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Wednesday, June 3, 2015


Scrip Code: 534309 NBCC
CMP:  Rs. 757.15; Market Cap: Rs. 9,085.80 Cr; 52 Week High/Low: Rs. 1,087.40 / Rs. 288.70. 
Total Shares: 12,00,00,000 shares; Promoters : 10,80,00,000 shares – 90.00 %; Total Public holding : 1,20,00,000 shares – 10.00 %; Book Value: Rs. 117.05; Face Value: Rs. 10.00; EPS: Rs. 23.11; Dividend: 50.00 % ; P/E: 33.47 times; Ind. P/E: 25.77; EV/EBITDA: 32.76.
Total Debt:  ZERO Cr; Enterprise Value: Rs. 8,189.59 Cr.

National Buildings Construction Corporation Ltd:  NBCC Limited was founded in 1960 and is based in New Delhi, India. NBCC Ltd is a public sector company engaged in the business of project management consultancy services for civil construction projects (PMC), civil infrastructure for power sector and real estate development and have 10 regional offices across India. NBCC came with an IPO in March, 2012 of 1,20,00,000 equity shares of Rs. 10 each at Rs. 106 raising Rs. 127.20 Cr. The object of the issue was to carry out the disinvestment of 10 % equity shares by the Government of India and to achieve the benefits of the listing. National Buildings Construction Corporation Limited provides project management consultancy, real estate development, and EPC contracting services in India and internationally. It’s Project Management and Consultancy Services segment offers services for various civil construction projects, including residential and commercial complexes, redevelopment of buildings and colonies, hospitals, educational institutions, infrastructure works for security personnel, border fencing as well as infrastructure projects such as roads, water supply systems, storm water systems and water storage solutions. Some of their clients are ESIC, Ministry of Defence, Ministry of Home Affairs (including Security forces like CRPF, CISF, NSG, BSF), Ministry of External Affairs, MoUD, Ministry of Commerce and Industry, Ministry of Corporate Affairs, Ministry of Finance, Haryana Urban Infrastructure Development Board, IIT Roorkee, IIT Kharagpur, IIT Patna, SVNIT etc. NBCC’s EPC Contracting segment provides engineering and construction for power projects, including design and execution of civil, structural, and architectural works; cooling towers; and chimneys. Its Real Estate Development segment primarily undertakes residential projects, such as apartments and townships; and commercial projects, such as office buildings and shopping complexes. This segment has land reserves of approximately 145 acres located in Delhi, Patna, Gurgaon, Kolkata, Kochi, Alwar, Meerut, Ghaziabad, Faridabad, and Lucknow. NBCC Ltd's civil Infrastructure for power sector segment includes providing engineering and construction services for power projects, including design and execution of civil and structural works for power projects, Cooling towers and Chimneys. Some of their clients in this segment include NTPC Limited, BHEL, APGENCO Ltd, Uttar Pradesh Rajya Vidyut Utpadan Nigam Ltd, MAHAGENCO Ltd and Karnataka Power Corporation Ltd. Their real estate segment includes residential projects and commercial projects. NBCC Ltd can be locally compared with BS Ltd, Continental Construction Ltd, Raunaq International Ltd, IVRCL Infrastructures & Projects Ltd, Jaihind Projects Ltd, Jyoti Structures Ltd, SPML Infra Ltd, C & C Constructions Ltd, Mukand Engineers Ltd, Engineers India Ltd, Jai Corp and Globally compared with KBR Inc of USA, Costain Group PLC of UK, Compagnie d’Enterprises of Europe, Yit Oyj of Finland, Nippon Koei Company Ltd of Japan, Samsung Engineering from South Korea, Hyundai Engineering & Construction of South Korea, Petrofac from Middle East, Saipem from Abu Dhabhi, National Petroleum Construction Company of Middle East, Technip from French, Technicas Reunidas from Spain, Jacobs Engineering from California, Watabe Wedding Corporation of Japan, central Security Patrols Company Limited of Japan, Mortice Ltd of Singapore.

