CCL PRODUCTS INDIA LTD: THE PERFECT CUP OF COFFEE !!

Scrip Code: 519600 / CCL 

CMP:  Rs. 183.70; Market Cap: Rs. 2,443.72 Cr; 52 Week High/Low: Rs. 222.50 / Rs. 60.75

Total Shares: 13,30,27,920 shares; Promoters : 5,92,49,243 shares – 44.54 %; Total Public holding : 7,37,78,677 shares – 55.46 %; Book Value: Rs. 26.65; Face Value: Rs. 2.00; EPS: Rs. 5.61; Dividend: 60.00 % ; P/E: 32.85 times; Ind. P/E: 30.84; EV/EBITDA: 10.63.

Total Debt:  Rs. 240.39 Cr; Enterprise Value: Rs. 2,650.20 Cr.

CCL PRODUCTS INDIA LIMITED: CCL Products India Ltd was incorporated on December 1961 and is based in Hyderabad, India. The company was earlier known as Sahayak Finance & Investment Corporation Limited and changed its name to Continental Coffee Limited in the year 1993 reflecting the change of its business from hire purchase financing to coffee related business. The company is predominantly engaged in exporting and manufacturing of Soluble Coffee known as Instant Coffee. The company came out with an IPO of about 27,00,000 lakh shares of Rs. 10 each at a premium of Rs. 10 per share in August, 1995. The company had split the face value of its share from Rs. 10 to Rs. 2 in 3 July 2013 and on same date it also declared bonus in ratio of 1:1. The company, CCL Products (India) Limited, together with its subsidiaries, manufactures and sells coffee products in India. Its coffee products include pure soluble coffee products comprising spray dried coffee powder and granules, freeze dried coffee, and freeze concentrate liquid coffee; decaffeinated coffee; flavoured coffees in vanilla, cinnamon, caramel, chocolate, and hazelnut flavours; certified coffees; and chicory-coffee mix. The company provides its products in various packs, such as jars, cans, sachets-pouches, bag-in boxes, drums, and bulk boxes under the brand name of Continental Spéciale, Continental Premium, and Continental Supreme. CCL Products (India) limited also exports its products to approximately 80 countries worldwide. Company also has its own manufacturing process units for Green beans storage, cleaning and grading, roasting and grinding unit, Extraction/Clarification unit, Aroma recovery and Evaporation unit, Spray drying, Agglomeration, Freeze-drying unit, Freeze Concentrated Liquid Coffee manufacturing unit, and Packaging unit. CCL Products also has an Export Oriented Unit, with the ability to import green coffee into India from any part of the world, and export the same to any part of the world, free of all duties. CCL Products exports to over 80 countries. CCL Products' state-of-the-art Coffee Manufacturing Plant is located at Duggirala Mandal, Guntur District, Andhra Pradesh, India. The company is also certified with ISO 9001:2008, HACCP and BRC Quality Management System (QMS), and has achieved “Trading House” status. CCL Products is also certified approved to produce Organic Coffee, Rain Forest Alliance Coffee and Fair Trade Coffee, in any combination, by the relevant organizations. The company’s Coffee Manufacturing Plant also holds Kosher and HALAL Certification. CCL Products India Ltd can be locally compared with Tata Global Beverages, Bombay Burmah Trading Co, Mcleod Russel (India) Ltd, Jay Shree Tea & Industries Ltd, Nestle India, Assam Company India Ltd, Goodricke Group Ltd, Warren Tea Ltd, B&A Ltd, Upper Ganges Sugar & Industries Ltd, Tata Coffee Ltd, Hindustan Unilever Ltd and Globally with Unilever PLC of UK, Suntory Beverages & Foods Limited of Japan, BrasilAgro of Brazil, B& G Foods Inc of USA, Premium brands holding corporation of Canada, Ten Peaks Coffee Com of USA, Farmer Bros. Co. of USA, Keurig Green Mountain Inc of USA, Growers Direct Coffee Company Inc of USA,   Power Root Berhad of Malaysia, Unicafe Inc of Japan, Coffee Holding Co. Inc of USA. Key Coffee Inc of Japan.

