Avendus On NCC

IndiaEquityResearch
Construction&Engineering
July7,2011
NCC
BUY
TargetPrice(INR)
108
INITIATINGCOVERAGE
LastPrice(INR)
83.1
Bloombergcode
NJCCIN
Reuterscode
NGCN.BO
Avg.Vol.(3m)(mn)
1.08
Avg.Val.(3m)(INRmn)
102
194/74.6
52wkH/L(INR)
18,727
Sensex
MCAP(INRbn/USDmn)
21.31/479
Shareholding(%)
12/10
3/11
Promoters
20.0
20.0
MFs,FIs,Banks
18.9
15.9
FIIs
35.4
38.4
Public
Others
13.6
12.1
11.5
14.2
Acutabovetherest
Thenewsegmentsenteredintointhepastfiveyearsnowcontribute
33%ofNJCCsorderbook.Thecurrentstandalonebooktobillratioof
2.7x is the highest in the past five years. The company is jointly
developing a 2x660MW thermal power plant; leading to INR3.5bn of
pendinginvestmentsfordevelopmentprojectsonhand.Weforecasta
threeyearCAGRof11%inrevenueand9%inPATwithoutfactoringin
ordersfromthethermalpowerproject.WeestimatethefairP/Eand
EV/EBITDA for the stock at 7.0x and 5.5x, respectively. Based on the
average of the two methods, and taking INR53/share as the value of
investments,wearriveatourJun12TPofINR108.Weinitiatecoverage
with a Buy rating. Sustained high working capital and larger funding
requirementforthepowerprojectarethekeyrisks.
Newsegmentsaidhighergrowth;businessmovesupthevaluechain
Since 2006, NJCC has entered into five segments that are higher up on the
construction value chain and which today account for c33% of the order book.
Withouttheircontribution,theorderbookwouldhavegrownataCAGRof15%
over FY07FY11, instead of the reported CAGR of 24%. The diversification has
beenachievedwithoutimpactingEBITDAmargins,whichhaveincreasedby70
bpoverthepastfiveyears,anindicationofNJCCsstrongexecutioncapabilities.
StockChart(RelativetoSensex)
250
200
Focusonpowerprojectdevelopment;INR3.5bninvestmentpending
150
100
50
Jul10
Nov10
Mar11
Nag.Constructn.
Jul11
SensexRebased
The five road BOT projects undertaken by NJCC are complete. The pending
equity commitment remains high, at INR3.5bn, on account of the 2x660MW
projectbeingjointlydevelopedinNelcastEnergy.NJCChassignificantexposure
to real estate with a stakeadjusted land bank of c300 acres, with INR7bn of
financial support through equity and loans to subsidiaries. Given the adverse
macroconditions,weestimatethereturnonrealestateinvestmentstoremain
insignificant.
StockPerfm.(%)
1m
6m
1yr
ForecastthreeyearCAGRof9%inPAT,withmorebackendedgrowth
Absolute
0.9
36.0
54.5
Rel.toSensex
3.3
32.2
62.9
03/11
03/12f
03/13f
Thebooktobillratiooftheparentcompany,at2.7x,isthehighestinthepast
fiveyears,drivenbyordersinthebuildingsandpowersegments.Weforecasta
threeyear CAGR of at 8% in order inflows, leading to a CAGR of 11% in
revenue. The threeyear PAT CAGR is forecast at 9%,with a decline in PAT in
FY12, before recovering over FY13FY14. With c25% of assets held as
investments, we forecast the RoE in FY14 to remain low, at 8.4%, while core
ROICisforecastat12.3%.
Financials(INRmn)
Sales
50,737 55,684 61,906
YoY(%)
6 10 11
EBITDA(%)
9.6 9.8 9.9
A.PAT
1,824 1,552 1,827
Sho/s(diluted)
209 229 229
A.EPS(INR)
7.1 6.0 7.1
YoY(%)
15
18
D/E(x)
0.7 0.8 1.2
P/E(x)
11.7 13.7 11.7
EV/E(x)
7.9 7.5 6.9
RoCE(%)
RoE(%)
7 6 7
8 6 7
06/10
09/10
12/10
03/11
Sales(INRmn)
QuarterlyTrends
10,865
12,013
13,355
14,504
PAT(INRmn)
414
500 444 422
Pleaserefertothedisclaimertowardstheendofthedocument.
BuywithaTPofINR108;investmentvalueunlockingholdsthekey
WeestimateNJCCsstandalonefairP/Eat7.0xandEV/EBITDAat5.5x.Based
ontheaverageofthetwomethods,estimatethefairvalueofthestandalone
businessatendJun12atINR55/share.Weestimatethevalueofinvestmentsin
subsidiaries at INR53/share using varying P/B multiples. Our Jun12 TP of
INR108isarrivedatbasedontheSOTPmethod.WeinitiatewithaBuy.Value
unlocking from investments is a key trigger, while a sustained high working
capitalandlargerfundingrequirementforthepowerprojectarethekeyrisks.
DevangPatel,+9102266842861
devang.patel@avendus.com
India Equity Research
NCC
InvestmentSummary
NJCCsconstructionbusinesshasbeenmovingupthevaluechainwiththeentryintonewsegmentsoverthepastfive
years.Thesesegments,accountingforc33%ofthecurrentorderbook,haveaidedtheCAGRof24%intheorderbook
over FY07FY11. The business has expanded smoothly without impacting EBITDA margins, which have increased by
70bp over the period. In its international foray, the company has had its most notable success, as the business
contributedc25%totheFY11consolidatedPAT.Overthenexttwoyears,weestimatethebulkofNJCCsincremental
investmentsgotowardsitsjointthermalpowerdevelopmentproject.Assumingtheprojectachievesfinancialclosure
and private equity investment in FY12f, we estimate the pending equity commitment for BOT projects at INR3.5bn.
Domesticordersinthebuildingsandpowersectorhavebeengainingtraction,leadingtostandalonebooktobillratio
of 2.7x the highest in the past five years. We forecast a threeyear CAGR of 11% in revenue and 9% in PAT. We
estimate the fair P/E and EV/EBITDA for the stock at 7.0x and 5.5x, respectively. Based on the average of the two
methods, and taking INR53/share as the value of investments, we arrive at our Jun12 TP of INR108. We initiate
coveragewithaBuyrating.Sustainedhighworkingcapitalandlargerfundingrequirementforthepowerprojectarethe
keyrisks.
Thefivesegmentsentered
intosince2006today
accountforc33%ofthe
orderbook
Withc25%ofassets
lockedinunyielding
investments,theRoEis
forecasttoremainatthe
lowlevelof8.4%inFY14,
thoughcoreROICis
forecasttoimproveby
162bpto12.3%over
FY12FY14
Weinitiatecoveragewith
aBuyratinganda30%
upsidetoJun12TPof
INR108
EPCmovesupthevaluechain;focusonlargethermalpowerproject
NCC(NJCC)hasmoveditsconstructionbusinessupthevaluechainbydiversifyingacrosssegmentsand
intonew geographies.The fivesegmentsentered intosince 2006todayaccountforc33% ofthe order
bookandhavecontributedsignificantlytotheCAGRof24%intheorderbookoverFY07FY11.Withits
strongcapabilitiesinconstruction,thecompanyhasmanagedthetransitionwithoutanyadverseimpact
on profit marginsas seen in the 70bp improvement in EBITDA margins over the past five years. The
companyhasalsomanagedsignificantgrowthinitsinternationalbusiness,whichinFY11contributed14%
of the order book, 19% of consolidated revenues and c25% of consolidated PAT. NJCC has significant
exposuretorealestatewithastakeadjustedlandbankofc300acres,withINR7bnoffinancialsupport
through equity and loans to subsidiaries. However, on account of the adverse macro conditions, the
companyhashadlimitedsuccessinunlockingvaluefromthebusiness;itisunlikelytofurtherinvestinthe
business. In the development business, five road BOT projects are complete and incremental focus is
likelytobeonthepowersector.WeestimatethependinginvestmentcommitmentatINR3.5bn,mostof
whichwillbeforthe2x660MWthermalpowerprojectthatcurrentlyawaitsfinancialclosure.