Investment Rationale: 
National Buildings Construction Corporation Ltd. (NBCC) is a Schedule A, Public sector undertaking under the aegis of Ministry of Urban Development (MoUD), incorporated in year 1960. The Company enjoys a Status as a NAVRATNA CPSE, conferred upon it by the Govt. of India from June 23, 2014. It’s a construction major under the Ministry of Urban Development, Govt. of India, and provides Civil Engineering Construction Services in wide Gamut of Projects of varied nature, complexities & at socio-political Geographical locations, both at home & overseas. Company is carrying out its business in three segments (i) Project Management Consultancy (PMC), (ii) Engineering, Procurement and Construction (EPC), and (iii) Real Estate Development. NBCC also offers post construction services i.e. maintenance of assets. NBCC is certified ISO 9001:2008 from Bureau of Indian Standard in respect of Project Management & Consultancy. NBCC is aiming at high value projects in EPC segment to benefits of economies of scale. Projects having a high order value typically have a smaller percentage of overhead cost and this provides higher profit margins to NBCC. Prequalification and financial entry barriers for pursuing high value projects would provide NBCC an edge over the competitors who bid for such projects. In real estate, NBCC operates in two areas, one is direct real estate projects wherein the Company buys land from private and government agencies, develops the land and then sells off; and the other where NBCC carries out redevelopment of government colonies via Public Private Partnership (PPP) mode. Recently, the Company has been notified as a Public Works Organization (PWO) explicitly, a construction agency covered under revised Rule 126 (2) of GFRs, which says that the Government Department(s)-PSUs and Autonomous Bodies can now award the works to NBCC on nomination basis. The Indian real estate sector is one of the fastest growing and globally recognised sectors. It comprises four sub sectors-Housing, Retail, Hospitality, and Commercial. The real estate industry's growth is linked to developments in the retail, hospitality and entertainment like hotels, resorts, cinema, and theatres etc., & industries, economic services like hospitals and schools and information technology (IT) enabled services like call centres etc. and vice versa. The total realty market in the country is expected to touch US$ 180 billion by 2020. India ranks third for the most LEED (Leadership in Energy and Environmental Design) certified space globally, with nearly 12 million sq m. The LEED system is the most widely used rating system guiding the design, construction, operations and maintenance of green buildings. Private equity (PE) funding in this sector has picked up in the last one year due to attractive valuations and low level of bank funding to the sector. Moreover, the government is trying to introduce developer and buyer friendly policies, the outlook for the real estate sector in 2015-16 looks promising. The Indian construction market is expected to be the world's third largest by 2020. The market is expected to more than double to US$ 649.5 billion by 2020 from US$ 360 billion in 2010. It is currently the fourth-largest sector in the country in terms of foreign direct investment (FDI) inflows. FDI in the sector is estimated to grow to US$ 25 billion in 10 years. Real estate contributed about 6.3 % to India's GDP in 2014. The market size of the sector in India is expected to increase at a compound annual growth rate (CAGR) of 11.2 % during FY 2008- 2020 to touch US$ 180 billion by 2020. The Government of India has allocated US$ 1.3 billion for Rural Housing Fund in the Union Budget 2014-15. It also allocated US$ 0.7 billion for National Housing Bank (NHB) to increase the flow of cheaper credit for affordable housing for urban poor. The government has allowed FDI of up to 100 % in development projects for townships and settlements. The entry of major private players in the education sector has created vast opportunities for the real estate sector. Emergence of nuclear families and growing urbanisation has given rise