% in FY10, albeit on a low

asset base. We refrain from assigning a P/E multiple, given the limited resource commitment to the

business. Instead, we use a more conservative P/B method. Assuming a normal RoE and factoring in

a holding company discount for illiquidity, we assign a P/B of 1.0x for the business.

Exhibit 26: Sum‐of ‐the‐parts target price computation

Business Investment Valuation approach Value (INRmn) Price/share % of TPParent EPC business 7.0x P/E 13,612 53 49

Parent EPC business 5.5x EV/E 14,383 56 52

Average for EPC business 13,997 55 51

BOT investments 9,986 1x P/B 9,986 39 36

Real estate investments 3,838 0.5x P/B 1,919 7 7

International subsidiaries 1,596 1x P/B 1,596 6 6

Value of investments 15,419 13,500 53 49

SOP target 27,498 108 100

Source: Avendus Research

Initiate coverage with a Buy rating and 30% upside

We initiate coverage on NJCC with Jun12 target price of INR108 and a Buy rating. Our target price is at

a 30% upside from the current price. At our target price, the stock would trade at 6.2x P/E and 5.1x

EV/E on FY13f. Value un‐locking from BOT assets may improve NJCC’s cash flows and trigger further

upsides in the company supported by improving PAT growth trajectory forecast over FY13f ‐FY14f.

At the current price, excluding the value of investments, NJCC is trading at 5.1x and 4.3x FY12f and

FY13f, respectively. This implies a 4% discount to IVRC on FY12f and is in line with the lower ROE of the

company.

Exhibit 27: Peer valuation comparison (%)

CMP ‐‐‐‐‐ P/E (x)^ ‐‐‐‐‐ ‐‐‐‐‐ EV/EBITDA (x)^ ‐‐‐‐‐ EBITDA margin PAT margin ROIC ROE 3‐year forecast growth

(INR) FY12f FY13f FY14f FY12f FY13f FY14f FY12f FY12f FY12f FY12f Revenue EBITDA PAT

IVRC 71.5 5.3 4.8 4.1 4.4 4.3 4.1 9.8 3.1 12.4 9.1 11.2 11.6 8.0

SINF 267.9 10.7 8.8 6.8 5.7 5.0 4.3 9.7 2.3 9.0 10.9 12.2 12.2 16.2

Peer weighted average 7.5 6.4 5.2 4.9 4.6 4.2 9.8 2.8 11.0 9.8 11.6 11.8 11.4

NJCC 83.1 5.0 4.3 3.4 5.1 4.7 4.2 9.8 2.8 10.7 6.4 11.1 12.7 9.2

Source: Bloomberg, Avendus Research ^Note: Excluding value of investments (VOI) of INR34 for IVRC and INR53 for NJCC

We initiate coverage on

NJCC with a 30% upside to

our Jun12 target price of

INR108 and a Buy rating





Risk factors

Risks to execution: The changing order book composition raises fresh execution challenges. Sector‐

wide problems such as delays in land acquisition and financial closures may impact segments such

as power, roads and buildings, which together constitute c50% of the order book. The working

capital cycle has increased by 28% in FY11 to 156 days and may impact the pace of execution going

forward.

Delay in power project execution: Delays in financial closure or private equity investment in the

Nelcast Energy project may increase the capital commitment from NJCC and adversely impact cash

flows and return ratios.

High gearing and low promoter stake limits room for dilution: The gross/debt equity is forecast to

remain at over 1.1x over FY12‐FY14; at this level, it is likely to raise the need for dilution in the

future. However, at 20%, the promoter holding is low, which may restrict the firm’s financial

flexibility in raising fresh capital; thus, affecting growth.

Exposure to real estate: Rising interest rates and tightening liquidity are likely to most affect

execution in the buildings segment. The buildings segment accounts for the largest share of the

company’s order book. It may also strain the financials of NCC Urban, and which may require

further support from NJCC in the form of loans. Of our estimated target price, 7% is contributed by

the company’s investments in real estate projects.

Sharp increase in interest rates: A sharp increase in interest rates is likely to impact the growth of

new orders. It may also adversely impact the working capital cycle and directly impact profitability

through higher cost of debt. Buildings and industrials are two of the key constituents of the order

book that are most likely to be impacted by higher interest rates.

Risk to margins on account of raw material prices and entry into new segments: The company has

entered new segments where it is yet to establish a significant market share. Due to this, the

company may face low pricing power. Also, adverse raw material price movement may have a

significant impact on margins, especially for long gestation projects.

Large exposure to state government projects; higher exposure to political factors: A significant

share of orders comes from various governments and their enterprises. The receivables may be

adversely affected by the fiscal health of these governments. Growth in orders from the sector may

slow down, leading to higher competition.





