Friday, June 3, 2016

VINATI ORGANICS LTD: SPECIAL IN SPECIALITY CHEMICALS !!!

Scrip Code: 524200 / VINATIORGA

CMP: Rs. 465.35; Market Cap: Rs. 2,400.79 Cr; 52 Week High/Low: Rs. 591.00 / Rs. 360.95

Total Shares: 5,15,91,025 shares; Promoters : 3,73,03,247 shares – 72.31 %; Total Public holding : 1,42,87,778 shares – 27.29 %; Book Value: Rs. 109.63; Face Value: Rs. 2.00; EPS: Rs. 25.50; Dividend: 175.00 %; P/E: 18.39 times; Ind. P/E: 16.35; EV/EBITDA: 11.45 times.

Total Debt: Rs. 65.30 Cr; Enterprise Value: Rs. 2,438.95 Cr.

VINATI ORGANICS LIMITED: The Company was founded in 1989, Vinati Organics Limited (VOL) is an India-based company, which manufactures specialty organic intermediaries and Monomers. The Company is engaged in manufacturing of speciality organic intermediates and monomers, including IBB (Isobutyl Benzene), ATBS (2 Acrylamido 2Methylpropane Sulphonic Acid), NaATBS(Sodium Salt of 2 Acrylamido 2Methylpropane Sulphonic Acid, Diacetone Acrylamide and Isobutylene. The company gave bonus in November 2007 in ratio of 1 new share for every two shares held and then company split face value of its shares from Rs. 10 to Rs. 2 in October 2009. IBB finds application in the manufacturing of Ibuprofen, while ATBS is a specialty monomer with multiple applications such as industrial water treatment, oil field applications, construction chemicals, hydrogels for medical applications, personal care products, emulsion polymers, detergents, textile print pastes, adhesives and sealants, thickeners and paper coatings. In an effort towards backward integration, VOL executed a project for its ATBS plant to manufacture isobutylene (IB), which is one of the major raw materials. The IB plant in India is the largest plant with a capacity of 12000 TPA. Besides, VOL also manufactures Normal Butylbenzene (NBB), Sodium Salt of 2-Acrylamido 2- methylpropanesulfonic Acid (NaATBS), N-Tertiary Butyl Acrylamide (TBA), Hexenes and other industrial monomers on a small scale. The recent addition to its product portfolio includes isobutylene, high purity methyl tert butyl ether (MTBE) and methanol. The company’s products are exported to customers across the US, Europe and Asia. VOL is a market leader in its chosen product categories with presence across more than 22 countries globally. Company has plants in Mahad-Raigad which the biggest IBB manufacturing facility in the world. This plant has specialized equipment for the production of IBB that adheres to the highest standards of quality and purity. Company’s Ratnagiri plant has customized equipment for the manufacture of ATBS, TBA, IB, HPMTBE, DAAM and other speciality chemicals. ATBS is engaged in Emulsions for paints and paper coatings, water treatment chemicals, adhesives, hydrogels and absorbents, textile, auxiliaries, detergents and cleaners, acrylic fibre, construction polymers and oil field polymers. VOL’s products are Speciality Monomers 2-acrylamido 2-methylapropane sulphonic acid (ATBS) Sodium salt of 2-acrylamido-2-methylpropane sulphonic acid (NaATBS) N-Tertiary Butyl Acrylamide (TBA); N-Tertiary Octyl Acrylamide (TOA); Diacetone Acrylamide (DAAM) Specialty Aromatics Iso Butyl Benzene (IBB) Normal Butylbenzene (NBB). C 10 Aromatic Solvent, Hexene; its other Speciality Products includes Isobutylene (IB); Methanol; High Purity- Methyl Tertiary Butyl Ether (HP-MTBE); Miscellaneous Polymers; Vinflow HT; Vinplast 245 (Acrylic Super Plasticizer). Vinati Organics Ltd is locally compared to IOL Chemicals and Pharmaceuticals Ltd, Deepak Nitrite Ltd, Paushak Ltd, Dharamsi Morarji Chemical Co Ltd, Navin Flurine Industries, Panama Petrochem Ltd, Manali Petrochemicals Ltd, Adi Finechem ltd, Camphor and Allied Products Ltd, Resonance Specialties Ltd, Camlin Fine Sciences Ltd, Diamines And Chemicals Ltd, and globally with BASF, AkzoNobel, Clariant, Evonik, Cognis, Kemira, Lanxess, Rhodia, Wacker and Croda from Europe, Huntsman, Ashland, Chemtura, Rockwood, Albemarle, Cabot, W.R. Grace, Ferro Corporation, Cytec Industries and Lubrizol of USA.

