NBCC - Mcrosec

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“A Fully Integrated Power Initiating Coverage Report NBCC Ltd- “Strong Balance Sheet Provides Visibility” Recommendation-STRONG BUY Target Price- INR 224 Research Analyst: Anik Das Email- [email protected] Telephone- 033 3051-2020 Website- www.microsec.in

Transcript of NBCC - Mcrosec

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RETAIL

CESC LTD

“A Fully Integrated Power

Initiating Coverage Report NBCC Ltd- “Strong Balance Sheet Provides Visibility” Recommendation-STRONG BUY Target Price- INR 224

Research Analyst: Anik Das Email- [email protected] Telephone- 033 3051-2020 Website- www.microsec.in

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Microsec Research

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Table of Contents

Topic Page Number Investment Highlights ……………………………………………………………………………….. 03-03 Company Background ……………………………………………………………………………….. 04-05 Investment Rationale ……………………………………………………………………………….. 06-07 Order Book ……………………………………………………………………………….. 07-08 Financial Analysis……………………………………………………………………………….. 09-10 Business Strategy……………………………………………………………………………….. 10-11 Peer Comparison ……………………………………………………………………………….. 11-12 Valuation ……………………………………………………………………………….. 13-13 Financial ……………………………………………………………………………….. 14-17 Disclaimer ……………………………………………………………………………….. 18-20

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Particulars FY09 FY10 FY11 FY12 FY13E FY14ENet Sales 2041 2,982 3,146 3,448 3,930 4,520 Growth (%) 3.6% 46.1% 5.5% 9.6% 14.0% 15.0%EBITDA 153 96 132 151 185 221 EBITDA Margin (%) 7.5% 3.2% 4.2% 4.4% 4.7% 4.9%Net Profit 32 117 145 184 221 269 Growth (%) -89.0% 265.6% 23.9% 26.9% 20.1% 21.7%Net Profit Margin (%) 1.6% 3.9% 4.6% 5.3% 5.6% 6.0%Diluted EPS (INR) 13.26 9.71 11.69 15.85 18.45 22.43 P/E 12.90 17.61 14.63 10.79 9.27 7.62

BVPS 38.11 45.54 54.51 66.29 80.50 97.68 P/BV 4.38 3.67 3.06 2.52 2.07 1.71 EV/EBITDA (3.30) (4.60) (5.00) 4.50 2.20 0.10 RoE 40.16 23.21 23.38 26.24 25.10 25.20

Investment Highlights

Key Financials Highlights (Figure in Rs CR)

STRONG BUY

National Building Construction Corp Ltd Sector – Construction

Source: Company, Microsec Research

National Building Construction Corporation Ltd (NBCC), a public sector company, primarily provides project management consultancy services for civil construction to various state and central government ministries and departments. With an order book of INR 150 bn, 4.4x FY12 revenues providing revenue visibility over the next couple of years coupled with company’s debt-free balance sheet with a cash surplus of INR 13.25 bn provides an attractive investment opportunity. A key trigger is revenue booking of real estate projects in Okhla and Gurgaon. Other positive factors include net cash per share of INR35 and negative working capital. The company’s uniqueness in project management services to government projects, Scalable model, sustainable free cash flows, healthy return ratios and reasonable valuations provide room for further upside. Hence, we are initiating coverage on the stock with a “STRONG BUY” rating and a target price of INR 224 per share.