3yearCAGRinPATforecastat9%,morepaininthenearterm
NJCCs adjusted booktobill ratio has been on the rise over the past two years on the back of
improvementinordersinthedomesticbusinessnotablyinthepowerandbuildingssegment.At2.7x
currently, the booktobill ratio is at its highest in the past five years. We forecast a CAGR of 8% in
order inflow during FY12fFY14f, implying moderation from the threeyear CAGR of 24% over FY08
FY10without factoring in the inflows from its power development projects. We do not forecast
significant improvement in execution, given the rising share of the buildings and power segments in
theorderbook.WeforecastathreeyearCAGRof11%inrevenue.PATisforecasttodeclineinFY12
duetothehigherinterestcostburden,leadingtoathreeyearCAGRof8%.Afterdecliningsharplyin
FY11, we forecast cash flow generation to improve over FY12FY14 on the back of an improving
working capital cycle and declining investment requirement in development projects. With c25% of
assetslockedinunyieldinginvestments,theRoEisforecasttoremainatthelowlevelof8.4%inFY14,
thoughcoreROICisforecasttoimproveby162bpto12.3%overFY12FY14.
InitiatewithBuy,Jun12TPofINR108;valueunlockingthekey
NJCC, adjusted for the value of investments, currently trades at a oneyear forward P/E of 6.6x and
EV/EBITDAof5.0x.ItsdiscounttotheSensexandLarsenandToubros(LTIN,Hold)oneyearforward
P/Ehasbeenwideningoverthepastoneyearandcurrentlystandsat54%and70%,respectively.We
estimatethefairP/EforNJCCat7.0x,supportedbyathreeyearCAGRof9%inPAT.Weestimatethe
fairEV/EBITDAat5.5x,implyingc10%improvementfromcurrentlevels.BasedontheP/Emethod,we
NCC
estimatetheJun12fairvalueoftheEPCbusinessatINR53/share,basedonJun13fEPSofINR7.6.Based
on5.5xEV/EBITDA,weestimatethefairvalueoftheEPCbusinessatINR56/share.Wearriveatthefair
valueofINR55/shareforthestandaloneEPCbusinessbasedontheaverageofthefairvaluesderived
fromtheP/EandEV/EBITDAmethods.OurJun12TPofINR108isarrivedatbasedontheSOTPmethod,
afteraddingINR53/shareasthevalueofNJCCsinvestmentsinBOT,realestateandtheinternational
businessarrived at using varying P/B multiples. We initiate coverage with a Buy rating and a 30%
upside.OurDCFbasedvalueestimatefortheconstructionbusinessishigher,atINR93/share.Pruning
thebalancesheetandunlockingvaluefrominvestmentsholdthekeyforfurtherreratinginthestock
asc50%ofourtargetpriceisderivedfromthevalueofunlistedinvestments.Sustainedhighworking
Exhibit1: OneyearforwardP/EandtargetP/E(x)
1yearforwardP/E
AverageP/E
TargetP/E
30
20
Average=13.6x
10
Target=7.0x
Jul08
Apr09
Feb10
Nov10
Sep11
Jun12
Source:Company,Bloomberg,AvendusResearch
Exhibit2: RelativepremiumtoSensexandLTP/E
PremiumtoSensexP/E(%)
PremiumtoLTP/E(%)
80
40
40
80
120
Jul08
Feb09
Sep09
Apr10
Nov10
Jul11
Exhibit3: Valuationsummary(standalone)
(INRmn)
NetSales
EBITDA
NetProfit
EPS(INR)
P/E^(x)
Mar10
47,778
4,834
1,831
7.1
4.3
3.5 0.3 1.1
Mar11
50,737
4,876
1,780
6.9
4.4
5.1 0.5 0.9
Mar12f
55,684
5,463
1,552
6.0
5.0
5.1 0.5 0.9
Mar13f
61,906
6,136
1,827
7.1
4.3
4.7 0.5 0.9
Mar14f
69,635
6,971
2,314 9.0
3.4
4.2 0.4 0.8
Source:Company,AvendusResearch
EV/EBITDA^(x)
EV/Sales^(x)
P/B(x)
^Note:MultiplesafterexcludingINR53/shareasvalueofinvestments
NCC
TableofContents
InvestmentSummary ........................................................................................................................ 2
EPCmovesupthevaluechain;focusonlargethermalpowerproject .................................................2
3yearCAGRinPATforecastat9%,morepaininthenearterm ..........................................................2
InitiatewithBuy,Jun12TPofINR108;valueunlockingthekey ..............................................................2
EPCmovesupthevaluechain,focusondevelopingpowerproject ................................................. 5
Orderbookdiversificationriseswithoutmargincompromise..............................................................5
Internationalpresenceanadvantagethoughgrowthcurrentlyslow ...................................................5
Largerealestatelandbankof300acres,withexposureofINR7bn .....................................................6
Lowreturnsfromrealestateonpoorsales;investmentsarelocked ...................................................7
BOTbusinessfocusedonroadsandpowerprojects.............................................................................7
EstimatependingequityatINR3.5bnforprojectsunderdevelopment ..................................................8
ThreeyearCAGRinPATforecastat9%,morepaininthenearterm............................................... 9
Steadygrowthinorderbook;booktobillratioupondomesticorders .................................................9
3yearCAGRof8%inorderinflow,powersegmentlendsupwardbias..................................................9
Executionforecasttoremainsubduedwithachangeincomposition ...............................................10
ForecasttwoyearCAGRof11%inrevenueand9%inPAT ................................................................11
Workingcapitalcycleupsharply,forecastreversaltoFY10level.......................................................11
Cashflowtoimproveonbetterworkingcapitalcycle,lowinvestment ................................................11
InitiatewithaBuyandJun12TPofINR108,valueunlockingthekey ............................................. 13
RelativediscounttoLTP/Eatclosetoitshighestinthepast3years.................................................13
Estimategradualreratingonslowearningsrecovery;fairP/Eat7x .................................................14
BalancesheetpruningmaytriggerfurtherP/Ererating ....................................................................14
TargetEV/EBITDApeggedat5.5x;27%discountto3yearaverage ...................................................15
BasecaseDCFvalueofconstructionbusinesspeggedatINR93/share ..............................................15
Jun12TPofINR108basedonaverageofP/EandEV/EBITDAmethods...................................................16
InitiatecoveragewithaBuyratingand30%upside ...........................................................................17
Riskfactors ..........................................................................................................................................18
Financialsandvaluations(standalone)............................................................................................ 19
NCC
EPCmovesupthevaluechain,focusondevelopingpowerproject
NJCChasmoveditsconstructionbusinessupthevaluechainbydiversifyingacrosssegmentsandintonewgeographies.
Thefivesegmentsenteredintosince2006todayaccountforc33%oftheorderbookandhavecontributedsignificantlyto
theCAGRof24%intheorderbookoverFY07FY11.Withitsstrongcapabilitiesinconstruction,thecompanyhasmanaged
