NBCC INDIA LTD: BEST IN SECTOR TO OWN !!!

* NBCC quotes ex-split basis from June 02, 2016. Company declared split in face value of its shares from Rs. 10 to Rs. 2.00 .

Scrip Code: 534309 / NBCC

CMP:  Rs. 193.51 (Rs. 967.55); Market Cap: Rs. 11,610.60 Cr; 52 Week High/Low: Rs. 1,214.40 / Rs. 705.50

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. 110.34; Face Value: Rs. 2.00 (Rs. 10.00); EPS: Rs. 5.14 (Rs. 25.73); Dividend: 55.00 % ; P/E: 37.60 times; Ind. P/E: 22.62; EV/EBITDA: 23.02 times.

Total Debt:  ZERO Cr; Enterprise Value: Rs. 10,943.51 Cr.

National Buildings Construction Corporation of India 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. NBCC declared split in face value of shares from Rs. 10 to Rs. 2 on May 2016. 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 DLF, Oberoi Realty, Parsvnath developers, Prestige Estates, Indiabulls Realestates, HDIL, 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. The Indian Real Estate sector is one of the most globally recognised sectors. In India, real estate is the second largest employer after agriculture and is slated to grow at 30 % over the next decade. The real estate sector comprises four sub sectors - housing, retail, hospitality, and commercial. The growth of this sector is well complemented by the growth of the corporate environment and the demand for office space as well as urban and semi-urban accommodations. The construction industry ranks third among the 14 major sectors in terms of direct, indirect and induced effects in all sectors of the economy. It is also expected that this sector will incur more non-resident Indian (NRI) investments in both the short term and the long term. Bengaluru is expected to be the most favoured property investment destination for NRIs, followed by Ahmedabad, Pune, Chennai, Goa, Delhi and Dehradun. The Indian real estate market is expected to touch US$ 18,000 Cr by 2020. The housing sector alone contributes around 5 % to 6 % to the country's Gross Domestic Product (GDP). In the period FY08-20, the market size of this sector is expected to increase at a Compound Annual Growth Rate (CAGR) of 11.2 %. Retail, hospitality and commercial real estate are also growing significantly, providing the much-needed infrastructure for India's growing needs. Real estate has emerged as the second most active sector, raising US$ 120 Cr from private equity (PE) investors in the last 10 months. Mumbai is the best city in India for commercial real estate investment, with returns of 12 % to 19 % likely in the next five years, followed by Bengaluru and Delhi-National Capital Region (NCR). Also, Delhi-NCR was the biggest office market in India with 110 million sq ft, out of which 88 million sq ft were occupied. Sectors such as IT and ITeS, retail, consulting and e-commerce have registered high demand for office space in recent times. Delhi’s Central Business District (CBD) of Connaught Place has been ranked as the sixth most expensive prime office market in the world with occupancy costs at US$ 160 per sq ft per annum. The project management consultancy (PMC) division of NBCC is the cash cow business for the company. Its PWO status helps in getting contract on a nomination basis. NBCC gets 70 % to 80 % contract on a nomination basis from various ministries. As a result, in Q4FY16, the PMC division revenues grew 45.1 % YoY to Rs. 2,059.9 crore. NBCC has a unique advantage of generating cost-free float from its PMC division where it is able to get revenue upfront from clients. On the other hand, it gets an extended credit period from contractors. Consequently, this has led to a negative working capital cycle and healthy Cash Flow from Operations and FCFF over the years. It is one of the biggest economic moats of NBCC compared to its peers in the industry. In FY14, NBCC enhanced its land bank to expand its real estate business, which led to an increase in the inventory, in turn, leading to a higher working capital and lower CFO compared to those in the previous year. Hence, it earns from both operations as well as float. While the PMC division can get projects from diverse sectors and grow at a steady rate on the back of a macroeconomic revival, the next big opportunity lies in redevelopment of old government properties. The government has started focusing on redevelopment of ramshackle buildings and old government colonies in Delhi and across India to build multi-storeyed residential and commercial complexes. Currently, the company is awaiting approvals from government for redevelopment of three old colonies in Delhi which are worth Rs. 25,000 crore. They expect it to come by July, 2016. The successful execution of the New Moti Bagh project and PWO status for NBCC has opened up a huge opportunity in other government/PSU properties. Currently, NBCC is implementing similar redevelopment projects of a government colony in East Kidwai Nagar, Delhi. It is the first of 30 government colonies across Delhi spreading over 1100 hectares of prime real estate. NBCC has been executing many landmark projects as a PMC as its core strength & leveraging its rich experience in diverse sectors. The company has also been designated as the implementing agency for executing projects under Jawaharlal Nehru National Urban Renewal Mission (JNNURM), Pradhan Mantri Gram Sadak Yojna (PMGSY), solid waste management (SWM) and developmental work in the North Eastern Region. NBCC has signed an agreement with the state government of Punjab wherein it will build 18 de-addiction centres at an initial cost of Rs. 100 crore using prefab technology. Also, the company is in the process of sending a Cabinet note for redevelopment of 18 government presses across India wherein presses will be modernised and the rest of the land will be used for commercial exploitation. Recently, in the state budget speech, the Rajasthan chief minister announced the formation of a JV with NBCC to execute various redevelopment works and construction projects in Rajasthan. NBCC’s strategy has always been to invest part of its surplus cash flow into the value enhancing real estate business in a disciplined manner which also helps them to keep its balance sheet debt free. Currently, NBCC has accumulated 170 acres of land reserves which is spread across 12 states in India. However, the company is not aggressive in this segment and does not wish to launch any new projects but would focus on completion of the existing projects. Mainly, the projects are for affordable housing and middle income group. NBCC was incorporated as a pure EPC player wherein it has been executing engineering and construction services for projects such as chimneys, cooling towers and various types of power plant works. However, growth has remained subdued in the last few years. Currently, mere 5.00 % of the revenues are contributed by the EPC business. Going ahead, the government’s priority to boost infrastructure will create opportunities for the construction industry. NBCC is well poised to grab this opportunity. NBCC became the fifteenth Navratna Company on June 23, 2014 among 250 PSUs in India. Navratna status gives the company freedom to tie-ups in the international market and also allows its autonomy on Investment decision up to Rs. 1000 crore. The government is considering a proposal to hive off real estate owned by sick PSUs such as Bengal Chemicals, National Bicycle Corporation and Richardson & Cruddas in Mumbai's Worli, Byculla, etc. to NBCC. NBCC will be using the direct sale of land or JV for the development of real estate. This is expected to pave the way for long-term opportunities for NBCC in the real estate segment. The company is also looking at strategic alliances with domestic and international players in West Asia, Europe and Commonwealth of Independent States (CIS) countries to scout for EPC contracts as the acquisition route would be time consuming. NBCC has already signed a JV with Oman based Al Naba Construction LLC for EPC contracts in Oman and the UAE. Also, it is looking at similar opportunities in political stable geographies like Turkey and CIS countries. The redevelopment projects, huge land bank and project execution capabilities makes NBCC first choice.