Unique business model with impressive financial track record-NBCC has a unique business model & provides project management & consultancy (PMC) services (Which constitutes 91% of revenues & 76% of PBT) across civil construction segments ranging from residential complex to institutional buildings, hospitals etc. for central & state government agencies. NBCC also has a Real Estate Development segment (6% of revenues & 18% of PBT).NBCC’s strong relationship with its client & bargaining power with its sub-contractors has been the drivers of its robust cash generating business model. Also, company’s debt free status and negative working capital cycle is a clear evidence of its superior business fundamentals. Order-backlog at 4.4x FY12 revenues provides strong visibility–With an order backlog of INR 150bn or 4.4x FY12 revenues we see strong growth visibility for the company. Further NBCC bagged a massive INR45 bn worth PMC contract for the redevelopment work of Kidwai nagar (E) in Delhi which will pan across 86 acres entailing a total development of 12mn square feet to be executed over a period of 5 years. We believe the order will provide strong growth traction to NBCC beyond FY13e. In FY13 NBCC is likely to complete 2 real estate projects with saleable area of 2.4lac sq ft mainly comprising of a commercial complex in Okhla, Delhi. Debt free balance sheet with surplus cash, High return ratio-NBCC is a debt-free company with cash surplus of INR1325 crore. The significant cash surplus has been on account of better (negative) working capital management. The negative working capital has been on account of advances received from customers and retention margin from the subcontractor. It reported RoE and RoCE of 26% and 31% in FY12, respectively, backed by strong operating performance and asset light model.

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NBCC SENSEX

Current Market Price (INR) 167.0052 Week High / Low(INR) 175/77Target Price (INR) 224Upside 34.1%Market Cap (In INR Cr) 2,004

Market Data

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Company Background

NBCC is a top rated project management & consultancy company with expertise in residential and commercial complexes, institutions, hospitals and other buildings, sewage treatment plants, roads; and civil infrastructure for power sector such as cooling towers, chimneys and other civil and structural works predominantly for State and Central government ministries, department & agencies and various public sector undertakings. NBCC is engaged in the business of (i) project management consultancy services for civil construction projects (ii) civil infrastructure - power sector and (iii) real estate development. In the PMC division, the company provides management and consultancy services for a range of civil construction projects such as residential and commercial complexes, redevelopment of buildings and colonies, hospitals, educational institutions, etc. As on January, 2012, NBCC has an outstanding order book of INR 110bn in this division. In civil infrastructure for the power sector, the company provides engineering and construction services for power projects, including design and execution of (i) civil and structural works for power projects (ii) cooling towers and (iii) chimneys. It has an outstanding order book of INR 6bn in this division. In the real estate development division, the company focuses on residential and commercial development. As on January, 2012, it had land reserves aggregating 125.2 acres with saleable and leaseable area of 10.7 million sq ft. It recently bagged a significant order of INR40bn for redevelopment of government colonies of east Kidwai Nagar (Delhi) which is spanning over 90 acres. Further, Management is confident of stable order inflow from various government agencies over the next 2-3 years.

NBCC’s Business Model

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Overview Of NBCC

Profile of senior management team

Investment

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Investment Rationale

Unique player with strong order book- NBCC is a unique player, which provides project management services to government projects. After its establishment in 1960, the company has established a relationship with different state and central government ministries, department, agencies and various public sector undertakings. The company has completed 54 projects in PMC and civil infrastructure for power segments. NBCC enjoys automatic nomination status for PMC civil construction projects related to government projects. Currently, it has an order book of INR 15,000 crore i.e., 4.4x FY12 revenues providing revenue visibility over the next couple of years. The order book consists of PMC division INR 11,000 crore and civil infrastructure for power sector INR 600 crore. Scalable business model & strong brand recognition in central & state agencies- NBCC has a strong track record in the project management & consultancy field with strong brand recognition in the central & state government agencies. Over a period of time the company has achieved significant financial strength. Even after adopting a conservative strategy of not levering its balance sheet it has been able to achieve a 13% CAGR (FY08-12). With no debt, negative working capital & project pipeline the company will maintain the growth trajectory over future as well. Over the past five decades, its ability to successfully manage projects as well as maintain quality standards has helped in developing its brand as a trusted service provider. This provides NBCC with access to business opportunities especially in its PMC segment. It intends to continue to leverage the goodwill of its brand to enhance relationships with existing clients, seek new clients as well as diversify its business in allied sectors to help it grow its operations.

