NCC Ltd (NAGCON) 85. Execution to improve in FY18E... Result Update. ICICI Securities Ltd Retail Equity Research. May 24, 2017

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1 [ [ [ [[[ Result Update Rating matrix Rating : Buy Target : 110 Target Period : months Potential Upside : 29% What s changed? Target Changed from 115 to 110 EPS FY18E Changed from 4.9 to 4.7 EPS FY19E Changed from 5.8 to 5.9 Rating Unchanged Quarterly performance Q4FY17 Q4FY16 YoY (%) Q3FY17 QoQ (%) Revenue 2, , , EBITDA (16.7) EBITDA (%) bps bps PAT (26.1) Key financials ( Crore) FY16E FY17E FY18E FY19E Net Sales 8, , , ,641.7 EBITDA Net Profit EPS ( ) Valuation summary (x) FY16E FY17E FY18E FY19E P/E Target P/E EV / EBITDA P/BV RoNW (%) RoCE (%) Stock data Particular Amount Market Capitalization 4,725.4 Total Debt 2,042.7 Cash 85.9 EV 6, week H/L ( ) 104 / 69 Equity capital Face value 2.0 Price performance Return % 1M 3M 6M 12M NCC (6.0) NBCC (5.8) Simplex Infra Research Analyst Deepak Purswani, CFA deepak,purswani@icicisecurities.com Vaibhav Shah vaibhav.shah@icicisecurities.com Execution to improve in FY18E... May 24, 2017 NCC Ltd (NAGCON) 85 NCC s topline de-grew 12.8% YoY to crore (our estimate: crore) on account of muted execution owing to payment delays in some projects EBITDA margins fell 38 bps YoY to 8.1% (our estimate: 8.8%) due to higher construction expenses (11.8% in Q4FY17 vs. 10% in Q4FY16) Reported PAT de-grew 26.1% YoY to 63.7 crore. However, it included an exceptional loss of 47.3 crore relating to provision for loans and warranties. Adjusting for this, bottomline grew 28.8% YoY to crore. It was higher than our expectation of 72.5 crore despite a topline miss, on account of higher than expected other income ( 47.1 crore in Q4FY17 vs. our expectation of 25.0 crore) The board has recommended a final dividend of 0.4/share for FY17 Closes the year with order book of crore NCC has witnessed robust order inflows worth 9226 crore in FY17 taking its orderbook to ~ crore. Further, it is also L1 in orders worth 2000 crore. NCC has also been shortlisted among four players at the RFQ stage for one of the patches in the Pune Metro project. The total project cost for the Pune Metro project was at crore, which is being executed by Maha Metro (a Government of India and Maharashtra government JV). On the opportunity front, the company is looking to bid for hybrid annuity projects in the roads division with strong traction in the sector. Also, it expects to win some EPC contracts in road division, building contracts in Amravati apart from some irrigation projects. With strong opportunities across sectors & anticipated pick-up in execution, the management has guided for topline growth of ~8-10% & EBITDA margin in the range of % for FY18E. Consequently, we expect revenues, PAT to grow at 10.5%, 20.8% CAGR to crore, crore, respectively, with EBITDA margin improving 40 bps to 9.3% over FY17E-19E. Upgraded credit ratings, debt reduction lead to interest cost savings Recently, India Ratings & Research (Ind-Ra) upgraded NCC s long term issuer rating to IND A- from IND BBB+ and maintained a stable outlook. Going forward, this should help the company reduce the cost of borrowing leading to interest cost savings, which could improve its profitability. Also, the company received ~ 400 crore from NCC Infra, resulting in a significant debt reduction to 1577 crore as on FY17. Consequently, NCC s interest costs have reduced to crore in FY17 vs crore in FY16. However, with execution expected to pick up, the management expects debt to rise to crore by FY19E end. Hence, we have factored in debt at 1977 crore for FY19E. Reports strong order inflows; maintain BUY We like NCC given its better financial leverage compared to other players, which would allow it to capture strong opportunities in the infrastructure space, going ahead. Consequently, we expect its bottomline to grow at a CAGR of 20.8% CAGR to crore in FY17-19E. We maintain our BUY recommendation on the stock with a revised target price of 110/share. We value NCC s domestic construction business at 121/share (7.5x FY19E EV/EBITDA in line with the historical average of Simplex Infrastructure which is also a pure EPC player), international construction business at 6/share (10x FY19E PE) and real estate business at 15/share (0.7x P/BV). ICICI Securities Ltd Retail Equity Research

