BUY NCC. An Ordinary Quarterly Performance; Maintain BUY. Target Price: Rs98. Institutional Equity Research. 4QFY17 Result Update May 24, 2017

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4QFY17 Result Update May 24, 2017 Market Cap. (Rs bn) 46 Free Float (%) 80 Shares O/S (mn) 556 An Ordinary Quarterly Performance; Maintain s reported performance has come in below the expectation as dismal revenue booking and higher exceptional items dragged earnings. Further, a lower than estimated order inflow aggravated the concern. Its top-line de-grew by 13% YoY to Rs21.4bn (vs. our expectation of Rs23bn), mainly owing to revenue loss in its electrical division in UP due to assembly elections. While EBITDA declined by 17% YoY (flat on sequential comparison) to Rs1.74bn, EBITDA margin came in at 8.1% (-38 bps YoY and -101 bps). Finance cost declined by 22% YoY to Rs1.02bn led by a significant reduction in gross debt. However, exceptional item of Rs500mn pertaining to liquidated damage (DLD) for Nellore power project dragged its PBT to Rs440mn (-59% YoY and -42% QoQ). Though we have downwardly revised our EBITDA estimates by 7% and 6% for FY18E and FY19E, respectively to factor in insipid order inflow, we continue to like on account of consistent balance-sheet deleveraging and better working capital management. We believe that turnaround of international business, further divestment of non-core assets and improvement in order intake will be the key catalysts for in near to medium-term. Thus, we maintain our recommendation on the stock with a revised SOTP-based Target Price of Rs98 (from Rs100 earlier). Dismal Revenue Booking Drags Performance A tepid order flow in 2HFY17 along with revenue loss owing to payment delays impacted s revenue booking with its top-line declining by 13% YoY to Rs21.4bn in 4QFY17. cited that it lost revenue to the tune of Rs4.0bn owing to payment delays (due to assembly elections in UP) and demonetization. Consequently, EBITDA de-grew by 17% YoY (flat on QoQ basis) to Rs1.74bn, while EBITDA margin came in at 8.1% (-38 bps YoY and -101 bps). Order Book Concerns Aggravate Current order backlog stands at Rs181bn, which is 2.3x of FY17 revenue. However, adjusting with Mining Development Order (MDO) worth Rs18.7bn, order book to sales works out at 2.0x. secured orders worth Rs92.3bn (including MDO order) in FY17 compared to Rs74.2bn in FY16, while current L1 position stands at Rs20.0bn. The Management has guided for an order inflow of Rs100bn in FY18. Outlook & Valuation Higher-than-expected reduction in debt and efficient working capital management during FY17 are key positives. We have upwardly revised our PAT estimates by 3% and 5% for FY18E and FY19E, respectively mainly to factor in higher-than-expected savings in interest cost. We believe that turnaround of international business, further divestment of non-core assets and improvement in order intake will be the key catalysts for in near to medium-term. Thus, we maintain our recommendation on the stock with a revised SOTP-based Target Price of Rs98 (from Rs100 earlier). Share price (%) 1 mth 3 mth 12 mth Absolute performance (15.9) 2.2 16.9 Relative to Nifty (17.5) (2.5) (3.9) Shareholding Pattern (%) Dec'16 Mar'17 Promoter 19.74 19.72 Public 80.26 80.28 1 Year Stock Price Performance 100 90 80 70 60 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Key Financials (Rs mn) FY16 FY17 FY18E FY19E Sales (Rs) 83,252 78,921 85,296 92,131 EBITDA (Rs) 7,374 6,852 7,603 8,396 PAT 2,228 2,255 2,923 3,460 EPS (Rs) 4.0 4.1 5.3 6.2 P/E (x) 20.7 20.5 15.8 13.3 EV/Sales (x) 0.8 0.8 0.7 0.6 EV/EBITDA (x) 8.5 8.9 7.6 6.9 RoE (%) 6.7 6.4 7.8 8.6 RoCE (%) 15.1 12.4 14.4 15.1 Divi. Yield (%) 0.7 0.5 0.7 1.0 Source: Company, RSec Research Research Analyst: Binod Modi Contact: 022 3320 1097 Email: binod.modi@relianceada.com 1