Financials and valuations (standalone)

Income statement (INRmn)Fiscal year ending 03/10 03/11p 03/12f 03/13f 03/14f

Gross sales 47,778 50,737 55,684 61,906 69,635

Less: Excise duty 0 0 0 0 0Net sales 47,778 50,737 55,684 61,906 69,635

Other operating income 0 0 0 0 0

Total operating income 47,778 50,737 55,684 61,906 69,635

Total operating expenses 42,944 45,861 50,221 55,771 62,664

Net materials 18,070 17,564 19,829 21,890 24,797

Other direct costs 22,063 24,657 26,570 29,677 33,102

Personnel 1,841 2,438 2,560 2,816 3,239

SG&A 969 1,201 1,261 1,388 1,526

R&D ‐ ‐ ‐ ‐ ‐

EBITDA 4,834 4,876 5,463 6,136 6,971

Other income 48 146 70 82 96

Depreciation 525 685 798 914 1,043

EBIT 4,357 4,337 4,735 5,304 6,025

Interest 1,322 1,682 2,419 2,578 2,571

Recurring PBT 3,035 2,656 2,316 2,726 3,454

Net extra ordinary items 496 ‐ ‐ ‐ ‐

PBT (reported) 3,530 2,656 2,316 2,726 3,454

Total taxes 1,204 876 764 900 1,140

PAT (reported) 2,326 1,780 1,552 1,827 2,314

Add: Share of earnings of associate ‐ ‐ ‐ ‐ ‐

Less: Minority interest ‐ ‐ ‐ ‐ ‐

Prior period items ‐ ‐145 ‐ ‐ ‐

Net income (reported) 2,326 1,635 1,552 1,827 2,314

Avendus net income 1,831 1,780 1,552 1,827 2,314

Dividend + Distribution tax 389 299 270 329 419

Shares outstanding (mn) 256.8 256.8 256.8 256.8 256.8

Avendus diluted shares (mn) 256.8 256.8 256.8 256.8 256.8

Avendus EPS (INR) 7.1 6.9 6.0 7.1 9.0

Growth ratios (%)

Total operating income 15.1 6.2 9.8 11.2 12.5

EBITDA 29.4 0.9 12.0 12.3 13.6

EBIT 34.3 ‐0.5 9.2 12.0 13.6

Recurring PBT 33.0 ‐12.5 ‐12.8 17.7 26.7

Avendus net income 19.0 ‐2.8 ‐12.8 17.7 26.7

Avendus EPS 6.1 ‐2.8 ‐12.8 17.7 26.7

Operating ratios (%)