Debt free balance sheet with surplus cash-

NBCC is a debt-free company with a cash surplus of INR 1325 crore. This is a key differentiator as other construction companies in the sector are finding it difficult to grow their earnings currently. The significant cash surplus has been on account of better (negative) working capital management. The negative working capital has been on account of advances received from customers and retention margin from the subcontractor. Hence, the company generates significant other income, which contributes significantly to its bottom line. Conservative policy provides comfort- The conservative accounting policy of recognising the contract revenues only on completed contracted method is also expected to result in significant ramp up of revenues for the Real estate division. In FY13, NBCC is expected to achieve completion of two projects entailing a saleable area of 2.4lac sq ft mainly comprising of a commercial complex in Okhla entailing 2.25lac sq ft which is expected to boost its Real estate revenues significantly.

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Order Book

Order-backlog provides visibility at 4.4x FY12 revenues – NBCC has the preferred agency status for executing public works & Civil infrastructure for government of India & a strong order backlog of INR 150bn or 4.4x FY12 revenues .The company boasts a strong order book accretion of INR 45bn for redevelopment of Kidwai nagar (E) in Delhi which will pan across 86 acres entailing a total development of 12mn square feet. The project is to be executed over a period of 5 years.

Segmental break-up of current order book-

Source: Company, Microsec Research

Source: Company, Microsec Research

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Break-up of ongoing PMC projects-

NBCC has over the years, leveraged its PMC expertise in diverse segments of the civil construction such as residential and commercial complexes, institutions, hospitals and other buildings, sewage treatment plants, roads; and civil infrastructure for power sector such as cooling towers, chimneys and other civil and structural works. As of Dec12, it’s Order Book of the PMC projects comprising of 38% - institution segment, 44% - infrastructure segment, 14% - commercial construction and 3% - residential construction. Real Estate Development- Profit booking a key trigger NBCC is focused primarily on residential and commercial projects. It has land bank in Delhi, Khekra (UP), Patna, Kolkatta, Kochi, Alwar (Rajasthan), Ahmedabad and Lucknow. The existing land bank is a mix of land either owned or acquired on lease through government or acquired through auction. It also intends to secure land available with central and state government agencies for development through joint ventures projects. This model helps it to spread the risk of its real estate projects’ portfolio in addition to reducing its capital investment and beneficially utilising its PMC, sales and marketing capabilities. The business segment is mostly funded through internal accruals. It is currently working on three of its major projects in Okhla (1 project) and Gurgaon (2 projects). It has sold major portions in both the projects. Management expects to book part (50%) of the revenue from the Okhla project in 4QFY13e and the remaining in 1HFY14e. It plans to book revenue on the two Gurgaon projects in FY14e. These projects, so far, have been very successful, backed by strong prices in the NCR region.

Source: Company, Microsec Research

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Financial Highlights

We estimate revenues to grow at 10% CAGR in FY11-14E to INR 4520 crore. Revenue growth will be fuelled by strong order execution and profit booking in the real estate project. Management expects a top line growth of 15% and an EBITDA margin of 4.8% for the next two Years.

Source: Company, Microsec Research

Source: Company, Microsec Research

Source: Company, Microsec Research

Source: Company, Microsec Research

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Source: Company, Microsec Research

Source: Company, Microsec Research

Source: Company, Microsec Research

NBCC has reported RoE and RoCE of 26% and 31%, respectively, in FY12, backed by strong operating performance and asset light model.

In FY12, NBCC has reported a Dividend pay put ratio of 22%.For the last 5 years company has able to maintain a payout ratio of 20%.

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Key Business Strategy For NBCC

PMC to benefit from economies of scale-

In PMC segment, NBCC intends to focus on undertaking projects having a high order value (above INR 1 Bn). It intends to focus on redevelopment projects whereby old buildings, complexes and colonies are redeveloped. It aims to focus on establishing itself as a leading player in the large order size projects so that it can take advantage of these barriers to entry leading to lower levels of competition and higher profit margins.