Key Risks ff Slowdown in government s planned spending on towards infrastructure development. ff Any political uncertainty or changes in macroeconomic policies. ff Substantial deterioration in working capital cycle. Conference Call Key Takeaways Order Book: s current order book stands at Rs181bn vs. Rs177bn as of FY16-end. Building & Road contracts account for 46% of total order backlog, while Water and Irrigation projects account for 34% and 19%, respectively. secured orders worth Rs92.3bn (including MDO order) in FY17 compared to Rs74.2bn in FY16, while current L1 position stands at Rs20.0bn. The Management has guided for an order inflow of Rs100bn in FY18. Guidance on Revenue & Margins: lost revenue to the tune of ~Rs4.0bn in FY17 mainly due to: (a) execution slowdown following payment issue faced by its electrical division owing to assembly elections in UP; (b) demonetization; and (c) slowdown in project execution in water division due to payment issues. However, expects 8-10% revenue growth and an EBITDA margin of 9-9.15% in FY18. Exceptional Item: has provided for an exceptional item of Rs500mn during the quarter pertaining to liquidated damage (DLD) for Nellore power project. However, the Management expects a productive negotiation with the client. Debt Reduction: reduced its gross debt to Rs15.8bn in FY17, which stood at Rs18.8bn in FY16 mainly owing to better working capital management and divestment of non-core assets. Though divestment of non-core assets will continue in FY18, foresees its debt level to be in Rs18-20bn range in FY18. Finance Cost: Its finance cost is expected to be in the range of Rs3.6-3-7bn in FY18 (vs. Rs4.0bn in FY17). Rating up-gradation to A- from BBB+ will lead to further reduction in interest cost. Subsidiaries: expects its domestic subsidiaries to witness a complete turnaround in FY18, while the losses of international subsidiaries are likely to reduce substantially. Divestment in Vizag Urban: is actively negotiating with some PE players to divest its 40-45% stake in Vizag Urban. It is having ~98 acres of developable land and is getting lot of interest from PE players due to bright prospects of Vizag as next IT hub. Working Capital: Receivable days stand at 71 days in FY17 (vs. 58 days in FY16). Retention and Withhold amounts stand at Rs16.3bn and Rs4.98bn, respectively. expects its working capital cycle to improve in 1QFY18. 2

Exhibit 1: Quarterly Performance (Rs mn) 4QFY17 4QFY16 % yoy 3QFY17 % qoq FY17 FY16 % yoy Net Sales 21,394 24,522 (12.8) 19,035 12.4 78,921 83,252 (5.2) Cost of Materials 7,521 9,930 (24.3) 6,790 10.8 29,959 38,619 (22.4) Change in WIP 632 803 (21.3) 749 (15.7) 1,398 390 258.8 % sales 38.1 43.8 39.6 39.7 46.9 Construction Exps. 2,534 2,455 3.2 2,302 10.1 9,347 8,396 11.3 % sales 11.8 10.0 12.1 11.8 10.1 Sub-contractor Works 7,597 8,049 (5.6) 6,169 23.1 26,167 23,351 12.1 % sales 35.5 32.8 32.4 33.2 28.0 Employee Costs 871 776 12.2 829 5.0 3,316 3,008 10.2 % sales 4.1 3.2 4.4 4.2 3.6 Other Exps. 498 419 18.8 454 9.7 1,883 2,111 (10.8) % sales 2.3 1.7 2.4 2.4 2.5 Total Expenditures 19,653 22,432 (12.4) 17,294 13.6 72,069 75,875 (5.0) EBITDA 1,742 2,090 (16.7) 1,741 0.0 6,852 7,377 (7.1) EBITDA margin (%) 8.1 8.5 (38.2) 9.1 (100.5) 8.7 8.9 (17.9) Depreciation 276 275 0.6 284 (2.8) 1,121 1,100 1.9 Interest 1,022 1,307 (21.8) 1,009 1.3 3,957 5,089 (22.2) Other Income 471 768 (38.7) 395 19.3 1,401 2,240 (37.5) Exceptional Items (473) (203) (78) (503) (203) PBT 440 1,072 (58.9) 764 (42.4) 2,672 3,225 (17.2) Tax (197) 210 (193.5) 181 (208.5) 417 823 (49.4) % PBT 30 19.6 23.7 15.6 25.5 PAT 637 862 (26.1) 583 9.2 2,255 2,402 (6.1) Net Margin (%) 3.0 3.5 3.1 2.9 2.9 Source: Company, RSec Research Exhibit 2: Revised v/s Old Estimates FY18E FY19E Old Revised % change Old Revised % change Sales 88,302 85,296 (3.4) 95,285 92,131 (3.3) EBITDA 8,166 7,603 (6.9) 8,907 8,396 (5.7) EBITDA margins (%) 9.2 8.9 9.3 9.1 Interest Cost 4,008 3,637 (9.3) 3,894 3,635 (6.7) PAT 2,852 2,923 2.5 3,310 3,460 4.5 EPS (Rs) 5.1 5.3 2.5 6.0 6.2 4.5 Source: RSec Research 3