thetransitionwithoutanyadverseimpactonprofitmarginsasseeninthe70bpimprovementinEBITDAmarginsover
the past five years. The company has also managed significant growth in its international business, which in FY11
contributed 14% of the order book, 19% of consolidated revenues and c25% of consolidated PAT. NJCC has significant
exposuretorealestatewithastakeadjustedlandbankofc300acres,withINR7bnoffinancialsupportthroughequityand
loans to subsidiaries. However, on account of the adverse macro conditions, the company has had limited success in
unlockingvaluefromthebusiness;itisunlikelytofurtherinvestinthebusiness.Inthedevelopmentbusiness,fiveroad
BOTprojectsarecompleteandincrementalfocusislikelytobeonthepowersector.Weestimatethependinginvestment
commitmentatINR3.5bn,mostofwhichwillbeforthe2x660MWthermalpowerprojectthatcurrentlyawaitsfinancial
closure.
Orderbookdiversificationriseswithoutmargincompromise
Exhibit4: Breakupoforderbacklog(%)
Building
International
100% 5
Water
Power
Roads
Metals
11
75%
10
6
8
21
24
3
7
43
36
15
25%
14
23
0%
Mar05
Electrical
Mining
22
50%
Irrigation
Oil&Gas
25
23
16
27
21
14
5
5
8
5
10
8
11
5
21
16
17
22
19
21
24
Mar06
Mar07
Mar08
Mar09
Mar10
13
35
Mar11
Source:Company
Theorderbookhasgrown
atafiveyearCAGRof24%
butexcludingthenew
segments,wouldhave
grownatafiveyearCAGR
of15%
ThenumberofsegmentsNJCCoperatesinhasincreasedfrom5inMar06to10currently.Asaresult,
theshareofthetopthreesegmentsinMar06hasdeclinedfrom85%to63%byMar11.Thecompany
has managed a large diversification in its business over the past five years and has entered new
segmentsandverticals.Itsdiverseorderbookandsizeablepresenceshowcasesitsstrongcapabilities
intheconstructionsector.
ThesegmentsaddedinMar06todayaccountfor33%oftheorderbookandhavesignificantlyaddedto
order book growth. The order book has grown at a fiveyear CAGR of 24%. If the new segments are
excluded,theorderbookwouldhavegrownatafiveyearCAGRof15%.
Thecompanyhasmanagedtodiversifythebusinesssmoothly,withoutanysignificantcompromiseon
profitmarginsasisusuallythecasewiththeindustry.StandaloneEBITDAmarginshaveincreasedby
70bpoverthepastfiveyears,increasingfrom8.9%inFY06to9.6%inFY11.
Internationalpresenceanadvantagethoughgrowthcurrentlyslow
Thecompanyhasgrownitsinternationalbusinessaggressivelyoverthepastfiveyears,eyeingstrategic
advantagesintermsofgeographicderiskingandopeningupnewavenuesofgrowthwithwiderand
largerbidding.ItsengineeringandconstructionexpertisehashelpedestablishitspresenceintheDubai
andOmanmarketswhereNJCCoperatesthroughthreesubsidiaries.
InFY11,theinternational
businesscontributed14%
totheorderbook,19%to
consolidatedrevenues
andc25%ofconsolidated
PAT
NCC
InFY11,theinternationalbusinesscontributed14%totheorderbook,19%toconsolidatedrevenues
andc25%ofconsolidatedPAT.
Exhibit5: Internationalordersbooked
Location
Scope
Value(INRbn)
Oman
66kmexpresswaylinkingAlFalajwithKhatmalah
Dubai
DEWAWaterPipeline
16.0
AbuDhabi
588villasatAlAlin
Oman
AlBatinaCoastalRoad
Oman
AlAmeratQuriyatRoad(70kms)
6.8
Oman
WadiAdaiAmeratRoad
6.5
Oman
718villasatQuriyatCity
8.9
Oman
WaterPipeline,SoharCity
0.8
7.1
6.8
18.1
After posting a CAGR of 57% in revenues over the past three years, the international business has
currently reached a stage of consolidation and we believe the management is likely to proceed with
caution. Revenues in FY11 are largely flat on a yoy basis. The segments contribution to the order
book has declined from 27% in Mar09 to 14% in Mar11, while on absolute basis the order book has
decreasedby29%.
Largerealestatelandbankof300acres,withexposureofINR7bn
NJCChassignificantinterestsintherealestatedevelopmentbusinesswithtotalstakeadjustedcurrent
land bank of 300 acres. The company has been in the business since 1996. A separate entity NCC
UrbanInfrastructurewascarvedoutinDec05tofocusontherealestatebusiness.Thecompanyowns
80% stake in NCC Urban, while the promoters own the rest. Apart from NCC Urban, there are three
largeprojectsthatarebeingcarriedoutbytheparentcompanyorbyitsdirectsubsidiaries(Exhibit6).
Exhibit6: Summaryofrealestateprojects(INRmn)
Projects
City
Stake
TypeofDevelopment
Acres
Builtuparea
Acreage
Builtuparea
(mnsq.ft.) (Co.Share) (mnsq.ft.)(Coshare)
Status
NCCUrban
287
11.04
192
Gachibowli
Hyderabad
70%
Residential
1.16
0.65
6.02
Ongoing
NGHC
Ranchi
88%
Residential
56
1.75
40
1.23
Ongoing
Meadows
Bangalore
60%
Residential
0.65
0.31
Ongoing
Premier
Bangalore
55%
Residential
0.19
0.08
Ongoing
AsterPark
Bangalore
80%
Residential
0.31
0.20
Ongoing
MapleHeightsII
Bangalore
100%
Residential
0.18
0.14
Ongoing
GreenValley
Cochin
100%
Residential
89
0.18
71
0.14
Ongoing
Laurel
Cochin
100%
Residential
0.16
0.13
Ongoing
Gajularamaram
Hyderabad
25%
Residential
38
1.46
0.29
Pending
KompallyVillas
Hyderabad
100%
Residential
37
0.68
30
0.54
Pending
Poppalaguda
Hyderabad
100%
Residential
0.90
0.72
Pending
Bachupally
Hyderabad
100%
Residential
18
1.40
14
1.12
Pending
SymphonyApts
Chennai
100%
Residential
0.57
0.46
Pending
NCCHarmony
Dubai
Residential&Commercial
1.45
Ongoing
NCC
204
17.68
126
10.36
JHLP
Hyderabad
25%
0.90
0.23
Pending
TellapurTechnocity Hyderabad
26%
100
7.50
26
1.95
Pending
Gajularamaram
Hyderabad
75%
Residential
NCCVizagUrban
Visakhapatnam
100%
TOTAL
4.38
3.29
Pending
98
4.90
98
4.90
Pending
491
28.7
318
16.38
NJCCstotalmonetary
exposuretorealestate
standsatINR7bn
NCC
The companys real estate land bank is spread over six cities. There are 17 projects planned by the
group, of which 12 are currently ongoing. NJCCs total monetary exposure to real estate stands at
INR7bn,spreadevenlyintheformofequityinfusionsandloanstosubsidiaries.
Lowreturnsfromrealestateonpoorsales;investmentsarelocked
Exhibit7: NCCUrbansfinancialsnapshot
(INRmn)
FY07
FY08
FY09
FY10
Revenue
322
N.A.
1,401
1,222
EBITDA
7
N.A.
540
341
Interest
N.A.
N.A.
436
460
PAT
NetWorth
Debt
NCCUrbanperformance
improvedinFY11with
revenuespickingupby
36%toINR1.65bnbutthe
PATwasjustcINR30mn
15
58
132
1,499
N.A.
1,513
N.A.
1,570
1,437
4,460
4,892
EBITDAmargin(%)
38.5
27.9
PATmargin(%)
4.2
10.8
D/E(x)
2.8
3.4
Interest/Sales(%)
31
38
With real estate sales remaining lackluster, the group has had limited success in monetizing its land
bank so far. NCC Urbans performance deteriorated in FY10, with a fall in revenue and margins.
Coupledwithagrowingdebtburdenandhighinterestoutgo,theentityreportedalossinconsolidated
numbers.TheperformanceimprovedinFY11withrevenuespickingupby36%toINR1.65bnbutthe
PAT was just cINR30mn. Nevertheless, the returns from its real estate investments remain poor.
Although the company is not planning to invest further in the business, its existing investments may
remain locked in as the outlook for the business is likely to be impacted in the rising interest rate