High growth opportunities in the infrastructure segment-

NBCC intends to take advantage of opportunities in the infrastructure space by Bidding for BOT / BOLT / BOOM projects under PPP mode. An additional advantage of BOT / BOLT / BOOM projects is that they offer long-term revenue streams. It also intends to leverage on its PMC and real estate development businesses to procure large infrastructure projects and to pursue strategic alliances with established domestic as well as international players, which will augment its prospects of securing such projects

Expand its real estate development business-

NBCC intends to secure lands available with Central and State Government agencies for its real estate development projects and to continue to selectively enter into joint ventures agreements to increase the amount of land or land development rights available to it for development. This model helps it to spread the risk of its real estate projects’ portfolio in addition to reducing its capital investment and beneficially utilising its PMC, sales and marketing capabilities. Company to focus on quality and timely project delivery NBCC intends to continue to focus on quality and timely project execution thereby maximizing customer satisfaction in all its business segments.

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Peer Comparison

Source: Company, Microsec Research, Ace Equity

CompanySales FY12

EBITDA FY12

PAT FY12

EPS FY12

EBITDA (%)

PAT (%)

ROE (%) FY12

D/E FY12

EPS FY13E CMP P/E FY12

P/E FY13E Bloomberg

No of shares MCAP

Order Book/ Sales

P/BV FY12

EV/EBITDA FY12

NCC Ltd. 6665 898 55 2 13.5% 0.8% 2.6 2.0 3 54 25.4 16.4 25.7 1393 3.3 0.5 7.1Simplex Infrastructures Ltd. 6019 466 84 17 7.7% 1.4% 7.2 1.8 11 215 12.7 19.4 5.0 1067 2.4 0.9 6.6IL&FS Transportation Networks Ltd. 5605 1465 497 25 26.1% 8.9% 21.5 3.7 29 210 8.2 7.2 19.4 4074 2.3 1.4 8.5Engineers India Ltd 3723 716 644 19 19.2% 17.3% 38.0 0.0 20 225 11.8 11.5 33.7 7588 1.2 4.5 7.2Patel Engineering Ltd. 3592 466 67 10 13.0% 1.9% 4.7 1.8 15 81 8.5 5.4 7.0 567 2.5 0.5 5.9Sadbhav Engineering Ltd. 2866 414 122 8 14.5% 4.3% 11.7 3.0 5 136 16.9 29.9 15.0 2049 2.6 2.0 12.7National Buildings Construction Corpn. Ltd 3448 151 184 15 4.4% 5.3% 25.4 0.0 18 168 11.0 9.1 12.00 2016 4.4 0.0 4.6

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Valuations

A PSU construction company with no debt and good cash resources on its books becomes very attractive. A good execution track record and a diverse range of projects seem to be the key to its success. With more government spending in infrastructure and with a sound order book, we have a rosy outlook for the company. It is also a good proxy for dividend play. The strong business model is depicted in its financial performance with negative working capital cycle clubbed with the return ratios which also signify its superior business model. Also the fact that NBCC has not relied on leverage to fund its growth reiterates our belief about the superior business model. At the CMP of INR 168 per share, NBCC is quoting at 9.1x and 7.5x its FY13E and FY14E price earnings (P/E), respectively. We believe NBCC is better placed than most of its peers. We assign a P/E multiple of 10x and arrive at a target price of INR 224 per share which reflects 34% upside over the current stock price of INR 168 per share.

Risk & Concerns

Dependence of Government for projects- The Company’s PMC and Civil Infrastructure for power sector segments are fully dependent on projects awarded by government entities. Accordingly, any change in the government’s policy or in budgetary allocations may adversely affect its order book and future business prospects. Land & real estate related risks- NBCC title and development rights or other interests over land may be subject to legal uncertainties and defects which may have an adverse impact on its ability to develop and market projects developed on such lands. Excessive dependence on PMC business- NBCC derived 91%, 93.4 % and 90.9 % of total income for FY 2012 and FY 2011 & 2010, respectively from its PMC segment. Any decline or delay in this segment might have an adverse impact on the future business prospect s and the financial condition.