to several townships that are developed to take care of the elderly. A number of senior citizen housing projects have been planned, and the segment is expected to grow significantly in future. Growth in the number of tourists has resulted in demand for service apartments. This demand is likely to be on the uptrend and presents opportunities for the unorganised sector. NBCC is one of the very few public sector companies engaged in the three verticals of PMC, EPC and Real Estate development business. Finding a similar one in the public listed space is also difficult. The larger chunk of orders received by NBCC is from government agencies, state and central government. Since most of government agencies doesn’t have an extended project execution arm to undertake various civil construction projects, NBCC is at a sweet spot, were given its execution abilities and history, it is awarded projects. Further, the recent PWO (Project Works Organization) status helps to get the projects on Nomination basis. For eg, the largest segment PMC that contributes 82 % of total business get about 80 % business through nomination basis and the rest through competitive bidding. Besides, NBCC has a long history of positive relationships with several ministries, PSUs and various government agencies. Also, it has a well-qualified and experienced staff to cater the order’s completion in time and agreed quality. NBCC signs MOU’s with government every year stipulating the target revenue, new orders and profit it would generate in the period. Based on MOU ratings, NBCC has consistently won Excellent rating every year since 2003-2004, meaning it has always out-performed its target. The company had prospered with orders in the past, now given the new government at the helm; a brighter future awaits NBCC. PMC services entail implementation of projects from concept to commissioning. NBCC doesn’t carry execution risk but carries performance risk as it has to ensure the completion of projects under contracted Cost, Quality and Time. The construction is outsourced and NBCC is responsible in getting approvals and ensuring timely delivery. The margins are low, considering the low-risk nature of the business. For its service NBCC gets a gross service fee ranging 7 %-10 %, depending upon the size of the project and mobilization advance the client is prepared to invest. Going by its ability to win new orders consistently and stable execution, augurs well in terms of revenue visibility. Management has expressed confidence in improving execution from FY16E. Real Estate business at its nascent stage and NBCC has land parcels of +150 acres and continues to add more into its holdings. Management is keen to invest Rs. 400 Cr for purchasing land in FY15. This comes at a time when government is considering selling real estate assets to aid ailing PSUs and NBCC is poised to benefit on this. The segment contributes 16 % of total revenue and the share of this segment can grow to 20 % in 2 years timeframe. NBCC has asset light business model, as it operates as implementing agency and receives advances in the range of 8-10 % for executing government projects in building, rural and urban development projects. It enjoys high RoCE of 30 % plus. NBCC has strong order book of Rs. 18,000-Cr. This gives strong revenue growth visibility for the next 3-4 years. Being a project implementation agency for various government programmes like PMGSY, JNNURM, etc and notified as a Public Work Organization by the Government would make NBCC a major beneficiary of the expected revival in infrastructure and government spending. NBCC also executes Government’s redevelopment projects where it sees great opportunity going forward. It already has one such project under execution at Kidwainagar of INR 4,000 cr while another project at Ghitorni is expected to be included in the order book in FY16. Besides, NBCC has been given three more old government colonies (value INR 15,000 cr) in Delhi at Netaji Nagar, Kasturba Nagar and Thyagaraj Nagar, which is not included in the order book. This huge opportunity comes with stable margins, which are in-line with PMC segment margins.

