NBCC Cherry Pick

Malhar Complex, Dumas Road, Ichchanath, Surat – 395007. Tel (0261) 305 5555, www.jainam.in, [email protected]

Executive Summary

This is a tactical call. We currently have a 1 year view on the company and recommend a BUY. We

do not view it as a long term compounding story at present.

Minimum 50% returns expected.

This can be a sizable allocation in the portfolio. At present, a 10% allocation of the overall

portfolio is recommended.

We are leaving some space to add more shares at lower prices, if the opportunity presents itself.

Basic Data

CMP Rs. 125.55 TTM revenue Rs.cr 3372

Market cap Rs.cr 1430 TTM EPS Rs. 15

EV Rs.cr 130 52-week H/L 195/73

FY12 Dividend Rs. 3.5 Promoter 90%

National Buildings Construction Corp. Ltd (NBCC)

CMP : Rs 125 Action: ACCUMULATION Target Price: Rs.185 Time Horizon: 1 Year

April 1, 2013


Business NBCC is a PSU, with 90% Government holding. The company operates in basically 3 business segments

Project management consultancy (PMC)

Biggest and most stable division. Accounts for over 90% of the total revenues.

Government ministries and departments have their own construction requirements, such as

constructing a new office building, constructing new staff quarters etc. By law, they are not

allowed to approach private sector entities for this construction. They requisition the Public

Works Department (PWD) to undertake this construction.

NBCC has been given PWD status by the Government. Hence, such ministries and departments

can also approach NBCC, instead of the overworked PWD to get their work done. This law

protects NBCC’s business. Since no other entity is allowed to get into this business, there is

virtually no competition.

After getting orders, NBCC does not undertake any construction on its own, but outsources it to

private parties on tender basis. It merely supervises and manages the construction work and acts

as the nodal authority. For this, it charges a fee, ranging from 5% to 10% of the total contract


value. This business model ensures extremely low pressure on cash-flows, stable and steady

business and a clean balance sheet.

NBCC is not liable for any substandard / delayed work done by the contractor. The liability is of

the contractor. Similarly, NBCC passes any escalation in the contract work to the contractor,

ensuring fair terms for the contractor.

Currently, this division has an order book of Rs.16000 cr, which is more than 4x TTM revenues,

giving good visibility. It recently won a Rs.4200 cr project to redevelop Government housing

colonies in Delhi.

Civil Construction for power sector

In this division, the company provides engineering and construction services to the power sector.

The services include design and execution of civil and structural works, cooling towers and

chimneys.

In this division too, NBCC does not carry out any work itself, but subcontracts the work after

getting orders on a tender basis.

Currently the division contributes negligible portion of NBCC’s revenues.

Real estate development

NBCC has a real estate division, which operates in both residential and commercial segments.

The company has a land bank of more than 130 acres, spread across various cities predominantly

in North India. The land is a mix of owned land and that acquired on lease from the Government.

Currently, the company has two ongoing residential projects in Gurgaon and a large commercial

project in Okhla. The company expects to book Rs.100 cr revenues and Rs.33 cr profits on the

Gurgaon projects in the present quarter.

The commercial project in Okhla has 2 lakh sq ft salable area. Since the company follows

completed contract method of accounting, no revenues or profit from this project have been

booked till now. On this project alone, there is potential to earn more than Rs.400 cr revenue and

Rs.150 cr profit. These are expected to be booked in FY14 and will act as a big trigger to the stock.

The company recently purchased 3 additional parcels of land measuring a total of 10 acres for

Rs.100 cr.

As more and more projects take off, this division will contribute substantially to the fortunes of

the company, although its performance will not be consistent due to the inherent nature of the

business.


What we like about the company

The pseudo monopoly position of NBCC makes it a relatively recession and cycle-proof business,

with stable revenues and cash flows.

Advances that the company receives give them a tremendous float. On a market cap of Rs.1430

cr, the company carries cash of Rs.1300 cr. Out of this, Rs.350 cr is NBCC’s own cash, while the

rest is advances received. The company generates more than Rs.200 cr of operating cashflow

every year.

While the main PMC business gives stability to the company, the real estate business gives an

additional kicker to the profitability. NBCC has been intelligently investing the cash-flows

generated out of the PMC business into its real estate business and reaping the profitability out

of the same, due to their continuous cash float.

The management has guided PAT of Rs.225-250 cr for FY14. If full revenues and profit of the

Okhla project are booked, the actual PAT will be far higher. At the current market cap of Rs.1430

cr, with Rs.350 cr of net cash, the company therefore looks highly attractively priced. We believe

that a market cap of Rs.2400 cr + (10x FY14 PAT) is easily possible, given the performance of the

company and the real estate revenue booking in FY14.

As a PSU, the company has to distribute minimum 20% of its profits as dividend. NBCC distributes

25%. Given the high profitability for FY14, a dividend of Rs.5-6 is very much possible. High

dividend gives good floor and support to stock price even in unfavourable markets.

What are the risks?

Capital misallocation is the biggest risk in the company. The company’s promoter does not always

have profitability as the key decision making criteria! E.g. if the company is ‘instructed’ by the

Government to invest its huge cash reserves in let’s say a BOT project or a coal block, then the

entire float would disappear and this would lead to a massive derating of the stock. Although the

management has assured us in its concall that something like this will not happen, we should be

vigilant about the same.

The company had high contingent liabilities, in excess of Rs.1000 cr. Although majority of them

have been cleared, we continue to keep a watch on these.

The business model is such that there is large scope for corrupt officials to earn money under the

table! There are 16 pending cases of corruption against the company’s officials. A high profile

case can derail the company’s reputation and rating.

The Government currently holds 90% of the company, making an Offer For Sale necessary. It has

been seen that any news about an OFS leads to hammering of the stock price, so that the stock

can be subscribed to at lower levels. In the event of an OFS in NBCC, a temporary slide in the

stock price cannot be ruled out. However, we would view this as an opportunity to buy more!


Final advice

NBCC is a company which has become a pseudo monopoly due to Government regulations, which

will not change in the near future. The company has healthy revenue visibility, excellent business

model, healthy cash flow and dividend and highly attractive financials and valuations.

We advise investors to buy the stock at CMP, with a 1 year view. Post booking of the Okhla

project revenues, we anticipate a good run-up in price. We would extend our holding when we

review the stock in future, depending on the circumstances.

Investors should be prepared to see a slide in stock price if an OFS is declared by the

Government. Instead of panicking, such a slide should be used to buy more shares.


Research Team

Reports Pulished By Research Department :

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This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Jainam Share Consultants Pvt. Ltd. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients.

We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completeness cannot be guaranteed. Neither Jainam Share Consultant Pvt. Ltd., nor any person connected with it nor any author of the reports accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in this material may go up or down. No part of this material may be duplicated in any form and/or redistributed without Jainam Share Consultants Pvt. Ltd.’ prior written consent.

Nirav Kansariwala Research Executive [email protected] 0261-3082014

Sahil Modi Research Analyst [email protected] 0261-3082016

Tejas Jariwala Research Analyst [email protected] 0261-3087016

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Yagnesh Patel Research Executive yagnesh.patel @jainam.biz 0261-3082015

NBCC Cherry Pick

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