Monday, February 13, 2012


NCC reported very disappointing numbers for the quarter. Every alternate quarter has been a disappointment from NCC, and this was one. Revenue lower by 13% and EBITBA margins down by a whopping 365bps have taken net profit to (Rs95mn). The reasons are the same: general economic slowdown and a few project specific issues. We have reduced our numbers sharply and downgraded the rating from Buy to Hold. The stock has seen a sharp 60% rise since our upgrade in Jan’12 and we believe the risk-reward is not favourable. We advice investors to consider Sadbhav Engineering which is our top pick.

 Operational numbers disappointing: Revenue lower by 13% and EBITDA margins down by 365bps impacted net profit. We expected Rs307mn in net profit but the company delivered a loss of Rs95mn. The reasons cited for lower margins were 1) general economic slowdown 2) labour shortages 3) lower revenue impacting absorption of overheads 4) a few project specific issues. Working capital situation improved marginally from Q2FY12, but investors should note that this was due to substantial amount of advance money received from its power subsidiary. Debtor’s days have deteriorated to 108 from the company’s target of

 Order-Intake strong, but mostly from internal power: NCC has an order-book of Rs220bn (around 3.5X FY11 consolidated revenue) and reported order-intake of Rs100bn in 9MFY12 period. The company also included internal power EPC orders worth Rs53bn in Q3FY12 and this order will contribute 25% of the total order-book and impact the financials of the company going forward. Financial closure of the project is awaited (REC, PFC and ICICI have sanctioned money) whereas REC and PFC have also disbursed their first installments). PPA does not exist and the company is trying for 500MW PPA with the AP government.

■ We downgrade the stock to hold as stock ran up by 60% post our upgrade in Jan, and carry forward our valuation on FY14 numbers: NCC stock has seen a sharp run up by 60% after our upgrade in Jan’12 and outperformed all other stock in our coverage (we placed it as our best buys in the construction sector). We have reduced our estimates for FY12 & FY13 sharply and made marginal changes in our FY14 numbers. We believe, the stock at the current market price does not present a favorable risk-reward especially after the 60% spike in one month. Hence, we downgrade our rating to Hold from Buy earlier. Our new target price is Rs57 (7% downside). We advise investors to shift to a better stock like Sadbhav Engineering which presents better risk-reward at current market price.