EBITDA margin 10.1 9.6 9.8 9.9 10.0

EBIT margin 9.1 8.5 8.5 8.6 8.7

Net profit margin 3.8 3.5 2.8 2.9 3.3

Other income/PBT 1.6 5.5 3.0 3.0 2.8

Effective Tax rate 34.1 33.0 33.0 33.0 33.0





Balance sheet (INRmn)Fiscal year ending 03/10 03/11p 03/12f 03/13f 03/14f

Equity capital 513 513 513 513 513

Preference capital ‐ ‐ ‐ ‐ ‐

Reserves and surplus 21,943 23,274 24,556 26,053 27,948

Net worth 22,457 23,787 25,069 26,566 28,461

Minority

interest‐ ‐ ‐ ‐ ‐

Total debt 15,302 24,841 27,591 28,591 29,591

Deferred tax liability 255 308 354 408 478

Total liabilities 38,013 48,935 53,014 55,566 58,530

Gross block 7,561 9,489 10,881 12,428 14,169

less: Accumulated depreciation 2,023 2,708 3,506 4,420 5,463

Net block 5,538 6,781 7,374 8,008 8,707

CWIP 434 434 434 434 434

Goodwill ‐ ‐ ‐ ‐ ‐

Investments 9,412 12,008 14,508 15,508 16,508

Cash 1,997 1,397 1,129 708 824

Inventories 7,539 8,960 9,834 10,386 11,099

Debtors 12,995 14,536 15,554 16,860 18,017

Loans and advances 18,552 24,562 25,592 26,985 28,699

less: Current liabilities 17,497 19,031 20,626 22,382 24,583

less: Provisions 957 712 785 943 1,175

Net working capital 22,629 29,712 30,697 31,615 32,881

Total assets 38,013 48,935 53,014 55,565 58,530

Cash flow statement (INRmn)Fiscal year ending 03/10 03/11p 03/12f 03/13f 03/14f

Net profit 2,326 1,635 1,552 1,827 2,314

Depreciation 525 685 798 914 1,043

Deferred tax 99 53 46 55 69

Working capital changes ‐3,552 ‐5,683 ‐919 ‐987 ‐780

Less: Other income 48 146 70 82 96

Cash flow from operations ‐650 ‐3,456 1,408 1,725 2,550

Capital expenditure ‐1,481 ‐1,928 ‐1,392 ‐1,548 ‐1,741

Strategic investments purchased ‐2,009 ‐2,596 ‐2,500 ‐1,000 ‐1,000

Marketable investments purchased ‐ ‐ ‐ ‐ ‐

Change in other loans and advances ‐1,219 ‐2,000 ‐335 ‐352 ‐369

Goodwill paid ‐ ‐ ‐ ‐ ‐

Other income 48 146 70 82 96

Cash flow from investing ‐4,661 ‐6,378 ‐4,157 ‐2,817 ‐3,014

Equity raised ‐ ‐ ‐ ‐ ‐

Change in borrowings 2,863 9,539 2,750 1,000 1,000

Dividends paid (incl. tax) ‐389 ‐299 ‐270 ‐329 ‐419Others 3,489 ‐5 0 0 0

Cash flow from financing 5,963 9,234 2,480 671 581

Net change in cash 652 ‐600 ‐269 ‐421 117





Key RatiosFiscal year ending 03/10 03/11p 0 3/12f 03/13f 03/14f

Valuation ratios (x)

P/E (on Avendus EPS) 11.7 12.0 13.7 11.7 9.2

P/E (on basic, reported EPS) 11.7 12.0 13.7 11.7 9.2

P/CEPS 9.1 8.7 9.1 7.8 6.4

P/BV 0.9 0.9 0.9 0.8 0.7

Dividend yield (%) 1.6 1.2 1.1 1.3 1.7

Market cap. / FCF ‐18.6 ‐6.4 15.2 12.4 8.4

Market cap. / Sales 0.4 0.4 0.4 0.3 0.3

EV/Sales 0.6 0.8 0.7 0.7 0.6

EV/EBITDA 6.2 7.9 7.5 6.9 6.1

EV / FCF ‐11.5 ‐7.3 2,611.4 237.6 53.0

EV / Total Assets 0.8 0.8 0.8 0.8 0.7

Net Cash / Market cap. 31.4 37.9 38.2 37.9 40.2

Per share ratios (INR)

Avendus EPS 7.1 6.9 6.0 7.1 9.0

EPS (Basic, reported) 9.6 6.4 6.0 7.1 9.0

Cash EPS 9.2 9.6 9.2 10.7 13.1

Book Value 87.4 92.6 97.6 103.4 110.8

Dividend per share 1.3 1.0 0.9 1.1 1.4

ROE Decomposition (%)

EBIT margin 9.1 8.5 8.5 8.6 8.7

Asset turnover (x) 1.4 1.2 1.1 1.1 1.2

Interest expense ratio 3.9 3.9 4.7 4.7 4.5

Tax retention ratio 65.9 67.0 67.0 67.0 67.0

ROA 5.4 4.1 3.0 3.4 4.1

Total assets / equity (x) 1.7 1.9 2.1 2.1 2.1

ROE 9.3 7.7 6.4 7.1 8.4

Return ratios (% )

EBIT / Capital Employed 12.9 10.0 9.3 9.8 10.6

ROCE 8.0 6.7 6.2 6.5 7.1

ROIC 8.5 7.0 6.4 6.7 7.2

FCF / IC ‐8.3 ‐12.7 0.0 0.3 1.4

OCF/Sales ‐2.4 ‐6.5 2.5 2.8 3.7

FCF/Sales ‐5.5 ‐10.3 0.0 0.3 1.2

Turnover ratios (x)

Gross turnover 6.3 5.3 5.1 5.0 4.9

Net turnover 8.6 7.5 7.6 7.7 8.0

Revenue / IC 1.5 1.2 1.1 1.2 1.2

Inventory / Sales (days) 57.4 59.3 61.6 59.6 56.3

Receivables (days) 88.8 99.0 98.6 95.6 91.4

Payables (days) 150.2 157.9 156.0 152.2 148.0

Working capital cycle (ex‐cash) (days) 108.2 135.1 144.7 135.8 125.4

Solvency ratios (x)

Gross debt to equity 0.7 1.1 1.1 1.1 1.1

Net debt to equity 0.4 0.7 0.8 0.8 0.8

Net debt to EBITDA 3.2 5.1 5.1 4.7 4.2

Interest Coverage (EBIT / Interest) 3.3 2.6 2.0 2.1 2.3





Analyst Certification

I, Devang Patel, PGDFA, research analyst and author of this report, hereby certify that all of the views expressed in this document accurately reflect our personal views about the

subject company/companies and its or their securities. We further certify that no part of our compensation was, is or will be, directly or indirectly related to specific

recommendations or views expressed in this document.

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document.

Avendus

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Any comment or statement made herein are solely those of the analyst and do not necessarily reflect those of Avendus.




Disclosure of Interest Statement (as of July 7, 2011)

Analyst ownership

of the stock

Avendus or its associate company’s

ownership of the stock

Investment Banking mandate with

associate companies of Avendus

Gayatri Projects No No No

IL&FS Engineering and Construction Company No No No

IVRCL

Infrastructures

No

No

No

Larsen and Toubro No No No

NCC No No No

Simplex Infrastructures No No No

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