2 Variance analysis Year Q4FY17 Q4FY17E Q4FY16 YoY (%) Q3FY17 QoQ(%) Comments Net Sales 2, , , , Topline de-grew on account of muted execution as the company had temporarily halted works in some projects owing to payment delays Other Income The other income came in higher as the company received interest on income tax refund Total Construction Expenses 1, , , Employee cost Other expenditure EBITDA EBITDA Margin (%) bps bps Depreciation Interest Exceptional items NA -7.8 NA It includes provisions for loans and warranties PBT Taxes NA 18.1 NA PAT PAT de-grew on account of exceptional loss of 47.3 crore during the quarter Change in estimates FY17 FY18E FY19E ( Crore) Old New % Change Old New % Change Revenue 7, , , , , We have factored in muted execution in Q4FY17 and taken revenue growth in line with management guidance EBITDA EBITDA Margin (%) bps bps PAT EPS ( ) Assumptions crore FY14 FY15 FY16 FY17 Current Earlier Current Earlier Domestic Order Inflow 8,950 5,033 7,399 9,226 10,000 12,000 12,000 12,000 We have lowered our order inflow assumptions for FY18E to crore in line with management guidance Domestic Order book 19,553 16,289 15,401 17,126 18,608 20,198 20,967 21,895 Execution rate- Average (%) ICICI Securities Ltd Retail Equity Research Page 2

3 Conference Call Highlights: Management guidance: The management has guided for revenue growth of 8-10% for FY18E. Further, the EBITDA margin is expected to be in the range of % for FY18E Orderbook details & opportunities: The order book as on March 31, 2016 was at crore with strong order inflow of 9226 crore in FY17. Further, the company is L1 in orders worth ~ 2000 crore. The company would look to bid for hybrid annuity projects in the roads division, going forward. Also, it expects to win some EPC contracts in the road division, building contracts in Amravati apart from some irrigation projects Debt update: The standalone debt of the company reduced substantially to crore vs crore in Q3FY17 as the company received 400 crore from NCC Infra. However, with execution expected to pick up, the management expects debt levels to rise to crore by FY19E end. The company plans to reduce its interest costs to crore for FY18 Payment delays: The company faced certain payment delays in Uttar Pradesh in the electrical division due to ongoing elections, post which the company had temporarily stopped execution of some projects, impacting its topline. Furthermore, it also faced some payment delays in the water division in Rajasthan and Tamil Nadu Other income: The other income in Q4FY17 came in higher at 47.1 crore vs crore in Q3FY17 as it received some income tax refund pertaining to earlier years in the current quarter along with normal interest income NCC Urban: The subsidiary is expected to receive ~ crore from land sale and a metro project in FY18E, which would be used to repay loan to the parent company Arbitration awards: The company has arbitral awards in its favour worth ~ 120 crore, which it expects to receive in FY18E. Furthermore, proceedings on arbitration worth 1500 crore is going on which has moved towards fast track now. The company expects some update on the same over the next months International order book: The company reported a net loss of ~ 190 crore in FY17. NCC is not bidding for any orders in the international market Real estate exposure: Currently, the company has an exposure worth crore towards the real estate division ICICI Securities Ltd Retail Equity Research Page 3