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Income Statement

DESCRIPTION FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013E FY 2014ENet Sales 1970 2041 2982 3146 3448 3930 4520Other operating incomeNet Sales & Other Operating Income 1970 2041 2982 3146 3448 3930 4520% growth 34.9% 3.6% 46.1% 5.5% 9.6% 14.0% 15.0%Total Expenditure 1660.75 1887.98 2886.11 3014.30 3296.64 3746 4299PBIDT (Excl OI) 309 153 96 132 151 185 221EBDITA (%) 15.7% 7.5% 3.2% 4.2% 4.4% 4.7% 4.9%% growth 395.4% -50.5% -37.4% 37.4% 14.6% 22.3% 19.6%Other Income 112.52 93.94 86.75 85.41 134.62 154 190Operating Profit 422 247 183 217 286 339 411Interest (Net) 3.56 3.22 4.87 0.00 0.00 0 0PBDT 418 244 178 217 286 339 411Depreciation 3.09 3.07 3.12 3.21 1.96 3 3PBT 415 241 175 214 284 336 408Tax 135.06 80.80 58.10 69.29 99.66 114 139Profit After Tax 280 32 117 145 184 221 269Minority InterestShares of AssociatesConsolidated Net Profit 280 32 117 145 184 221 269PAT (%) 14.2% 1.6% 3.9% 4.6% 5.3% 5.6% 6.0%% Growth 246% -89% 264% 24% 27% 20% 22%

Equity Capital 90 90 90 90 120 120 120Face Value (In Rs) 1000 1000 1000 1000 10 10 10No. of shares 0 0 0 0 12 12 12

Adjusted EPS 3112 355.56 1294.78 1607.33 15.34 18.45 22.43

National Buildings Construction Corpn. Ltd. Annual-Y-O-Y(%)- [INR-Crore]

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Balance sheet (Figure in Rs CR)

DESCRIPTION FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013E FY 2014E

Share Capital 90 90 90 90 120 120 120Share Warrants & Outstandings 0 0 0 0 0Total Reserves 245 367 457 564 675 846 1052Shareholder's Funds 335 457 547 654 795 966 1172Secured LoansUnsecured LoansTotal Debts 0 0 0 0 0 0 0Total Liabilities 335 457 547 654 795 966 1172

Gross Block 22 23 36 35 35 38 41Less: Accumulated Depreciation 9 10 11 12 12 15 18Less: Impairment of AssetsNet Block 13 13 25 24 23 23 23Lease Adjustment A/cCapital Work in ProgressGoodwill on ConsolidationInvestments 6 143 250 64 57 78 89Toll receivable accountCurrent Assets, Loans & AdvancesInventories 269 196 267 409 450 470 480Sundry Debtors 448 778 882 568 852 850 850Cash and Bank 921 910 944 1170 1325 1644 1978Other Current Assets 13 9 8 23 28 31 35Loans and Advances 469 581 651 669 727 770 785Total Current Assets 2119 2473 2752 2839 3383 3765 4128Less : Current Liabilities and ProvisionsCurrent Liabilities 1523 1876 2263 1981 2496 2658 2806Provisions 283 302 224 296 176 246 265Total Current Liabilities 1805 2178 2486 2277 2673 2904 3071Net Current Assets 314 296 266 562 711 861 1057Miscellaneous Expenses not written off 0 0 4 4 4 3Deferred Tax Assets / Liabilities 3 5 5 -5 -8Total Assets 335 457 547 654 795 966 1172

SOURCES OF FUNDS:

APPLICATION OF FUNDS :

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Cash Flow (Figure in Rs CR)