scenario.
BOTbusinessfocusedonroadsandpowerprojects
NJCC focuses on development projects in the roads and power spaces. It formed NCC Infrastructure
HoldingsinFY06asa100%subsidiarytoactastheholdingcompanycumdeveloperforsuchprojects.
NJCCforayedintotheBOTspacein2003withitsfirstBOTAnnuityprojectintheroadsector.
Itcurrentlyhasaportfoliooffiveroadprojects,twohydroprojectsandonethermalpowerprojectas
consortium partner. Of the five completed road projects, three have been completed in the past six
months(afterconsiderabledelaysduetolandacquisitionproblemsfacedbytheNHAI).
Exhibit8: SummaryofBOTassets(INRmn)
Project
Partner
Type
Capacity Concession
(km/MW)
date
Roadprojects
BangaloreMadurai
Maytas^,KMC
Annuity
63
BangaloreElevatedTollway
Maytas,Soma
Toll
OraiBhognipurBarah
KMC
Annuity
MeerutMuzzafarnagar
Maytas,Gayatri
PondicherryTindivanam
Concession
(yrs)
Cost Stake(%)
Pending
3,418
Nov03
16
2,475
33.3
150
24
Jan06
20
9,067
35.4
1,203
63
Apr06
15
5,848
67.9
940
Toll
79
Sep05
6,690
30.0
795
Maytas
Toll
38
Jul07
30
3,150
49.0
330
Powerprojects
HimachalSorang
Maytas
100
Jun07
NelcastEnergy
Gayatri
1,320
HimalayanGreen
SMECInternational
280
Total
27,230
Equity
share
97,122
16,764
95.0
1,588
655
70,000
55.0
11,550
10,665
19,600
50.0
3,626
3,311
20,182
14,631
7,522
124,352
^Note:NamechangedtoIL&FSEngineeringandConstructionCompany
InJan11,thecompany
bought55%stakein
anotherpowerprojectof
2x660MWbeing
developedbyNelcast
Energycurrently
awaitingfinancialclosure
Weestimateanadditional
INR3bnofequity
investmenttoberequired
byNJCCinNelcastEnergy
NCC
The environmental clearance for the companys 2x660MW thermal power project at Sompeta,
Srikakulam District in Andhra Pradesh, was withdrawn in Jul10, following which NJCC is considering
shifting the plant to another location. It has incurred preoperative expenses of cINR830mn on the
project,includingINR450mnonland.
InJan11,thecompanybought55%stakeinanotherprojectof2x660MWbeingdevelopedbyNelcast
Energy,atKrishnapatnamDistrictinAndhraPradesh.Theprojectiscurrentlyinthedevelopmentstage
withalllandandclearancesalreadyacquiredandisawaitingfinancialclosure.
EstimatependingequityatINR3.5bnforprojectsunderdevelopment
The equity commitment for road projects has been fully invested and the projects are already
complete. NJCC is unlikely to be an aggressive bidder for upcoming NHAI projects (as seen in past
bidding).Theinvestmentinpowerprojectsunderdevelopmentiscomparativelylargerandislikelyto
entailamuchlargershareofincrementalinvestmentsbythecompany.
ThecompanyhaspaidINR1.5bnforits55%stakeinNelcastEnergy.WeestimateanadditionalINR3bn
of equity investment to be required by NJCC, assuming 49% stake is sold in the project to a private
equityinvestoratapremiumof1.33xP/B.
ThetotalequitycommitmentpendingforalldevelopmentprojectsisestimatedatINR3.5bnincluding
Nelcast Energy and Himachal Sorang project and INR6.5bn including the Himalayan Green project
whichiscurrentlyunderdevelopment.
Exhibit9: NJCC'sinvestmentcommitmentfor55%stakeinNelcastEnergyproject
(INRmn)
Investmentstage
Total
Capacity(MW)
1320
Projectcost
70,000
21,000
11,550
Onacquisition
2,700
1,485
Projectequity(70:30D:E)
Acquisitioncostpaid
Equityinfusionrequiredforfinancialclosure(30%)
NJCC'sshare
6,300
3,465
4,690
2,580
14,700
8,085
EquityvalueforPEstakesale(1.33xP/B)
27,930
15,362
EquityinfusionbyPE(49%stake)
13,686
7,527
7,314
4,023
1,014
558
Balanceequitypendingforfinancialclosure
Onfinancialclosure
Equitypendingpostfinancialclosure
PromoterequityrequiredexcludingPEinfusion
BalancepostFCandPE
Duringconstruction
RevocationriskforINR1.2bnguarantee,unlessNelcastEnergyupby2015
Pursuanttothecompanyssuccessfultariffbasedbidding(case1)withtheKarnatakastateelectricity
board, it has provided a commitment to supply 400MW at INR3.89/unit from 2014, along with a
performance guarantee of INR1.2bn. Unless the Nelcast Energy project is completed by 2015, the
companyfacestheriskofforfeitingitsguarantee.
NCC
ThreeyearCAGRinPATforecastat9%,morepaininthenearterm
NJCCsadjustedbooktobillratiohasbeenontheriseoverthepasttwoyearsonthebackofimprovementinordersin
the domestic businessnotably in the power and buildings segment. At 2.7x currently, the booktobill ratio is at its
highestinthepastfiveyears.WeforecastaCAGRof8%inorderinflowduringFY12fFY14f,implyingmoderationfrom
thethreeyearCAGRof24%overFY08FY10withoutfactoringintheinflowsfromitspowerdevelopmentprojects.We
donotforecastsignificantimprovementinexecution,giventherisingshareofthebuildingsandpowersegmentsinthe
order book. We forecast a threeyear CAGR of 11% in revenue. PAT is forecast to decline in FY12 due to the higher
interest cost burden, leading to a threeyear CAGR of 8%. After declining sharply in FY11, we forecast cash flow
generation to improve over FY12FY14 on the back of an improving working capital cycle and declining investment
requirement in development projects. With c25% of assets locked in unyielding investments, the RoE is forecast to
remainatthelowlevelof8.4%inFY14,thoughcoreROICisforecasttoimproveby162bpto12.3%overFY12FY14.
Exhibit10: Quarterlyorderbacklogtrend
Exhibit11: Booktobillratio(x)trend
30%
180
Orderbacklog(INRmn)
3.8
yoy(%,RHS)
ReportedBTBratio
3.3
3.4
3.4
AdjustedBTBratio
3.3
3.2
20%
160
3.4
3.2
3.2
3.2
2.9
10%
140
2.6
2.6
2.7
2.7
2.7
2.7
2.7
2.5
0%
120
Jun09 Sep09 Dec09 Mar10 Jun10 Sep10 Dec10 Mar11
2.0
Jun09
Sep09 Dec09 Mar10 Jun10
Sep10 Dec10 Mar11
Steadygrowthinorderbook;booktobillratioupondomesticorders
NJCC has maintained steady growth in the consolidated order backlog over the past two years, with
growth mostly maintained at over 15% on yoy basis. The company reports a consolidated order
backlog, which includes the share of international orders, although revenues from the same are not
reflectedinstandaloneresults.Wehave,therefore,computedtheadjustedbooktobillratioasseenin
Exhibit11.
Orderinflowshave
improvedinthebuildings
andpowersegments
leadingto2.7xbookto
billratiohighestinlast
fiveyearends
Theinternationalbusinesshassloweddowninthepastoneyear,hencethepaceofnewordershas
declined. In FY11, NJCC only international booked orders worth INR1.7bnrepresenting 3% of the
consolidatedorderbookingduringtheperiod.
ThebooktobillratiointhestandalonecompanyhasbeenontheriseduringJun10Dec10ontheback
ofimprovementinordersinthedomesticbusiness.Mostnotably,orderinflowshaveimprovedinthe
buildingsandpowersegmentsduringFY11,leadingtothebooktobillratioimprovingto2.7xalevel
matchingorhigherthanthatseeninsevenofthepasteightquartersandthehighestinlastfiveyear
ends(Exhibit11and13).
3yearCAGRof8%inorderinflow,powersegmentlendsupwardbias
From FY07 to FY10, order inflows grew at a threeyear CAGR of 24%. Growth during the period was