4 Company Analysis Revenue to grow at 10.5% CAGR over FY17-19E As on Q4FY17, NCC s order book was at crore i.e. book to bill ratio of 2.3x on a TTM basis, thereby providing strong revenue visibility, going ahead. Out of this, the building, transportation, O&G division contributed 8298 crore (46%), water & railway division contributed 3349 crore (19%), electrical division contributed 1609 crore (9%) and international division contributed 962 crore (5%) with the remaining contribution coming from other divisions. We also highlight that any easing of balance sheet through asset monetisation and working capital improvement could lead to a pick-up in execution and subsequently, lead to robust growth in topline, going forward. With an anticipated recovery in the investment cycle, the opportunity landscape remains robust in roads, water and urban infrastructure. Hence, we have built in order inflows of crore in FY18E and crore in FY19E. Consequently, we expect NCC to post topline growth at 10.5% CAGR to crore in FY17-19E. Exhibit 1: Quarterly order book trend Exhibit 2: Order book composition 20,000 15, (x) (%) , Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Order Book Order book-to-bill ratio (RHS) Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Buildings/Transportation/O&G Water/Railways Electrical Irrigation Power/Metals/Mining International Exhibit 3: Annual order book trend Exhibit 4: Annual revenue trend FY15 FY16 FY17 FY18E FY19E Order book Book to Bill (RHS) (x) FY15 FY16 FY17 FY18E FY19E ICICI Securities Ltd Retail Equity Research Page 4

5 Exhibit 5: Quarterly EBITDA trend Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 EBITDA Margins (RHS) Margins to improve further NCC has historically enjoyed EBITDA margins of 8-9%, which had shrunk to 6.6% in FY14. This was mainly due to cost escalation across projects, coupled with slower execution leading to unabsorbed fixed costs and low margin orders. Furthermore, margins moderated in FY17 to 8.7% vs. 8.9% in FY16. Furthermore, in Q4FY17, EBITDA margins have further contracted to 8.1% owing to topline decline and temporary stoppage of certain higher margin orders. However, going ahead, with less competitive intensity, execution pick-up and high quality orders we have built in EBITDA margins of 9.0 and 9.3% in FY18E & FY19E, respectively (%) Exhibit 6: Annual EBITDA trend FY15 FY16 FY17 FY18E FY19E EBITDA Margins (RHS) (%) Working capital expected to stretch a bit The slowdown in execution and delay in payments had led to a significant rise in working capital days for NCC in the last few years. The working capital days have reached their peak level of 187 days in FY14 from 139 days in FY09. This is largely attributable to loans and advances given to real estate, power and road SPVs. However, with debt reduction and better collection management, it has significantly improved to 140 days in FY17. However, we expect the working capital cycle to get stretched to 151 days in FY19E. Exhibit 7: Net working capital (NWC) trend (Days) FY15 FY16 FY17 FY18E FY19E NWC NWC (Days) 100 ICICI Securities Ltd Retail Equity Research Page 5

6 We expect debt to equity to remain flat at 0.5x in FY19E Leverage to rise marginally from current levels Elevated working capital and significant investment in real estate, power and road SPV have led to increase in debt levels over the last few years. However, with monetisation on the right track, the company managed to reduce its debt significantly from elevated levels over the past couple of years. Furthermore, the debt has significantly reduced during the quarter to 1577 crore on account of receipt of ~ 400 crore from NCC Infra during the quarter. However, with execution set to pick up over the next couple of years, we expect the debt to rise to 1977 crore by FY19E. Consequently, we expect debt to equity to remain flat at 0.45x in FY19E. Exhibit 8: Leverage trend (x) FY15 FY16E FY17 FY18E FY19E Debt Net Debt to Equity (RHS) PAT to bounce back The muted topline show, deteriorating margins and higher interest cost on account of higher debt levels and poor credit profile had radically impacted NCC s bottomline in the past few years. However, an improvement in credit ratings has led to better credit terms and lower borrowing costs. India Ratings & Research (Ind-Ra) has upgraded NCC s long term issuer rating to IND A- from IND BBB+ and maintained a stable outlook. Furthermore, with an improvement in execution, ratings and margins coupled with lower interest expenses, we expect NCC s bottomline to grow 20.8% CAGR to crore in FY17-19E. Exhibit 9: Quarterly PAT trend Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Exhibit 10: Annual PAT & PAT trend FY15 FY16 FY17 FY18E FY19E PAT PAT Margin (%) ICICI Securities Ltd Retail Equity Research Page 6