Investment Rationale:

Established in 1989, Vinati Organics Ltd is a speciality chemical company producing aromatics, monomers, polymers and other speciality products. It is the world’s largest manufacturer of Isobutyl Benzene (IBB) and 2-Acrylamido 2- Methylpropane Sulfonic Acid (ATBS). The company’s products are exported to customers across US, Europe and Asia. VOL is a market leader in its chosen product categories with presence across more than 22 countries globally. Global Chemical Industry Chemicals are an essential part of our modern life and have a wide range of product based applications. In fact, the global chemical output, valued at $171 billion in 1971, is estimated to have increased to about $3.9 trillion value-wise in 2015. This industry faced a number of initial challenges, with the most important ones being in the form of the global meltdown of 2009 and the consequent economic headwinds. However, a series of cost-cutting measures, along with cash management, deleveraging of balance sheets, and divestment of underperforming businesses helped it to counter this scenario. The volume of global chemical output was expected to increase by 2.4 % in 2015 as against 2.7 % in 2012. The growth is likely to improve further to 3.8 % in 2016, given the improving economic conditions. According to the American Chemistry Council (ACC), the regions that are expected to lead this growth include the Asia Pacific, the Middle East, and Africa. The global speciality chemicals market is expected to grow at a CAGR of 5.16 % over the period 2013 to 2018. One of the key factors contributing to this market growth is the increasing demand for specialty chemicals products in the rapidly developing countries of the APAC region. The global specialty chemicals market has also witnessed an increase in merger and acquisition related activity, as key market players increase their attempts to penetrate the emerging markets. However, the increasingly stringent health and environmental regulations could pose a challenge to the future growth of this market. India’s growing per capita consumption and demand for agriculture-related chemicals offers a goldmine of opportunities for the domestic chemicals industry. With an increased focus on improving products and the usage intensity of speciality chemicals, the industry is poised to record strong future growth. The total market size of the domestic chemicals industry is expected to grow from US$ 108 billion in 2011 to US$ 290 billion in 2017. This segment includes dyes and pigments, leather chemicals, personal care ingredients and other speciality chemicals (excluding pharmaceuticals and agrochemicals). In 2015, the Indian chemical industry earned revenues in the range of US$ 155-160 billion. It is likely to grow further at a rate of 11 % to 12 % over the next two to three years. Indian Specialty Chemicals Market including knowledge chemicals as active ingredients in agrochemicals and pharmaceuticals has the potential to grow at a rate of 15 % p.a. to reach USD 40 billion by FY 2017. This growth potential is significantly higher than the projected 3 % p.a. growth rate for the global chemical industry or even the 10 % p.a. growth rate envisaged for the domestic sector. The chemicals industry in India is the largest consumer of its own products, consuming as much as 33 % of its total output. Given the promising growth trends witnessed in the chemicals industry, this internal consumption is all set to rise even further. The Indian chemicals industry has a diversified manufacturing base that is characterised by world-class product offerings. There is a substantial presence of downstream industries in all segments. At the same time, this large and expanding domestic chemicals market also boasts of a large pool of highly-trained technical personnel. Promising Export Potential Chemicals constitute 5.4 % of the overall domestic export volumes. India already has a strong presence in the export market in the sub-segments of dyes, pharmaceuticals and agro chemicals. India exports dyes to Germany, the UK, the US, Switzerland, Spain, Turkey, Singapore and Japan. Vinati Organics Ltd