aided by the international and power segments. In FY11, growth in international segment has been
muted,whilethatinthebuildingssegmenthaspickedup.
NCC
Exhibit12: Orderinflowforecast
Exhibit13: Booktobillratio(x)forecast
OrderInflow(INRbn)
Orderinflow/Revenue(x)
yoy(%,RHS)
100
24%CAGR
100
3.4
50
2.6
8%CAGR
80
2.6
2.7
2.7
1.3
1.2
1.2
2.2
1.7
1.3
50
40
FY07
FY08
FY09
FY10
Wehaveconservatively
notincludedINR50bnof
potentialpowerEPC
ordersfromNelcast
Energyinourorderinflow
forecast
1.2
1.0
FY07
FY11 FY12f FY13f FY14f
2.6
1.9
1.8
2.7
2.5
2.4 2.2
60
BTBratio(x)
FY08
FY09
FY10
FY11
FY12f
FY13f
FY14f
WeforecastathreeyearCAGRof8%inorderinflows,implyingamoderationingrowthcomparedto
the FY07FY10 period. We believe the pace of growth in the buildings segment is likely to slow as
interest rate increases may impact the sector. We have not factored in any orders from the
internationalbusiness,giventheuncertaintiesintheregionovertheshorttomediumterm.
Ourorderinflow/revenueassumptionof1.2xoverFY12fFY14fismarginallybelowtheaverageof1.3x
over FY08FY10 as we believe a high base effect may impact the growth rate. The share of power
sectorordershasbeenontherise.Also,NJCChasbeenlookingtoincreaseitspresenceintheEPC/BOP
space. The company is looking to book orders worth cINR50bn in FY12f from its own 2x660MW
thermal power development project. We have conservatively not included it in our forecast and it
lends an upward bias to our order inflow assumptions. However, such EPC orders with a longer
executioncycle(fouryearsormore)areunlikelytoimpactourrevenueforecasttothesameextent.
Basedonourorderinflowforecast,thecompanyislikelytomaintainacomfortablebooktobillratio
of2.6xandabove.
Executionforecasttoremainsubduedwithachangeincomposition
Exhibit14: Trendinorderbacklogexecutionrate
50
46
46
44
45
45
40
39
40
39
38
35
FY07
FY08
FY09
FY10
FY11
FY12f
FY13f
FY14f
10
NCC
Exhibit15: Profitmargintrend(%)
EBITDAmargin
Exhibit16: RevenueandPATgrowthtrend(%)
PATmargin
Revenue(yoy)
10.4
10.1
9.4
5.5
9.6
9.0
8.5
9.8
9.9
10.0
35
5.3
4.7 3.7
3.9
3.5
2.8
3.0
FY12f
FY13f
3.3
2.5
PAT(yoy)
70
11.5
FY07
FY08
FY09
FY10
FY11
FY14f
35
FY07
FY08
FY09
FY10
FY11
FY12f
FY13f
FY14f
TheFY11standalonerevenuewas13%belowthecompanysguidancedueto:
f Extendedmonsoonsimpactingexecutioninthesouthernregion.
f Executionstalledduetodelayinpaymentsbyclients.
Theaverageexecution
cyclemayincreasewith
therisingshareofpower
segmentorders
f Projectsaffectedbydelayedclearanceandlandacquisitionproblems.
As a result of the above, the execution rate declined significantly in FY11. We believe the delay in
payments and land acquisitionrelated problems may persist. Hence, we believe the execution rate
may continue to be impacted. In addition, the average execution cycle of the order book is likely to
increasewiththerisingshareofpowersegmentorders.Inthebuildingssegment,thedelayinclient
payments may further increase with the tightening liquidity scenario, leading to slower execution of
projects.Takingtheaboveintoconsideration,wehavenotforecastonlymarginalimprovementinthe
executionrateoverFY13FY14.
ForecasttwoyearCAGRof11%inrevenueand9%inPAT
PATislikelytodecline
furtherinFY12f,dueto
slidingPATmargins,
beforerecoveringata2
yearCAGRofto22%
duringFY13FY14
Theworkingcapitalcycle
hasrisenfurtherin
FY11by28%to156days
BasedonourforecastsofathreeyearCAGRof8%inorderinflows,andmarginalimprovementinthe
executionrate,weforecastathreeyearCAGRof11%inrevenue.EBITDA marginswereimpactedin
FY11 by the slowdown in revenue growth. We forecast EBITDA margins to improve gradually on the
backofafavorablerevenuemix,withahighshareofthebuildingssegment.
PATislikelytodeclinefurtherinFY12f,duetoslidingPATmargins,beforerecoveringata2yearCAGR
ofto22%duringFY13FY14.PATmarginsareforecasttobehurtonaccountofhigherinterestcosts
asaresultofhighworkingcapitalandinvestmentsindevelopmentandrealestateprojects.
Workingcapitalcycleupsharply,forecastreversaltoFY10level
Thenetworkingcapitalcycle (calculatedas dayssalesoutstanding)hasbeenontheriseoverFY07
FY10.InFY11,ithasrisenfurtherby28%to156daysonaccountofanincreaseindebtorsdaysand
loansandadvances.
AfterstretchinginFY11,webelievethemanagementislikelytofocusmoreonimprovingreceivables
and, hence, forecast the working capital cycle in FY14 to revert to the FY10level. A higher share of
developmentprojectsmayleadtofurtherimprovementintheworkingcapitalcycle.
Cashflowtoimproveonbetterworkingcapitalcycle,lowinvestment
CashflowgenerationhasdeclinedsignificantlyinFY11onaccountofadeclineinmargins,increasein
workingcapitalcycleandhigherinvestmentsindevelopmentprojects.Operatingcashflowgeneration
11
Operatingcashflow
generationisforecastto
turnpositiveoverFY12
FY14
NCC
is forecast to turn positive over FY12FY14 on higher margins and reduction in the working capital
cycle.WehaveassumedinvestmentsofINR2.5bninFY12fandINR1bninFY13fforpowerprojects.We
havenotassumedanyoutflowonaccountofthe280MWhydroprojectasitisstillunderdevelopment
andisawaitingfinalizationofitsDPR.Thecapex/revenueisforecasttoremainstableat2.5x,basedon
thesteadyrevenuegrowthforecastoverFY12FY14.
Exhibit17: Workingcapitaltrend(days'salesoutstanding)
Debtors&Advances
Networkingcapital
240
232
210
200
223
205
215
204
185
154
166
160
148
109
120
139
122
127
83
80
52
40
FY07
Freecashflowgeneration
isforecasttoremain
negative,leadingtoan
increaseingearing
FY08
FY09
FY10
FY11
FY12f
FY13f
FY14f
As a result of the above, free cash flow generation is forecast to remain negative, leading to an
increaseingearing.Thenetdebt/equityratioisestimatedtorisefrom0.7xinFY11to0.8xinFY14f.
Apart froma highworkingcapitalcycle,c25%ofassetsarelockedupasinvestmentsinsubsidiaries,
which is higher than that for peers, and may increase further with large investments in the thermal
power project under development. As a result, the ROCE is forecast to decline to 6.2% in FY12f and
improve marginally by 85bp over FY12FY14 on higher profit margins and the improving working
capitalcycle.TheROEisforecasttoremainatlowlevelof8.4%inFY14fthroughcoreROICisforecast
toimproveby162bpoverFY12FY14to12.3%.
Exhibit19: NetD/Eandprofitabilitytrend
Exhibit18: Cashflow/revenue(%)trendandcomposition
OCF/Revenue
Capex/Revenue
Investments/Revenue
ROIC(%)
ROE(%)
NetD/E(x,RHS)
16
18
1.2
15
0.9
12
0.6
0.3
16
FY07
6
FY08
FY09
FY10
FY11
FY12f
FY13f
FY14f
FY07
FY08
FY09
FY10
FY11
FY12f
FY13f
0.0
FY14f
12
NCC
InitiatewithaBuyandJun12TPofINR108,valueunlockingthekey
NJCC,adjustedforthevalueofinvestments,currentlytradesataoneyearforwardP/Eof6.6xandEV/EBITDAof5.0x.
ItsdiscounttotheSensexandLarsenandToubros(LTIN,Hold)oneyearforwardP/Ehasbeenwideningoverthepast
oneyearandcurrentlystandsat54%and70%,respectively.WeestimatethefairP/EforNJCCat7.0x,supportedbya