7 Outlook and Valuation Our target price for NCC is 110/share based on the SOTP methodology. We like NCC given its better financial leverage compared to other players, which would allow it to capture strong opportunities in the infrastructure space, going ahead. Consequently, we expect its bottomline to grow at a CAGR of 20.8% CAGR to crore in FY17-19E. We maintain our BUY recommendation on the stock with a revised target price of 110/share. We value NCC s domestic construction business at 121/share (7.5x FY19E EV/EBITDA in line with historical average of Simplex Infrastructure which is also a pure EPC player), international construction business at 6/share (10x FY19E PE) and real estate business at 15/share (0.7x P/BV). Exhibit 11: SOTP Valuation - NCC Entity Value Per share ( ) Comment Domestic Construction Business 6, x FY19E EV/EBITDA International Construction Business x FY19E PE Investment in real estate Value at 0.7x P/BV Less:Net Debt (1,811) (33) FY19E net debt Fair Value 109 Rounded off target price 110 [ Exhibit 12: Valuation Metrics Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY FY FY18E FY19E ICICI Securities Ltd Retail Equity Research Page 7

8 [ [ Recommendation history vs. Consensus ( ) (%) 25 May-15 Jul-15 Oct-15 Dec-15 Mar-16 May-16 Aug-16 Oct-16 Dec-16 Mar May-17 Price Idirect target Consensus Target Mean % Consensus with BUY Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Dec-14 Jun-15 Sep-15 Jan-16 Feb-16 Event NCC raises 600 crore via rights issue NCC plans to monetise its power and road projects to pare debt which is currently at ~ 1995 crore NCC Ltd has been re-allocated 972 acres land at Sompeta in Srikakulam district of Andhra Pradesh for development of an agri-based economic zone NCC along with Gayatri Projects and its subsidiary enters into definitive agreement to sell 100% stake in Western UP Tollway project to Cube Highways NCC along with Soma Enterprise Ltd executes definitive agreement to sell their respective shareholdings in Bangalore Elevated Tollway to India Infrastructure Fund II Mar-16 Apr-16 May-16 May-16 Sep-16 Oct-16 NCC Infrastructure Holdings (subsidiary of NCC) enters into share sale agreement with Sembcorp, for sale of a portion of the stake held in Sembcorp Gayatri Power (SGPL) The Mumbai Metropolitan Region Development Authority (MMRDA) awards contracts to design and construct the 16.5 km Metro-VII corridor from Andheri East to Dahisar East in three packages to Simplex Infrastructure, NCC and J Kumar Infra. NCC will design and construct a third package NCC infrastructure Holdings, a subsidiary of NCC, enters into share sale agreement with Sembcorp Utilities Pte, for sale of a portion of the stake held in Sembcorp Gayatri Power (SGPL) for a gross consideration of crore NCC enters into agreement to sell its stake in Western UP Expressway (EV: 575 crore) and Bangalore Elevated Tollway (EV: 750 crore) in Q4FY16 India Ratings upgrades credit ratings of long term debt of NCC from BBB Stable to BBB+/Positive The NCC-BGR consortium bags Pachwara-North Coal Block MDO project worth ~ crore in Jharkhand to be executed over a 30 year period Top 10 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Jhunjhunwala (Rekha Rakesh) 31-Dec % AVSR Holdings Pvt. Ltd. 31-Dec % UTI Asset Management Co. Ltd. 31-Dec % 26.3 (0.0) 4 Norges Bank Investment Management (NBIM) 31-Dec % Napean Trading & Investment Co., Pvt. Ltd. 31-Dec % Tata Asset Management Limited 31-Dec % Goldman Sachs Asset Management (India) Private Ltd. 31-Dec % Reliance Nippon Life Asset Management Limited 28-Feb % Beacon India Managers, Ltd. 31-Dec % ICICI Prudential Asset Management Co. Ltd. 31-Dec % Shareholding Pattern (in %) Sep-16 Dec-16 Mar-17 Promoter Public Others Total Source: Reuters, ICICIdirect.com Research Recent Activity Buys Sells Investor name Value (m) Shares (m) Investor name Value (m) Shares (m) Goldman Sachs Asset Management (India) Private Ltd Birla Sun Life Asset Management Company Ltd. (2.1) (1.8) HDFC Standard Life Insurance Company Limited SBI Funds Management Pvt. Ltd. (1.7) (1.4) Tata Asset Management Limited Dimensional Fund Advisors, L.P. (0.8) (0.7) Norges Bank Investment Management (NBIM) J.P. Morgan Asset Management (Hong Kong) Ltd. (0.5) (0.4) ICICI Prudential Asset Management Co. Ltd Baroda Pioneer Asset Management Company Limited (0.1) (0.1) Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 8