entered ATBS manufacturing by getting technology developed from National chemical Laboratories, Pune, and setting a manufacturing plant with an initial capacity of 1,200tpa in 2002. VOL was the third company globally to enter ATBS after Lubrizol and Toagosei. Acrylamide tertiary butyl sulfonic acid is a vinyl polymer. Led by its excellent hydrolytic and thermal stability properties, ATBS finds wide application in emulsions for paints and paper coatings, water treatment chemicals, adhesives, hydrogels and super absorbents, textile auxiliaries, detergents and Cleaners, acrylic fiber, construction polymers, and oil field polymers. But due to the captive manufacturing practice of Lubrizol and Toagosei, ATBS was not available at the right price-quantity for other applications. Leveraging the short‐supply position in ATBS, VOL continuously expanded its capacity to 26,000tpa in FY13 and emerged as the largest manufacturer of ATBS in the world with over 45 % of global market share. Its robust client base across various markets, including the US, Europe, Asia, the Middle East, and China, has been a key to VOL’s success in ATBS. It has some of the world’s largest specialty chemical companies in its client list, including BASF, Dow chemicals, Nalco Company (USA), AkzoNobel, SNF Floerger, Ciba, and Clariant chemicals, among many others. Vinati would be launching 4 new products next year- PTBT/ PTBBA (Para Tertiary Butyl Toluene / Para Tertiary Butyl Benzoic Acid), IBAP (Isobutyl AcetoPhenone), TB Amine (Tertiary Butyl Amine), 1 niche customized product. PTBT/PTBBA is an IB derivative which would be sold in the domestic market. Currently it is imported in India. The company claims to have a better & cost effective technology for these products and aims to entirely capture the domestic market by substituting the imported products and repeat the success story of IBB. With IBAP, Vinati would be forward integrating from IBB. IBAP is subsequently used in making Ibuprofen. Vinati claims to have a better and cost effective technology for IBAP too. While steady expansion in geographic reach and client base offered scale to VOL’s ATBS operation, its strategic backward integration to IB (Isobutylene) manufacturing made it the price Leader. VOL is the only backward‐integrated ATBS manufacturer in the world. VOL’s price leadership in ATBS contributes 46 % of its total sales is a key to its sector leadership in profitability. VOL launched innovative and cost competitive products like ATBS, IBB, and IB, supported by its technological tie‐ups with National Chemical Laboratories (India), Institut Francais du Petrole (France), and Saipem S.p.A. (Italy), respectively. Its continued captive research on productivity and efficiency earned it global leadership in ATBS and IBB. VOL is the largest manufacturer of IB India. Leveraging its in‐house research, it introduced new products, which like N‐Tertiary Butylacrylamide (TBA), NTertiary Octyl Acryl amide (TOA), High purity Methyl‐Tertiary Butyl Ehter (HP‐MTBE) and Diacetone Acryl amide (DAAM) and these new product lines make up about 15 % of its revenue share. The new products are fully integrated with existing ones as by‐products, co‐products, or their further processed products, which make VOL the most cost‐effective producer of these products. In its product pricing pattern, Vinati charges mark up as absolute value per kg which ensures consistent profit for its irrespective of general pricing trend of its raw material or finished product. IBB and IB pricing is negotiated with clients on a monthly basis whereas ATBS pricing is revised with a lag of one quarter. VOL has renowned clientele like BASF, Nalco, Shasun Chemicals, SMF, Clariant Chemicals are among its top 10 clients. The top 10 clients account for 50 % of revenue. Vinati's customer count is more than 60 and it exports to 22 countries. And its Export contributes around 66 % of revenue. All of its exports are dollar denominated. Leadership in sector capacity expansion and pricing power makes Vinati Organics a strong player in the Specialty Chemicals segment and with strong management it will surely prove its leadership.