Outlook and Valuation: 

NBCC is one 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 became the fifteenth Navratna Company on June 23, 2014 among 250 PSUs in India. NBCC is under the administrative control of the Ministry of Urban Development, which 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. The Government of India along with the governments of the respective states have taken several initiatives to encourage the development in the sector. The Smart City Project, where there is a plan to build 100 smart Cities, is a prime opportunity for the real estate companies like NBCC. Government initiatives like India’s Prime Minister approved the launch of Housing for All by 2022, the Sardar Patel Urban Housing Mission; 30 million houses will be built in India by 2022, mostly for the economically weaker sections and low-income groups, through public-private-partnership (PPP) and interest subsidy. The Government of India has relaxed the norms to allow Foreign Direct Investment (FDI) in the construction development sector. This move should boost affordable housing projects and smart cities across the country. The Securities and Exchange Board of India (SEBI) has notified final regulations that will govern Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). This move will enable easier access to funds for cash-strapped developers and will create a new Investment avenue for institutions and high net worth individuals, and eventually ordinary investors. The Government of Maharashtra announced a series of measures to bring transparency and increase the ease of doing business in the real estate sector. The State Government of Kerala has decided to make the process of securing permits from local bodies for construction of houses smoother, as it plans to make the process online with the launch of software called “Sanketham”. This will ensure a more standardised procedure, more transparency, and less corruption and bribery. The Indian real estate sector has witnessed high growth in recent times with the rise in demand for office as well as residential spaces. According to data released by Department of Industrial Policy and Promotion (DIPP), the construction development sector in India has received Foreign Direct Investment (FDI) equity inflows to the tune of US$ 24.1 billion in the period April 2000-June 2015. Responding to an increasingly well-informed consumer base and, bearing in mind the aspect of globalisation, Indian real estate developers have shifted gears and accepted fresh challenges. The most marked change has been the shift from family owned businesses to that of professionally managed ones. Real estate developers, in meeting the growing need for managing multiple projects across cities, are also investing in centralised processes to source material and organise manpower and hiring qualified professionals in areas like project management, architecture and engineering. The growing Flow of FDI into Indian real estate is encouraging increased transparency. Developers, in order to attract funding, have revamped their accounting and management systems to meet due diligence standards. NBCC is taking up more and more work in remote and difficult areas to encash business opportunities with assured profit. A major work is being taken up in remote Arunachal Pradesh for development of roads in dense jungle area for 185 km valuing approximately Rs. 1400 crore. NBCC has signed MOUs with various foreign parties like: M/s Al Naba Services LLC, Sultanate of Oman; M/s Construction Industry Development Board Holdings Sdn Bhd., Malaysia; M/s Form Yapi Malzemeleri Insaat Samayi Ticaret Ltd, Turkey etc. NBCC is into the Real Estate business since 1988 and has many Real Estate projects to its credit both residential and commercial at various locations across the country which includes Kolkata, Delhi, Lucknow, Cochi, Cuttack, Vadodara, Ghaziabad, Faridabad etc. NBCC has land bank of around 132 acres and is likely to generate sizable business and steady income over a longer period of time. NBCC has achieved its target revenue of Rs. 4,200 crore, PAT margin of 5.6 % and order inflow of Rs. 5,000 crore in FY15 as per the MoU signed with Government of India. Considering the current order book, its ongoing projects and strong opportunities, it can be expected that its revenues can show robust growth at 38.1 % CAGR to Rs. 10968.0 