Outlook and Valuation: 
NBCC is of the valued Navratna companies and amongst very few public sector companies engaged in the three verticals of PMC, EPC and Real Estate development business. NBCC, is under the administrative control of the Ministry of Urban Development, provides project management consultancy services for construction projects, civil infrastructure for power sector and real estate development. The Company has earned a niche for itself in construction of Green Buildings. Office of The Indian Institute of Corporate Affairs at Manesar (Haryana); CSOI at New Delhi; Aayakar Bhawan at Noida (UP); SIB at Kolkata; Coal India Building at Kolkata etc. are some important Green Buildings by NBCC. Recently in May of 2015, NBCC has obtained business worth Rs. 2,000 crore from various clients including the West Bengal government. The Rajasthan government has also awarded its projects of Rs. 378 crore for the construction of medical college campus and up-gradation of a district hospital to NBCC. The West Bengal government sanctioned project for the construction of Indoor Auditorium at Alipur, Kolkata, which will have a seating capacity 2,400 people and which is estimated to cost around of Rs. 418.72 crores. Post the new government and with the thrust from the government for the infrastructure development initiatives will help NBCC. The Re-development of government colonies after New Moti Bagh project, NBCC has won similar projects worth Rs. 19,500 Cr. This has been primarily concentrated in Delhi regions. The management has expressed confidence in getting more such projects within the next six months valuing about Rs. 500 Cr to Rs. 700 Cr each. Further, NBCC gets such projects on nomination basis which is a major plus point. NBCC recently signed a MoU with Air India for joint development of surplus land held with the latter. Under this MoU, both the parties will identify commercially exploitable properties and develop them jointly on a profit sharing model, wherein NBCC’s equity contribution will be in the form of the construction cost, while Air India’s equity contribution will be in the form of the land value. While the current MoU is at a broader level, NBCC expects to finalise 1-2 properties for development within FY15. NBCC is also in talks with several other PSUs for a similar joint development model, as a lot of ailing PSUs have land bank but don’t have the capability or expertise to monetise the same. As per NBCC, it used to undertake orders with average ticket size of Rs. 10 Cr to Rs. 50 Cr earlier and thus used to manage close to 300 projects at any point of time. However, with larger projects (of as much as Rs. 5,000 Cr) now coming up, the number of projects is going down while order value is going up. As such, not only is it easier to manage, but also beneficial from a margin perspective as the resource deployment is not proportional to the order value, while corporate overhead, too, is inelastic to the order size. Thus, this is likely to boost margins for NBCC. As per NBCC, there is hardly any competition for it especially in the redevelopment of housing colonies and surplus land bank of PSUs. It cites that the Central Public Works Department (CPWD), its largest public sector competitor in normal PMC orders, doesn’t have the mandate to undertake commercial monetisation of land bank, which is an integral part of the redevelopment projects. As such, CPWD is ruled out as a competitor in the key growth area for NBCC On the other hand, the government is not willing to entrust land monetisation to private sector companies, thus this process has to be routed through a government-owned entity, namely NBCC in this case. NBCC board has approved 10 % follow on public offer to raise over Rs. 900 crore to fund business expansion plans of the company. The stake sale would be subject to the approval of the Government of India, which holds 90 % equity in the NBCC. The proceeds would be used as seed money to fund expected redevelopment projects. The FPO could result in equity dilution of around 11 %. Though the FPO announcement could remain an overhang in the short term, then business model of NBCC remains positive given the huge opportunities in the redevelopment and real estate space and its cash rich balance sheet. At the CMP of Rs. 757.15, the stock is trading at a PE of 28.89x for FY16E & 21.63x for FY17E. NBCC can post EPS of Rs. 26.20 for FY16E & Rs. 35 for FY17E. Given the healthy order book in the PMC division and cash rich balance sheet, NBCC’s revenues have grown at a CAGR of 10.6 % during FY12- FY15 despite the challenges being encountered by the industry. Going ahead, NBCC’s can show a growth in revenues and net profit at a sturdy CAGR of 31.1 % and 29.8 %, respectively, during FY15-17E. Also being a cash rich balance sheet company it will have healthy return ratios. On SOTP basis the valuation of NBCC’s PMC business & redevelopment business on the DCF basis comes at Rs. 325 per share & redevelopment opportunities at Rs. 573 a share. The value of real estate business comes at Rs. 79 a share, while the value of EPC business comes at Rs. 16.5 a share. Giving me the value of Rs. 993.5 per share.

SOTP valuation (FY2016E)
PMC & Re-development Business325.00
Re-development Opportunities573.00
Real Estate Business79.00
EPC Business16.50

SALES ( Crs)4,008.804,621.005,748.208,011.60
NET PROFIT (₹ Cr)247.20277.30350.00467.20
EPS ()18.5020.8026.2035.00
PE (x)42.8038.1030.2022.60
P/BV (x)9.408.004.103.60
EV/EBITDA (x)41.9033.2023.2015.80
ROE (%)22.1021.0013.6016.10
ROCE (%)19.9021.6015.5021.10

I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % on every purchase(Why Strict stop loss of 8 % ?) - Click Here

*As the author of this blog I disclose that I do not hold NBCC Ltd in any of my investment portfolio.

This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.

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  1. Gm sir. Thanq for the great recommendation and commitment for your blog followers

  2. The fact of the matter is the stock is different from the business and NBCC has lot of orders in the pipeline but the stock ran ahead factoring in all that too, it is so good that it has a moat even after the order flow is reduced, no after all its a construction company and that too PSU. Govt. rules it, not managements. Cant trust. May be they start milking it like NMDC for dividends some fine day.

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