Investment Rationale:

CCL Products (India) is among the world’s leading and India’s largest processor and exporter of instant coffee. It exports to more than 67 countries. It has 10 % market share globally in instant coffee exports. Its top big customers include Israel’s Strauss Coffee B.V. and Germany’s Deutsche Extrakt Kaffee. CCL is one of the very few companies globally that have successfully scaled up this business and increased its capacity near about 10 times since inception in 1995, and that too without equity dilution. CCL Products (India) Ltd.’s capacity expansion in Vietnam has brought CCL’s name to the world’s second-biggest grower of the beans list. Any good forecasts for record coffee crops in Vietnam and India will guarantee CCL Products raw materials and bolster efforts to win more buyers for instant coffee supplies which are currently dominated by Nestle SA and Kraft Foods Group Inc. CCL was the largest importer of coffee from Vietnam for 15 years and so Vietnam government offered concessions for setting up plant there. The Vietnam plant offers four benefits: Logistical advantage; better raw material availability; favourable duty structure and no income-tax for first four years and tax exemption of 50 % for next five years. Vietnamese operations are expected to account for almost 50 % of the profit by 2016-17. CCL added one large client in 3QFY15 in Europe for freeze dried coffee. The product enjoys super premium in nature as the company is using 100 % Indian coffee. As per the management, the client will provide additional business in other countries as well. It will take one year for the client to stop purchases from its existing supplier and ramp up volume from CCL. For CCL, 3Q and 4Q are better quarters than 1Q and 2Q on account of seasonality. The company has registered a volume of 15,000 ton from Indian operations which is 100 % capacity utilisation and 4,600 ton from Vietnam plant which is 46 % capacity utilisation in FY15. As per the management, total volume is expected at 25,000 ton in FY16. Vietnam plant’s volume is expected to increase 63 % from 4,600 ton in FY15 to 7,500 ton which will be 75 % capacity utilisation and Indian operations’ volume is likely to increase 16 % from 15,000 ton to 17,500 ton. CCL is expanding its Indian operations from 15,000 ton to 20,000 ton at a cost of Rs. 20 Cr through brownfield expansion and is expected to complete it by December 2015. CCL’s Swiss plant operates at sub-optimal utilisation level because of non-competitive pricing of supplies from Switzerland to the European Union. Import duty levied by the EU on Swiss coffee is 9.0 % whereas only 3.3 % is levied on coffee supplied from India. CCL is negotiating with Swiss government on the terms of duty payment, wherein CCL will import bulk coffee from its Indian plant by paying 3.3 % duty, do value addition in Switzerland and thereby get entitled to pay the balance 6 % duty on value addition, rather than on basic coffee. The company has sorted out the tax problem pertaining to Switzerland plant. As of now, CCL is paying tax on value-added products. Utilisation of the Switzerland plant is expected to improve and it incurred Rs. 3 Cr loss in FY15 will turn to positive by FY16. CCL gave marketing rights to a local Swiss authority for products from Switzerland plant. CCL expects capacity utilisation level at its Switzerland plant to improve to 75 % with single-shift capacity of 1,000tn in the next one year. Because of higher costs, liquid coffee is consumed only by the Japanese population. Currently, Japan consumes 10,000-20,000 ton of liquid coffee and out of this 50 % is produced locally while the rest is sourced from Brazil. The shifting of liquid coffee operations from Switzerland to India is complete and trial production started in 1QFY15. CCL expects some revenue from liquid coffee from December 2015 onwards and capacity utilisation to increase to 50 % in the next two years. To double the capacity at Vietnam plant from 10,000 ton to 20,000 ton, CCL has to incur incremental capex of US$10mn-US$12mn as against original capex of US$32mn. Once finalised, it will take one year to double the capacity. CCL is expected to finalise doubling of the capacity at its Vietnam plant once its existing operations achieve 75 % to 80 % capacity utilisation, tentatively by FY17. As per the management, US imports 80,000 ton to 100,000 ton of instant coffee, while CCL sells only 2,000 ton. The imports are mostly from Brazil, Mexico and Ecuador. CCL’s associates in the US have more than 30 years and have gained substantial experience. CCL will be conducting market research in the US over the next six months to set up a packaging facility where its coffee will be shipped from Vietnam. Capex required for the same is the range of US$8mn- US$10mn. The location will be finalised in the next six months. 