9 Financial summary Profit and loss statement crore FY16 FY17 FY18E FY19E Net Sales 8, , , ,641.7 Other Income Total revenues 8, , , ,741.7 Raw Material Expenses 3, , , ,797.1 Employee benefit expenses Construction expenses 3, , , ,338.8 Other Expenses Total operating expenses 7, , , ,746.8 EBITDA Interest Depreciation PBT Taxes PAT EPS Cash flow statement crore FY16E FY17E FY18E FY19E Profit after Tax Depreciation Interest paid Cash Flow before wc changes Net Increase in Current Assets (55.9) Net Increase in Current Liabilities (67.3) (255.5) - - Net cash flow from op. activities (284.1) 63.9 (Purchase)/Sale of Fixed Assets (97.2) (126.3) (100.0) (100.0) (Purchase)/Sale of Investments Net cash flow from inv. activities (69.5) (45.5) (100.0) Proceeds from Secured Borrowings (86.6) (306.6) Proceeds from Unsecured Borrowing (25.0) Net cash flow from fin. activities (147.3) (498.6) Net Cash flow (105.9) Opening Cash Closing Cash Balance sheet crore FY16 FY17E FY18E FY19E Equity Capital Reserve and Surplus 3, , , ,943.0 Total Shareholders funds 3, , , ,054.2 Total Debt 1, , , ,977.0 Other Non-current Liabilities Deferred Tax Liability (20.8) (134.2) (134.2) (134.2) Source of Funds 5, , , ,896.9 Gross Block 1, , , ,589.2 Less: Accumulated Dep ,012.8 Net Block Capital WIP Total Fixed Assets Investments 1, , , ,029.0 Inventory 1, , , ,864.1 Sundry Debtors 1, , , ,936.4 Loans & Advances 2, , , ,225.2 Cash & Bank Balances Other Current Assets 1, , , ,344.7 Total Current Assets 7, , , ,536.6 Trade Payable 2, , , ,169.9 Provisions Other Current Liabilities 1, ,123.2 Total Current Liabilities 4, , , ,334.2 Net Current Assets 3, , , ,202.4 Application of Funds 5, , , ,896.9 Key ratios crore FY16 FY17E FY18E FY19E Per Share Data Reported EPS Cash EPS BVPS Operating Ratios EBITDA / Net Sales PAT / Net Sales Return Ratios RoE RoCE RoIC Valuation Ratios EV / EBITDA P/E EV / Net Sales Market Cap / Sales Price to Book Value Turnover Ratios Asset turnover Debtors Turnover Ratio Creditors Turnover Ratio Solvency Ratios Net Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 9

10 ICICIdirect.com coverage universe (Construction) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) P/B (x) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E NBCC (NBCC) Hold 16, PNC Infratech (PNCINF) Buy 3, Sadbhav Engg. (SADENG) Buy 5, Ashoka Buildcon (ASHBUI) Buy 3, Simplex Infra (SIMCON) Buy 2, NCC (NAGCON) Buy 4, ICICI Securities Ltd Retail Equity Research Page 10

11 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 11

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