threeyearCAGRof9%inPAT.WeestimatethefairEV/EBITDAat5.5x,implyingc10%improvementfromcurrentlevels.
BasedontheP/Emethod,weestimatetheJun12fairvalueoftheEPCbusinessatINR53/share,basedonJun13fEPSof
INR7.6.Basedon5.5xEV/EBITDA,weestimatethefairvalueoftheEPCbusinessatINR56/share.Wearriveatthefair
valueofINR55/shareforthestandaloneEPCbusinessbasedontheaverageofthefairvaluesderivedfromtheP/Eand
EV/EBITDAmethods.OurJun12TPofINR108isarrivedatbasedontheSOTPmethod,afteraddingINR53/shareasthe
valueofNJCCsinvestmentsinBOT,realestateandtheinternationalbusinessarrivedatusingvaryingP/Bmultiples.
WeinitiatecoveragewithaBuyratinganda30%upside.OurDCFbasedvalueestimatefortheconstructionbusinessis
higher,atINR93/share.Pruningthebalancesheetandunlockingvaluefrominvestmentsholdthekeyfor furtherre
ratinginthestockasc50%ofourtargetpriceisderivedfromthevalueofunlistedinvestments.Sustainedhighworking
RelativediscounttoLTP/Eatclosetoitshighestinthepast3years
Exhibit20: RelativepremiumtoSensexandLTP/E
PremiumtoSensexP/E(%)
PremiumtoLTP/E(%)
80
40
40
80
120
Jul08
Feb09
Sep09
Apr10
Nov10
Jul11
Exhibit21: OneyearforwardEV/SalesandEV/InvestedCapital
EV/Sales(x)
EV/InvestedCapital(x)
1.6
1.3
1.0
0.7
0.4
0.1
Jul08
Feb09
Sep09
Apr10
Nov10
Jul11
13
ThelowEV/ICratioisnot
reflectingthe
comparativelyhighercore
constructionROICofthe
companyof11.5%inFY11
NCC
NJCC currently trades at a discount of 54% and 70% to the Sensex and LTs P/E, respectively. This is
significantly lower than the average of the past three years discount of 12% and 41% to the Sensex
and LTs P/E, respectively. Between Oct09 and Aug10, NJCC has traded at a premium to the Sensex.
However, the relative discount since then has considerably wideneda result of deteriorating
fundamentals.ThecurrentEVofthecompanyislowerthantheinvestedcapitalwiththeEV/Invested
Capital ratio at 0.76x compared to past threeyear average of 1.06x. The low EV/IC ratio is not
reflectingthecomparativelyhighercoreconstructionROICofthecompanyof11.5%inFY11.
WehaveusedtheadjustedP/EforNJCCcomputedafterreducingthevalueofinvestmentsfromits
priceonrollingbasis.TheinvestmentshavehistoricallybeenvaluedataP/Bbasisincludingrealestate
valuedatadiscounttobookvalue;leadingtoablendedmultipleof0.9x.
Estimategradualreratingonslowearningsrecovery;fairP/Eat7x
NJCCiscurrentlytradingataoneyearforwardadjustedP/Emultipleof6.6xcomparedtotheaverage
P/Eof13.6xoverthepastthreeyears.Givenourforecastofacomparativelyslowerearningsgrowth
andlowerROICcomparedtoitspastaverages,NJCCisunlikelytotradeatitsaveragehistoricalP/E.
OurfairtargetP/Efor
NJCCimpliesitsdiscount
toLTislikelytoreduce
fromthecurrent70%to
62%toourimpliedtarget
P/Eof18xforLT
WeestimatethefaironeyearforwardP/EforNJCCat7.0x,supportedbyourforecastthreeyearCAGR
in PAT of 9%. Based on FY13f EPS growth, our target P/E implies a PEG ratio of 0.4. However, we
believeafurtherreratinginthestockislikelytobeconstrainedbythelowaverageRoEof7.3%over
FY12fFY14f.
OurfairtargetP/EforNJCCimpliesitsdiscounttoLTislikelytoreducefromthecurrent70%to62%to
ourimpliedtargetP/Eof18xforLT.
Accordingly,basedontheJun13EPSforecastofINR7.6,weestimatethefairvalueoftheconstruction
business(standalone)basedontheP/EmethodatINR53/share.
Exhibit22: OneyearforwardP/EandtargetP/E(x)
1yearforwardP/E
AverageP/E
TargetP/E
30
20
Average=13.6x
10
Target=7.0x
Jul08
Apr09
Feb10
Nov10
Sep11
Jun12
Divestmentofstakein
developmentprojectsand
fasterpaybackonreal
estateinvestmentsare
likelytohelpimprovethe
RoEandtriggerafurther
rerating
BalancesheetpruningmaytriggerfurtherP/Ererating
Apartfromahighworkingcapitalcycle,c25%ofNJCCstotalassetsareestimatedtobelockedupin
the form of investments in its various subsidiaries and development projects, resulting in low asset
turns and RoE. Divestment of stake in development projects and faster payback on real estate
investmentsarelikelytohelpimprovetheRoEandtriggerafurtherrerating.Ontheotherhand,the
increasing share of own BOT projects in the order book is likely to further depress the RoE, besides
increasinggearingandraisingthedilutionrisk.
14
NCC
TargetEV/EBITDApeggedat5.5x;27%discountto3yearaverage
Exhibit23: OneyearforwardEV/EBITDA,targetEV/EBITDAandROIC
EV/EBITDA(x)
TargetEV/EBITDA(x)
ROIC(%,RHS)
11
20
14
Average=6.8x
5
8
Target=5.5x
2
Jul08
2
Apr09
Feb10
Nov10
Sep11
Weestimatethefair
EV/EBITDAforJun12fat
5.5x,assumingc10%
improvementfrom
currentlevelsandac10%
premiumtopeers
NJCCiscurrentlytradingataoneyearforwardEV/EBITDAof5.0x,adiscountof19%toitspastthree
yearaverageof6.8x.WebelievetheEV/EBITDAisunlikelytoreverttoitsmeanastheforecastROICis
lowerthanitspastaverage.WeforecastthecoreconstructionROICof11.5%inFY11toremainstable
atthesamelevelonaverageoverFY12FY14significantlylowerthantheaverageof18.1%overFY07
FY10.TheforecastCAGRinEBITDAoverFY12FY14islikelytobehigher,at12.7%,comparedto10.7%
overthepastthreeyears.
Weestimatethefair EV/EBITDAfor Jun12fat5.5x,assumingc10% improvementfromcurrentlevels
andac10%premiumtopeerssuchasSimplexInfrastructure(SINFIN,Buy)andIVRCLInfrastructures
(IVRC IN, Buy), considering (i) NJCCs comparatively higher historical multiple, (ii) higher growth
prospectsonaccountofordersfromitsownpowerprojectand(iii)acomparativelymorediversified
order book. We estimate the fair value of the construction business based on the EV/EBITDA at
INR56/share.
BasecaseDCFvalueofconstructionbusinesspeggedatINR93/share
WehaveestimatedthebasecasefairvalueofNJCCsconstructionbusinessatINR93/shareusingthe
threestageDCFmethod.Thekeyassumptionsare:
f ThefirststageintheDCFusesourexplicitforecastsduringFY12FY14.
f In the second stage, we have assumed 10% revenue growth till FY25f, assuming a prolonged
consolidationphaseamongstthelargeplayersintheindustry.WehaveassumedEBITmarginsto
remainsimilartothatinFY13f.Wehaveassumedtheworkingcapitalcycletoimproveto120days
similartoits peerandthelevelseeninFY10;thisis likely toleadtoanincreaseintheaverage
ROICto15.5%.
f Inthethirdstage,revenuegrowthisassumedat5%andEBITmarginsareestimatedtofallfurther,
tilltheROICconvergeswiththeWACC.
FortheWACCcalculations,wehaveassumedabetaof1.5x,basedonbeta(asperBloombergdata)for
thepastfiveyears.Wehaveassumedaleverageof1:1asastablerate.
15
NCC
Exhibit24: DCFassumptionsandsummary
Keyparameters
Year
StageII:12years
FY15f
FY26f OverstageII
StageIII:10years
FY27f FY36f OverstageIII
9.8 11.2 12.5 11.1 CAGR 10.0 10.0 10.0 CAGR 5.0 5.0 5.0 CAGR
8.5 8.6 8.7 8.6 Average 8.7 8.7 8.7 Average 8.4 5.9 7.1 Average
(INRmn) %ofEV
WACCassumption(%)
Sensitivityanalysis
Explicitperiodcashflows
Terminalgrowth
(%)
Revenuegrowth(%)
EBITmargins(%)
Taxrate(%)
Grossassetturnover(x)
WCAP(dayssales)
ROIC(%)
DCFvalueasonMar11
StageI:3yearsexplicit
FY12f FY13f FY14f
OverstageI
5,398
14
Riskfreerate
8.00
StageIIcashflows