India’s coffee market is estimated at Rs. 3,000 Cr with Nestle India and Hindustan Unilever Ltd dominating with a combined branded market share of more than 65 %. The organised coffee market in India is around Rs. 600 Cr or 20 % of the total domestic coffee consumption of Rs. 3,000 Cr and the coffee chain business is growing by 40 % in India. The per capita consumption of coffee in India is just 82 grams compare that with 4 kilos in US. Consumption in India is seen expanding to 2.5 million bags of 60 kilograms each by 2020 from 1.92 million bags in 2013. The world coffee market is set for the largest shortage in nine years as drought cuts the crop in Brazil. Demand will exceed production by 8.8 million bags in the 12 months starting October. Domestic consumption has increased, and this gives CCL the advantage of entering the Indian market as a brand and expects to garner revenue of Rs. 300 Cr in five years. CCL currently sells 1,000 ton of coffee in domestic market including super markets and does institutional sales as well as branded product sales. CCL did a soft launch of a product in Andhra Pradesh and the product was widely accepted. The next target which CCL is eyeing to sell its brands is North India, which is the leading instant coffee market after South India. To increase visibility, CCL has also started selling coffee under the Continental brand to institutions like hotels, airlines etc. Even the chefs of hotels are recommending the Continental brand. The company is also in the process of setting up a marketing team in the next six months so as to push the sale of products aggressively. As the brand is making reasonable profit now, the management is planning to increase advertisement spending. CCL is yet to hire senior people for its marketing team. It has hired market research and other consultants. CCL is planning to develop two separate brands and also two separate teams for marketing - one for chicory and one for coffee. As per the management, once the branding exercise is complete, senior members in the marketing team will be hired and also new states will be targeted. The company is now targeting northern cities like Punjab, Uttar Pradesh, Lucknow, Delhi, Allahabad etc. As per the management, in the next six months, Continental brand will be made available in Delhi market. As per management, the product is widely accepted in AP, Allahabad, some other parts of North India and also South India.

Outlook and Valuation: 

CCL Products India ltd is India’s largest private label in instant coffee, supplying to premium brands in over 80 countries. CCL Products also have one of the world’s largest single-location plants and is considered amongst the top three private label manufactures in global instant coffee. Coffee processing is a niche and highly profitable industry, and has high entry barriers. Coffee processing is not an easy business, as it is very important to get the right blend. Further, the taste & preference varies region-wise and culture-wise. Experience and relationships is Key to success, and the model is not easily replicable. It takes three to five years to win over a client and establish one’s credentials. CCL Products is one of the very few companies globally that have successfully scaled up this business. CCL’s USP is its technology, which it acquired from Brazil, allowing it to use low grade of green (or raw) coffee beans to produce very high quality instant coffee. CCL is building a market for coffee in Africa and at present, it sells 1,200 ton there. The company plans to set up 3,000 ton plant at a cost of Rs. 50 Cr, once the sales top 2,000 ton to 2,500ton. CCL officials are keen to invest in Africa as it has two advantages: Raw material there is available in plenty and no duty is levied in African countries and secondly, coffee can be exported to this country without any duty. Exports to South Africa attracts 35 % import duty currently. As a result, a significant part of coffee exports from India and other countries to West Africa is taking place illegally currently. In order to avoid this risk, CCL sells coffee to Indian exporters-trading houses-branded players who are selling coffee in Africa. Once the duty structure in the African region is streamlined, CCL will set up a plant there. CCL currently sells 1,000 ton of coffee in the domestic market including super markets, to Hindustan Unilever, and also via branded sales. CCL did a soft launch of a product in Andhra Pradesh and the product was widely accepted. The next target which CCL is eyeing to sell its brands is North India, which is the leading instant coffee market after South India. The company is targeting northern cities like Punjab, Uttar Pradesh, Lucknow, Delhi, Allahabad etc. As per the management, in the next six months, Continental brand will be made available in the Delhi market. To increase visibility, CCL has also started selling coffee under Continental brand to institutions like hotels, airlines etc. The company is also in the process of setting-up a marketing team in the six months so as to push the products aggressively. Indian coffee is the most extraordinary of beverages, offering intriguing subtlety and stimulating intensity. India is the only country that grows all of its coffee under its shade. India’s coffee growing regions have diverse climatic conditions, which are very well suited for cultivation of different varieties of coffee such as Arabicas and Robustas. India is one of the major coffee producing countries and ranks seventh in the world. With only about 2 % share in the global coffee area, India contributes about 4 % towards the world production and it contributes between 4.5 % to 5 % of global coffee export. CCL Products is no longer content with selling to institutional buyers outside India. The company wants a slice of the domestic branded instant coffee market and has started retailing under the Continental brand across the country. The company is also supplying to private label manufacturers such as retail supermarkets. Till last year the biggest goal of the company was to be to generate profits in excess of a Rs. 100 Cr every year. Well that being achieved, the management con-call clarifies, what the company wishes to do with all the additional money it generated. Even with the Swiss plant which is losing about Rs. 3 Cr a year the partly operational Vietnam plant has contributed over 25 % of the EPS in the current year itself. Of the 5000 MT capacity only about 75 % was effectively used this year. Next year onwards the company should be able to utilize full capacity turning out an EBITA of more than 25 % due to its excellent product mix as well as its tax holiday it enjoys from Vietnam. Thus for every Re. 1 of Vietnamese earning, Indian operation will have to earn Rs. 1.42 just to set off the tax advantage. No wonder then, the Vietnamese plant will be expanded to 10,000 MT as soon as steady orders are established. While the numbers have shown excellent growth, the quality of the numbers too has shown fantastic improvement. The company is future proofing itself by slowly moving away from the spray dried coffee into instant and into liquid coffee. With current capacity of 20,000 MT which will be upgraded to 25,000 MT by the end of the year and additional 5,000 MT in the anvil in Vietnam, CCL’s order book is going to be fully packed. CCL will repay its debt of upto Rs. 138 Cr which was due to Vietnam plant and CCL will pay off Rs. 45 Cr this year and the remaining Rs. 93 Cr in the next two years. Also, Coffee Day Enterprises Ltd, the firm behind Cafe Coffee Day, India's biggest home grown coffee chain, is all set for a market debut that could value it at almost $1 billion. Cafe Coffee Day, a cafe pioneer in India, aims to list a 20 %, raising roughly Rs. 1,150 Cr through IPO. CCD has more than 1,650 stores and 600 kiosks across India as well as 30,000 vending machines in 11,000 corporate offices. Cafes have become a hangout for India’s young and restless generation and have now became a meeting hub for entrepreneurs, corporate workers. It is said that Rs. 750 Cr will be used to repay CDEL debts and Rs. 290 Cr will be used for capex. CDEL owns Amalgamated Beans Coffee Trading CO. ltd- which runs the café chain. CDEL also owns Coffee Dat Hotels & Resorts Pvt Ltd, Global Technology Ventures Ltd and Tanglin Developments. CDEL is valued at Rs. 6200 Cr based on Pre-IPO round of funding concluded in March raising Rs. 100 Cr. Rakesh Jhunjhunwala, Radhakishan Damani & Nandan Nilekani have made pre IPO investment in CDEL at Rs. 289 apiece. CDEL had consolidated Revenue of Rs. 1,088 Cr with a net profit of Rs. 75 Cr as on 31 March 2014. On the other hand CCL will conservatively generate Rs. 115+ Crs PAT in the next year and so this company is available at just Rs. 2,450 Cr today, manageemnt expects company to grow 25 % yoy. CCL plans to launch its own products on Pan India basis under the brand name Continental (Spéciale, Premium and Supreme). CCL started doing private labelling for Reliance, Spencer and other super markets, which helped CCL to get space for the Continental brand in these super markets, thereby increasing its visibility. CCL’s management aims to achieve 20 % market share in the next three to five years. As CCL has completed a major portion of its capex, it is likely to incur only maintenance capex. With strong profitability, lower capex and improving working capital cycle, free cash flow generation is expected to be very healthy and company could be debt free by FY17 which would result in re-rating of the stock. Historically, the stock has traded between 5x and 20x one year forward earnings. However, with the sustainable strong growth in revenues and earnings in the medium term, the stock is expected to command a premium to its historic averages. At current price of Rs. 183.70 the stock is trading at P/E of 18.18x FY16E on EPS of Rs. 10.10 and 13.50x FY17E on the EPS of Rs. 13.60. 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	FY14	FY15	FY16E	FY17E
SALES (₹ Crs)	716.80	880.60	944.00	1,157.40
NET PROFIT (₹ Cr)	64.40	94.00	134.30	180.70
EPS (₹)	4.80	7.10	10.10	13.60
PE (x)	38.20	26.20	18.30	13.60
P/BV (x)	7.00	5.80	4.70	3.60
EV/EBITDA (x)	19.00	15.50	11.70	8.90
ROE (%)	20.40	24.30	28.30	30.00
ROCE (%)	12.30	16.00	21.00	25.50

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*As the author of this blog I disclose that I do hold CCL PRODUCTS INDIA LTD in my investment portfolio.

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Disclaimer: 

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RETURN ON CAPITAL

NBCC Ltd : COMMITTED TO INVESTOR's DELIGHT, FUTURE MULTIBAGGER !!

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)

BUSINESS SUBSIDIARY	Value per Share(₹)
PMC & Re-development Business	325.00
Re-development Opportunities	573.00
Real Estate Business	79.00
EPC Business	16.50
TOTAL VALUE PER SHARE	993.50

KEY FINANCIALS	FY14	FY15	FY16E	FY17E
SALES (₹ Crs)	4,008.80	4,621.00	5,748.20	8,011.60
NET PROFIT (₹ Cr)	247.20	277.30	350.00	467.20
EPS (₹)	18.50	20.80	26.20	35.00
PE (x)	42.80	38.10	30.20	22.60
P/BV (x)	9.40	8.00	4.10	3.60
EV/EBITDA (x)	41.90	33.20	23.20	15.80
ROE (%)	22.10	21.00	13.60	16.10
ROCE (%)	19.90	21.60	15.50	21.10

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

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