Outlook and Valuation:

Vinati Organics, a leader in specialty chemicals, follows the strategy of becoming the market leader in whichever product it deals in and enters into a new product only if it has a better technology. It has a product portfolio of 15 products of which IBB (Isobutyl Benzene), ATBS (2-acrylamido 2-methylpropane sulphonic acid), IB (Isobutylene) and HP MTBE (High Purity- Methyl Tertiary Butyl Ether) garner 90 % of revenue. Specialty chemicals business is knowledge as well as process-driven. It takes years of knowledge and trial and error to develop the chemistry to meet not only international purity standards but also achieve a favourable price-performance ratio. Also, specialty chemicals are required to meet customized needs of different customers. One of VOL’s products, IBB, which is used as a raw material for manufacturing ibuprofen, demands a purity level of 99.5 %, as per international standards. Given its usage in making drugs, consistency in quality is of utmost importance. Although VOL started its business in 1992 by setting up an IBB plant in Mahad with an initial capacity of 1,200mt, it took eight years of concentrated efforts to get the commitment from its client. Starting 1998, VOL was able to sell at the most 100mt of IBB to clients. However, consistent improvement in IBB quality and multiple visits to US-based clients finally gave VOL its first major IBB order in late 2006. VOL not only meets, but also beats industry standards in purity by manufacturing IBB with purity ratio of 99.8 %, the highest level globally. VOL’s another product, ATBS, had to go through a rigorous process before the company could come up with a marketable product. Since December 2002, production of ATBS has been streamlined and the first batch of commercially manufactured ATBS was shipped to VOL’s clients globally. However, clients rejected the ATBS produced by VOL because of quality problems. VOL then started providing 18 different parameters for its product on the basis of which the quality of ATBS could be accessed. The learning process lasted till 2005 when it finally made a breakthrough. The acceptable quality of ATBS for Enhanced Oil Recovery (EOR), one of the areas where ATBS is used, is even higher than its usage in other applications. Weight of ATBS should be higher than 400,000 amu for it to be used for EOR. The company’s ATBS product successfully achieved high purity standards with a purity tolerance level of 0.5 % against the accepted global tolerance level of 3.0 %. VOL, in a tie-up with National Chemical Laboratory or NCL under the guidance of Dr. Barve, was able first to achieve this feat in India. NCL has exclusively licenced this technology to VOL. The process developed by NCL is protected by two US patents. VOL’s other two major products - IB and HP-MTBE - are of equally superior quality. The company’s IB product achieved a 99.85 % purity standard, which is among the highest in the world. HP-MTBE achieved a purity standard of 99.95 %, accepted as one of the highest globally. Hence, it is believed that given the time and complexity involved in making these products, it is extremely difficult for a new entrant to foray into this business. The specialty chemicals which VOL produces accounts for a tiny portion of total raw material costs of VOL’s clients and hence, the incentive for clients to change its supplier is very low unless the supplier is not able to provide good and consistent quality products. There are very few players present in this segment. It takes a long time to build quality products that are acceptable at the global level. Hence, a small player can’t start from scratch because the gestation period is very high. A bigger player may not like to get into this business as it is completely value-driven and not volume-driven. Revenue from specialty chemicals would make up tiny portion of total revenues of a big player. Hence it will be less beneficial for them to get into this space. The above two factors give companies like VOL tremendous pricing power. Even if VOL decides to marginally increase its prices, the impact of that increase on the bottom-line of clients will be minimal. This is evident from VOL’s highly consistent margin profile since the past five years. Isobutyl Benzene (IBB) was VO’s first product. It is a specialty chemical widely used as