DESCRIPTION FY 2009 FY 2010 FY 2011 FY 2012 FY 2013E FY 2014E

Profit before Tax 241 175 214 284 336 408Depreciation 3 3 3 2 3 3Interest/ Dividend Recd. 0 0Change in Debtors -330 -104 315 -285 2 0Change in Loans & Adv -112 -70 -18 -58 -43 -15Change in Inventory 73 -71 -143 -41 -20 -10Change in Other C/A 4 1 -15 -5 -3 -4Change in CL 372 309 -209 395 231 167Income Tax Paid -81 -58 -69 -100 -114 -139Net operating Cash Flow 193 393 410

Change in Fixed Assets 0 -12 2 0 -3 -3Change in Capital WIP 0 0 0 0 0 0Change in Investments -138 -107 186 7 -21 -11CF from Investing Activities 7 -23 -14

Change in Share Capital 0 0 0 30 0 0Change in Long term Debt 0 0 0 0 0 0Change in Short Term Debt 0 0 0 0 0 0Dividend Paid -7 -27 -28 -42 -51 -62Interest Paid -3 -5 0 0 0 0Tax paid on Dividend 0 0 0CF from Financing Activities -12 -51 -62

Net Cash Flow from Business 188 319 334Add : Opening Cash 1170 1325 1644Closing Cash 1357 1644 1978

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Ratio Analysis

Particulars FY09 FY10 FY11 FY12 FY13E FY14E

EBIDTA Ratio 7.5% 3.2% 4.2% 4.4% 4.7% 4.9%PBT Ratio 11.8% 5.9% 6.8% 8.2% 8.5% 9.0%Net Profit ratio 1.6% 3.9% 4.6% 5.3% 5.6% 6.0%Sales/Total Asset (Times) 0.8 1.0 1.1 1.0 1.0 1.1

ROCE 61.6% 35.8% 35.6% 39.1% 38.1% 38.1%ROE 8.1% 23.2% 24.1% 25.4% 25.1% 25.2%

Debt / Equity 0.0 0.0 0.0 0.0 0.0 0.0Current Ratio 1.1 1.1 1.2 1.3 1.3 1.3Interest Cover(x) 1.4 2.7 2.3 NA NA NA

EPS 355.6 1294.8 1607.3 15.3 18.5 22.4DPS 200.0 258.9 311.8 3.5 4.2 5.2Dividend Payout Ratio (%) 56.3 20.0 19.4 23.0 23.0 23.0BV per Share 38.1 45.5 54.5 66.3 80.5 97.7P/BV 4.4 3.7 3.1 2.5 2.1 1.7P/E 0.5 0.1 0.1 11.0 9.1 7.5EV/Sales -0.4 -0.3 -0.3 0.2 0.1 0.0EV/EBITDA -3.3 -4.6 -5.0 4.6 2.0 0.2

Return Ratios

Liquidity Ratios

Investor Ratios

Profitability Ratios

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Microsec Research: Phone No.: 91 33 30512100 Email: [email protected]

Ajay Jaiswal: President, Investment Strategies, Head of Research: [email protected]

Fundamental Research

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Recommendation

Strong Buy >20%

Buy between 10% and 20%

Hold between 0% and 10%

Underperform between 0% and -10%

Sell < -10%

Expected absolute returns (%) over 12 months

MICROSEC RESEARCH IS ALSO ACCESSIBLE ON BLOOMBERG AT <MCLI>

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Disclaimer: This document is prepared by the research team of Microsec Capital Ltd. (hereinafter referred as “MCL”) circulated for purely information purpose to the authorized recipient and should not be replicated or quoted or circulated to any person in any form. This document should not be interpreted as an Investment / taxation/ legal advice. While the information contained in the report has been procured in good faith, from sources considered to be reliable, no statement in the report should be considered to be complete or accurate. Therefore, it should only be relied upon at one’s own risk. MCL is not soliciting any action based on the report. No indication is intended from the report that the transaction undertaken based on the information contained in this report will be profitable or that they will not result in losses. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advisors, as they believe necessary. Neither the Firm, nor its directors, employees, agents nor representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.