14,552
36
Mkt.RiskPrem.
6.00
StageIIIcashflows
11,384
28
Beta(x)
1.50
8,635
22
Costofequity
17.0
TotalEV
39,969
100
Costofdebt
13.0
Less:Grossdebt
Add:Investments&Cash
Equityvalue
25,148
8,093
22,913
Debt/Totalcapital
WACC
Terminalgrowth
50.0
12.8
5.0
257
89
93
Terminalvalue
Noofshares(mn)
Value/share(INR)(Mar12)
Value/share(INR)(Jun12)
WACC(%)
11.5
12.5
13.5
4.0
114
88
69
5.0
121
93
71
6.0
130
99
75
Exhibit25: DCFmodelfreecashflowandROICforecast
FreeCashFlow(INRbn)
ROIC(%,RHS)
WACC(%,RHS)
16
16
12
14
12
10
0
FY12f
FY14f
FY16f
FY18f
FY20f
FY22f
FY24f
FY26f
FY28f
FY30f
FY32f
FY34f
FY36f
Source:AvendusResearch
Jun12TPofINR108basedonaverageofP/EandEV/EBITDAmethods
WeestimatethefairvalueofNJCCsEPCbusinessatINR55/share.Thisisbasedontheaverageofthe
fairvaluesderivedusingtheP/EandtheEV/EBITDAmethods.OurJun12targetpriceisbasedonthe
sumoftheparts method and includes the value of NJCCs interests in three other businesses. The
multiplesusedforvaluationsareassumedonthefollowingconsiderations:
f NCC Infrastructure currently has few operational projects, with a significant history of operations
andindicationsofprofitability.ForNCCInfrastructurewehaveassumedavaluelowerthanthatfor
otherlistedholdingcompanies,assumingacertaindiscountforilliquidity.
f Thereturnsontherealestateinvestmenthavebeenpoorandattheriskoffallingfurther,giventhe
adverseheadwindsforthesector.NCCUrbanreportedalargelossinFY10andmanagedaPATof
justINR31mninFY11.Hence,wehaveassumedadiscountonP/Bbasis.
16
NCC
f Fromtheinternationalsubsidiaries,thecompanyhasearnedaRoEofc40%inFY10,albeitonalow
assetbase.WerefrainfromassigningaP/Emultiple,giventhelimitedresourcecommitmenttothe
business.Instead,weuseamoreconservativeP/Bmethod.AssuminganormalRoEandfactoringin
aholdingcompanydiscountforilliquidity,weassignaP/Bof1.0xforthebusiness.
Exhibit26: Sumofthepartstargetpricecomputation
Business
Valuationapproach
Value(INRmn)
Price/share
%ofTP
ParentEPCbusiness
Investment
7.0xP/E
13,612
53
49
ParentEPCbusiness
5.5xEV/E
14,383
56
52
AverageforEPCbusiness
13,997
55
51
BOTinvestments
9,986
1xP/B
9,986
39
36
Realestateinvestments
3,838
0.5xP/B
1,919
Internationalsubsidiaries 1,596
1xP/B
1,596
Valueofinvestments
15,419
SOPtarget
13,500
53
49
27,498
108
100
Source:AvendusResearch
Weinitiatecoverageon
NJCCwitha30%upsideto
ourJun12targetpriceof
INR108andaBuyrating
InitiatecoveragewithaBuyratingand30%upside
WeinitiatecoverageonNJCCwithJun12targetpriceofINR108andaBuyrating.Ourtargetpriceisat
a30%upsidefromthecurrentprice.At our targetprice,thestockwouldtradeat6.2xP/Eand5.1x
EV/E on FY13f. Value unlocking from BOT assets may improve NJCCs cash flows and trigger further
upsidesinthecompanysupportedbyimprovingPATgrowthtrajectoryforecastoverFY13fFY14f.
At the current price, excluding the value of investments, NJCC is trading at 5.1x and 4.3x FY12f and
FY13f,respectively.Thisimpliesa4%discounttoIVRConFY12fandisinlinewiththelowerROEofthe
company.
Exhibit27: Peervaluationcomparison(%)
CMP
P/E(x)^
EV/EBITDA(x)^ EBITDAmargin PATmargin
(INR) FY12f FY13f FY14f
ROIC
ROE 3yearforecastgrowth
FY12f
FY13f
FY14f
FY12f
IVRC
71.5
5.3
4.8
4.1
4.4
4.3
4.1
9.8
3.1
12.4
9.1
11.2
11.6
SINF
267.9
10.7
8.8
6.8
5.7
5.0
4.3
9.7
2.3
9.0
10.9
12.2
12.2 16.2
7.5
6.4
5.2
4.9
4.6
4.2
9.8
2.8
11.0
9.8
11.6
11.8 11.4
83.1
5.0
4.3
3.4
5.1
4.7
4.2
9.8
2.8
10.7
6.4
11.1
12.7
Peerweightedaverage
NJCC
Source:Bloomberg,AvendusResearch
FY12f FY12f FY12f Revenue EBITDA
PAT
8.0
9.2
^Note:Excludingvalueofinvestments(VOI)ofINR34forIVRCandINR53forNJCC
17
NCC
Riskfactors
f Riskstoexecution:Thechangingorderbookcompositionraisesfreshexecutionchallenges.Sector
wideproblemssuchasdelaysinlandacquisitionandfinancialclosuresmayimpactsegmentssuch
as power, roads and buildings, which together constitute c50% of the order book. The working
capitalcyclehasincreasedby28%inFY11to156daysandmayimpactthepaceofexecutiongoing
forward.
f Delay in power project execution: Delays in financial closure or private equity investment in the
NelcastEnergyprojectmayincreasethecapitalcommitmentfromNJCCandadverselyimpactcash
flowsandreturnratios.
f Highgearingandlowpromoterstakelimitsroomfordilution:Thegross/debtequityisforecastto
remain at over 1.1x over FY12FY14; at this level, it is likely to raise the need for dilution in the
future. However, at 20%, the promoter holding is low, which may restrict the firms financial
flexibilityinraisingfreshcapital;thus,affectinggrowth.
f Exposure to real estate: Rising interest rates and tightening liquidity are likely to most affect
execution in the buildings segment. The buildings segment accounts for the largest share of the
companys order book. It may also strain the financials of NCC Urban, and which may require
furthersupportfromNJCCintheformofloans.Ofourestimatedtargetprice,7%iscontributedby
thecompanysinvestmentsinrealestateprojects.
f Sharpincreaseininterestrates:Asharpincreaseininterestratesislikelytoimpactthegrowthof
neworders.Itmayalsoadverselyimpacttheworkingcapitalcycleanddirectlyimpactprofitability
throughhighercostofdebt.Buildingsandindustrialsaretwoofthekeyconstituentsoftheorder
bookthataremostlikelytobeimpactedbyhigherinterestrates.
f Risktomarginsonaccountofrawmaterialpricesandentryintonewsegments:Thecompanyhas
entered new segments where it is yet to establish a significant market share. Due to this, the
company may face low pricing power. Also, adverse raw material price movement may have a
significantimpactonmargins,especiallyforlonggestationprojects.
f Large exposure to state government projects; higher exposure to political factors: A significant
share of orders comes from various governments and their enterprises. The receivables may be
adverselyaffectedbythefiscalhealthofthesegovernments.Growthinordersfromthesectormay
slowdown,leadingtohighercompetition.
18
NCC
Financialsandvaluations(standalone)
Incomestatement(INRmn)
Fiscalyearending
Grosssales
Less:Exciseduty
Netsales
Otheroperatingincome
Totaloperatingincome
Totaloperatingexpenses
Netmaterials
Otherdirectcosts
Personnel
SG&A
R&D
EBITDA
Otherincome
Depreciation
EBIT
Interest
RecurringPBT
Netextraordinaryitems
PBT(reported)
Totaltaxes
PAT(reported)
Add:Shareofearningsofassociate
Less:Minorityinterest
Priorperioditems
Netincome(reported)
Avendusnetincome
Dividend+Distributiontax
Sharesoutstanding(mn)
Avendusdilutedshares(mn)
AvendusEPS(INR)
03/10
47,778
0
47,778
0
47,778
42,944
18,070
22,063
1,841
969
4,834
48
525
4,357
1,322
3,035
496
3,530
1,204
2,326
2,326
1,831
03/11p
50,737
0
50,737
0
50,737
45,861
17,564
24,657
2,438
1,201
4,876
146
685
4,337
1,682
2,656
2,656
876
1,780
145
1,635
1,780
03/12f
55,684
0
55,684
0
55,684
50,221
19,829
26,570
2,560
1,261
5,463
70
798
4,735
2,419
2,316
2,316
764
1,552
1,552