crore in FY16-18E. EBITDA is expected to grow at 48.2 % CAGR to Rs. 759.8 crore in FY16-18E. NBCC’s bottom line has grown at 19.0 % CAGR during FY10-15 largely led by its robust top line growth and zero interest expenses. The government has issued revised guidelines for central public sector enterprise (CPSEs) to pay annual dividend of 30 % of PAT or 30 % of Government of India's equity, whichever is higher. This is in lieu of previous guidelines in 2004 communicating a dividend policy of 20 % of PAT or 20 % of equity, whichever is higher. However, this should not impact NBCC much as it has paid 47 % of PAT as dividend in FY16. Going forward, it is expected that NBCC to maintain a similar dividend pay-out ratio. The average RoE and RoCE of NBCC during FY10-15 have remained at the level of 21.6 % and 30.5 %, respectively, on the back of a strong bottom line show. They were at 20.7 % & 31.2 % in FY16, respectively. Going ahead, it is expected that RoE and RoCE to bounce to 29 % & 44.6 %, respectively, in FY18E with anticipated bottom line growth. NBCC witnessed strong order inflows of Rs. 17517 crore in FY16. Its current order book is strong at Rs. 37,000 crore, 6.4x TTM construction revenues, providing strong revenue visibility. The order book consists of 85 % from PMC, 10 % from real estate and 4-5 % from EPC division. The management expects approvals for redevelopment of three old colonies worth Rs. 25000 crore to come from government by July, 2016. Further, NBCC will also have to make an equity investment of Rs. 300-500 crore in these for the first six months. Given the strong order book, huge opportunities, it is expected that its topline, bottomline to grow at a CAGR of 38.1 % & 36.6 % in FY16-18E to Rs. 10968.0 crore & Rs. 576.3 crore, respectively.  NBCC will be a key beneficiary of the government’s ambitious schemes like Housing for all and Smart Cities mission aimed at urban development. Further, NBCC is already implementing a few smart townships like Kidwai Nagar and New Moti Bagh. It is looking to provide an all-round smart city solution including both, construction and technical (IT/Electronic) services for which it had tied up with IBM and a Malaysian JV firm. NBCC has asset light business model, as it operates in Project Management & Consultancy (PMC) services which contribute 85 % of total revenues and more than 65 % of the PBT. In FY15, the company enjoyed high RoE and RoCE above 22.6 % and 35.2 % respectively and expect to maintain the same. The company is debt-free and thus has no interest cost. It maintains a current ratio of more than 1.2x which is clear evidence of its robust fundamentals. At the CMP of Rs. 193.51 (Rs. 967.55), the stock is trading at 28.29x FY17E P/E and 22.39x FY18E. Given the healthy order book in the PMC division and cash rich balance sheet, NBCC’s revenues have grown at a CAGR of 14.00 % during FY12- FY16 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 38.1 % and 36.6 %, respectively, during FY16-18E. Also being a cash rich balance sheet company it will have healthy return ratios. On SOTP basis the valuation of NBCC’s PMC business on the DCF basis comes at Rs. 528 per share & redevelopment opportunities at Rs. 500 a share. The value of real estate business comes at Rs. 95 a share, while the value of EPC business comes at Rs. 20 a share. Giving me the value of Rs. 228.60 (Rs. 1143.00) per share. The company can post Earnings per share (EPS) of Rs. 34.20 in FY17E and Rs. 43.20 in FY18E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also. 

SOTP valuation (FY2017E)

BUSINESS SUBSIDIARY	Value per Share(₹)
PMC Business	528.00
Re-development Opportunities	500.00
Real Estate Business	95.00
EPC Business	20.00
TOTAL VALUE PER SHARE	1,143.00

KEY FINANCIALS	FY15	FY16	FY17E	FY18E
SALES (₹ Crs)	4,621.00	5,749.20	7,430.50	9,613.90
NET PROFIT (₹ Cr)	277.30	308.80	410.00	518.60
EPS (₹)	23.10	25.70	34.20	43.20
PE (x)	42.70	38.40	28.60	22.60
P/BV (x)	8.90	8.00	6.70	5.50
EV/EBITDA (x)	37.10	30.60	26.00	19.20
ROE (%)	20.90	20.70	25.30	26.70
ROCE (%)	32.00	31.20	34.70	36.50

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*As the author of this blog I disclose that I do not hold  NBCC LTD in my any of the portfolios.

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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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