an intermediate in the preparation of Ibuprofen, an anti‐inflammatory/antiarthritic/ analgesic medicine for pain relief. Ibuprofen is primarily manufactured in India, China, and in the USA. It is also used in the perfume industry. VO is a market leader in IBB with more than 70 % global market share. It has the largest IBB manufacturing capacity in the world at 14,000TPA at Mahad, Maharashtra. It has acquired the technology to produce IBB from Institut Francais du Petrole (IFP), France. This is a mature product with demand of 20,000 TPA globally, growing at 5 % p.a. Vinod Banwarilal Saraf (a BITS Pilani graduate and an industry veteran) has been the key driving force behind the successful introduction of products such as IBB/ATBS and in the scaling up to global levels. He has hands‐on expertise in Grasim Industries in new chemical and petrochemical projects identification, technical tie‐ups, and feasibility studies. He worked as Managing Director in Mangalore Refinery & Petrochemicals Ltd. Mr Saraf’s decades of hands on industry expertise helped VO deliver 5‐8‐fold growth in revenue/profits over the last eight years. His leadership would ensure sustained business progress. Vinati Organics has capex of Rs. 200 Cr to be complete in FY17. The new products are likely to be launched throughout FY17 in a phased manner and ramp up will happen in subsequent 6months. At peak utilisation, Vinati is eyeing asset turnover of 2- 2.5x from these products. VOL has 5 MW Co-gen power plants in which it is investing Rs. 50 Cr, which would result in savings of Rs. 8 Cr in power costs starting FY18.While the company focuses on maintaining leadership position in each of its products, new product launches are expected to contribute to total revenue from 2HFY17. Reduction in prices of crude oil will lead to almost no demand for EOR (Enhanced Oil Recovery) chemicals. EOR constitutes 15% of ATBS revenue, which will lead to volume decrease in FY16 for VOL. And it is believed that the demand scenario to turn favourable from FY17E onwards on the back of new product launches and expectation of higher demand from user industries with favorable business dynamics. VOL's revenues and profits have grown at a CAGR of 24 % and 22 % over FY 11-15 respectively. The return ratios (ROE, ROCE) of the company have remained above 30 % over FY 11-15, despite a drop in leverage to 0.2x in FY15 from around 1x in FY13. The company's margins also have remained in low to mid 20s which was 26.5 % in FY15. VOL is looking to fund its current expansion worth Rs. 150 Cr through internal accruals. And as a diversified specialty chemicals company, VOL is a play on three key emerging trends like rising demand for specialty chemicals in India which is expected to be at 15 % CAGR from FY15-FY20E, the migration of global chemical manufacturing from China to India where Asia is expected to have 70 % production share by 2030 and established product positioning & lowest cost producer. The promoters of VOL currently holds 72.31 % stake in company and they have informed stock exchanges that they intend to increase their stake to 75.00 % which is to purchase 9 lakh shares at a price sub Rs. 500 per share from the secondary market from June 7, 2016 to December 6, 2016, if price goes above Rs. 500 they will refrain from buying. This buyback from the promoter is to offset the dilution done due to conversion of FCCB. At the current market price of Rs. 465.35, the stock is trading at a PE of 24.11 x FY16E and 19.88 x FY17E respectively. The company can post Earnings per share (EPS) of Rs. 19.30 in FY16E and Rs. 23.40 in FY17E. 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 .

KEY FINANCIALS	FY15	FY16E	FY17E	FY18E
SALES (₹ Crs)	766.30	604.70	718.90	841.00
NET PROFIT (₹ Cr)	115.80	99.40	120.90	149.60
EPS (₹)	22.40	19.30	23.40	29.00
PE (x)	17.60	20.50	16.90	13.60
P/BV (x)	4.70	4.00	3.30	2.80
EV/EBITDA (x)	11.10	12.10	10.00	7.90
ROE (%)	26.70	19.40	19.80	20.30
ROCE (%)	33.00	25.70	26.80	28.00

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

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Monday, May 23, 2016

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

As I always say, 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 % ?) -

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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.