1,552
03/13f
61,906
0
61,906
0
61,906
55,771
21,890
29,677
2,816
1,388
6,136
82
914
5,304
2,578
2,726
2,726
900
1,827
1,827
1,827
03/14f
69,635
0
69,635
0
69,635
62,664
24,797
33,102
3,239
1,526
6,971
96
1,043
6,025
2,571
3,454
3,454
1,140
2,314
2,314
2,314
389
299
270
329
419
256.8
256.8
7.1
256.8
256.8
6.9
256.8
256.8
6.0
256.8
256.8
7.1
256.8
256.8
9.0
15.1
29.4
34.3
33.0
19.0
6.1
6.2
0.9
0.5
12.5
2.8
2.8
9.8
12.0
9.2
12.8
12.8
12.8
11.2
12.3
12.0
17.7
17.7
17.7
12.5
13.6
13.6
26.7
26.7
26.7
10.1
9.1
3.8
1.6
34.1
9.6
8.5
3.5
5.5
33.0
9.8
8.5
2.8
3.0
33.0
9.9
8.6
2.9
3.0
33.0
10.0
8.7
3.3
2.8
33.0
Growthratios(%)
Totaloperatingincome
EBITDA
EBIT
RecurringPBT
Avendusnetincome
AvendusEPS
Operatingratios(%)
EBITDAmargin
EBITmargin
Netprofitmargin
Otherincome/PBT
EffectiveTaxrate
19
NCC
Balancesheet(INRmn)
Fiscalyearending
Equitycapital
Preferencecapital
Reservesandsurplus
Networth
Minorityinterest
Totaldebt
Deferredtaxliability
Totalliabilities
Grossblock
less:Accumulateddepreciation
Netblock
CWIP
Goodwill
Investments
Cash
Inventories
Debtors
Loansandadvances
less:Currentliabilities
less:Provisions
Networkingcapital
Totalassets
03/10
03/11p
03/12f
03/13f
03/14f
513
513
513
513
513
21,943
23,274
24,556
26,053
27,948
22,457
23,787
25,069
26,566
28,461
15,302
24,841
27,591
28,591
29,591
255
308
354
408
478
38,013
48,935
53,014
55,566
58,530
7,561
9,489
10,881
12,428
14,169
2,023
2,708
3,506
4,420
5,463
5,538
6,781
7,374
8,008
8,707
434
434
434
434
434
9,412
12,008
14,508
15,508
16,508
1,997
1,397
1,129
708
824
7,539
8,960
9,834
10,386
11,099
12,995
14,536
15,554
16,860
18,017
18,552
24,562
25,592
26,985
28,699
17,497
19,031
20,626
22,382
24,583
957
712
785
943
1,175
22,629
29,712
30,697
31,615
32,881
38,013
48,935
53,014
55,565
58,530
Cashflowstatement(INRmn)
Fiscalyearending
Netprofit
Depreciation
Deferredtax
Workingcapitalchanges
Less:Otherincome
Cashflowfromoperations
Capitalexpenditure
Strategicinvestmentspurchased
Marketableinvestmentspurchased
Changeinotherloansandadvances
Goodwillpaid
Otherincome
Cashflowfrominvesting
Equityraised
Changeinborrowings
Dividendspaid(incl.tax)
Others
Cashflowfromfinancing
Netchangeincash
03/10
03/11p
03/12f
03/13f
03/14f
2,326
1,635
1,552
1,827
2,314
525
685
798
914
1,043
99
53
46
55
69
3,552
5,683
919
987
780
48
146
70
82
96
650
3,456
1,408
1,725
2,550
1,481
1,928
1,392
1,548
1,741
2,009
2,596
2,500
1,000
1,000
1,219
2,000
335
352
369
48
146
70
82
96
4,661
6,378
4,157
2,817
3,014
2,863
9,539
2,750
1,000
1,000
389
299
270
329
419
3,489
5
0
0
0
5,963
9,234
2,480
671
581
652
600
269
421
117
20
NCC
KeyRatios
Fiscalyearending
Valuationratios(x)
P/E(onAvendusEPS)
P/E(onbasic,reportedEPS)
P/CEPS
P/BV
Dividendyield(%)
Marketcap./FCF
Marketcap./Sales
EV/Sales
EV/EBITDA
EV/FCF
EV/TotalAssets
NetCash/Marketcap.
Pershareratios(INR)
AvendusEPS
EPS(Basic,reported)
CashEPS
BookValue
Dividendpershare
ROEDecomposition(%)
EBITmargin
Assetturnover(x)
Interestexpenseratio
Taxretentionratio
ROA
Totalassets/equity(x)
ROE
Returnratios(%)
EBIT/CapitalEmployed
ROCE
ROIC
FCF/IC
OCF/Sales
FCF/Sales
Turnoverratios(x)
Grossturnover
Netturnover
Revenue/IC
Inventory/Sales(days)
Receivables(days)
Payables(days)
Workingcapitalcycle(excash)(days)
Solvencyratios(x)
Grossdebttoequity
Netdebttoequity
NetdebttoEBITDA
InterestCoverage(EBIT/Interest)
03/10
03/11p
03/12f
03/13f
03/14f
11.7
11.7
9.1
0.9
1.6
18.6
0.4
0.6
6.2
11.5
0.8
31.4
12.0
12.0
8.7
0.9
1.2
6.4
0.4
0.8
7.9
7.3
0.8
37.9
13.7
13.7
9.1
0.9
1.1
15.2
0.4
0.7
7.5
2,611.4
0.8
38.2
11.7
11.7
7.8
0.8
1.3
12.4
0.3
0.7
6.9
237.6
0.8
37.9
9.2
9.2
6.4
0.7
1.7
8.4
0.3
0.6
6.1
53.0
0.7
40.2
7.1
9.6
9.2
87.4
1.3
6.9
6.4
9.6
92.6
1.0
6.0
6.0
9.2
97.6
0.9
7.1
7.1
10.7
103.4
1.1
9.0
9.0
13.1
110.8
1.4
9.1
1.4
3.9
65.9
5.4
1.7
9.3
8.5
1.2
3.9
67.0
4.1
1.9
7.7
8.5
1.1
4.7
67.0
3.0
2.1
6.4
8.6
1.1
4.7
67.0
3.4
2.1
7.1
8.7
1.2
4.5
67.0
4.1
2.1
8.4
12.9
8.0
8.5
8.3
2.4
5.5
10.0
6.7
7.0
12.7
6.5
10.3
9.3
6.2
6.4
0.0
2.5
0.0
9.8
6.5
6.7
0.3
2.8
0.3
10.6
7.1
7.2
1.4
3.7
1.2
6.3
8.6
1.5
57.4
88.8
150.2
108.2
5.3
7.5
1.2
59.3
99.0
157.9
135.1
5.1
7.6
1.1
61.6
98.6
156.0
144.7
5.0
7.7
1.2
59.6
95.6
152.2
135.8
4.9
8.0
1.2
56.3
91.4
148.0
125.4
0.7
0.4
3.2
3.3
1.1
0.7
5.1
2.6
1.1
0.8
5.1
2.0
1.1
0.8
4.7
2.1
1.1
0.8
4.2
2.3
21
NCC
AnalystCertification
I,DevangPatel,PGDFA,researchanalystandauthorofthisreport,herebycertifythatalloftheviewsexpressedinthisdocumentaccuratelyreflectourpersonalviewsaboutthe
subject company/companies and its or their securities. We further certify that no part of our compensation was, is or will be, directly or indirectly related to specific
recommendationsorviewsexpressedinthisdocument.
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and/orsellanysecuritiesmentionedhereinand/orofficialconfirmationofanytransaction.Thisdocumentisprovidedforassistanceonlyandisnotintendedtobe,andmustnot
betakenas,thesolebasisforaninvestmentdecision.Theuserassumestheentireriskofanyusemadeofthisinformation.Eachrecipientofthisdocumentshouldmakesuch
investigationashedeemsnecessarytoarriveatanindependentevaluation,includingthemeritsandrisksinvolved,forinvestmentinthesecuritiesreferredtointhisdocument
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22
NCC
DisclosureofInterestStatement(asofJuly7,2011)
Analystownership
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InvestmentBankingmandatewith
associatecompaniesofAvendus
GayatriProjects
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IL&FSEngineeringandConstructionCompany
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No
IVRCLInfrastructures
No
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LarsenandToubro
No
No
No
NCC
No
No
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SimplexInfrastructures
No
No
No
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IndiaEquityResearch

50,737 55,684 61,906

9.6 9.8 9.9

1,824 1,552 1,827

209 229 229

7.1 6.0 7.1

0.7 0.8 1.2

11.7 13.7 11.7

7.9 7.5 6.9

500 444 422

India Equity Research

India Equity Research

3.5 0.3 1.1

5.1 0.5 0.9

5.1 0.5 0.9

4.7 0.5 0.9

4.2 0.4 0.8

India Equity Research

India Equity Research

India Equity Research

India Equity Research

India Equity Research

India Equity Research

Sep09 Dec09 Mar10 Jun10

Sep10 Dec10 Mar11

India Equity Research

FY11 FY12f FY13f FY14f

India Equity Research

India Equity Research

India Equity Research

India Equity Research

India Equity Research

India Equity Research

India Equity Research

EV/EBITDA(x)^ EBITDAmargin PATmargin

(INR) FY12f FY13f FY14f

FY12f FY12f FY12f Revenue EBITDA

India Equity Research

India Equity Research

India Equity Research

India Equity Research

India Equity Research

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