Profit & Loss Income 83,252 78,921 85,296 92,131 % yoy growth 0.3 (5.2) 8.1 8.0 Operting Expenses 75,878 72,069 77,693 83,734 EBITDA 7,374 6,852 7,603 8,396 EBITDA Margin (%) 8.9 8.7 8.9 9.1 Depreciation & Amortization 1,100 1,121 1,201 1,292 Interest 5,076 3,957 3,637 3,635 Other Income 1,965 1,401 1,471 1,544 Exceptional Item (203) (503) - - PBT 2,960 2,672 4,236 5,014 Tax 731 417 1,313 1,554 % Tax 24.7 15.6 31.0 31.0 Net Profit- Reported 2,228 2,255 2,923 3,460 YoY Growth (%) 99.3 1.2 29.6 18.4 Net Profit- Adjusted 2,228 2,255 2,923 3,460 Net Profit Margin (%) 2.7 2.9 3.4 3.8 Balance Sheet Equities and Liabilities Share Capital 1,112 1,112 1,112 1,112 Reserves & Surplus 32,976 34,965 37,487 40,413 Total Shareholder's funds 34,088 36,076 38,599 41,525 LT Borrowings 1,020 91 100 105 Deferred Tax Liability (net) - 31 - - Other LT Liabilities 497 755 764 825 LT Provisions 228 268 271 293 Total NC Liabilities 35,833 37,221 39,734 42,749 ST Borrowings 17,166 15,283 16,283 15,283 Trade Payables 21,229 28,681 29,042 31,379 Other Current Liabilities 19,725 9,559 9,679 10,458 ST Provisions 492 69 70 75 Total Current Liabilities 58,612 53,591 55,074 57,194 Total Liabilities 94,445 90,812 94,808 99,943 Assets Gross Block 12,682 13,542 14,542 15,642 Less: Accumulated Dep. / Amort. 6,484 7,620 8,821 10,112 Net Block 6,197 5,922 5,721 5,530 CWIP 76 13 13 13 Total Fixed Assets 6,274 5,935 5,734 5,542 NC Investments 10,311 10,768 10,311 10,311 Deferred Tax Assets (Rs) 208 1,342 1,342 1,342 LT Loans & Advances 1,055 - - - Other NC Assets 1,174 6,178 6,256 6,759 Total NC Assets 12,748 18,289 17,909 18,413 Current Investment 2 - - - Inventories 16,568 15,258 15,451 16,693 Trade Receivables 13,245 15,750 15,949 17,232 Cash and Bank Balances 2,158 1,105 4,856 4,345 ST Loans and Advances 27,420 5,861 5,935 6,412 Other Current Assets 16,030 28,615 28,975 31,306 Total Current Assets 75,423 66,588 71,165 75,988 Total Assets 94,445 90,812 94,808 99,943 4

Cash Flow Statement PBT 2,960 2,672 4,236 5,014 Depreciation 1,100 1,135 1,201 1,292 Finance Cost 5,076 3,957 3,637 3,635 Others (1,157) - - - Op. Profit before WC Changes 7,978 7,764 9,074 9,941 Net Change in Working Capital (2,141) 989 (408) (2,634) Tax (957) (1,520) (1,344) (1,554) Net Cash from Operating Activities 4,880 7,233 7,322 5,753 Capex (1,061) (796) (1,000) (1,100) Sale / (Purchase) of Investments 1,051 (455) 457 - Others 3,668 - - - Net Cash used in Investing Activities 3,658 (1,251) (543) (1,100) Proceeds / (Repayment) of Loans (Net) (1,116) (2,812) 1,009 (995) Finance Cost (5,746) (3,957) (3,637) (3,635) Dividend and Tax thereon (268) (267) (400) (534) Net Cash used in Financing Activities (7,130) (7,035) (3,028) (5,164) Net Increase/ (Decrease) in Cash 1,409 (1,054) 3,751 (511) Cash at Beginning of the Year 710 2,118 1,065 4,816 Cash at End of the Year 2,118 1,065 4,816 4,305 Other Balance as per the BS 40 40 40 40 Cl. Cash balance at B/S 2,158 1,105 4,856 4,345 Key Ratio Valuation Ratio (x) P/E 20.7 20.5 15.8 13.3 P/CEPS 13.9 13.7 11.2 9.7 P/BV 1.4 1.3 1.2 1.1 EV/EBIDTA 8.5 8.9 7.6 6.9 EV/Sales 0.8 0.8 0.7 0.6 Dividend Payout (%) 15.0 9.9 11.4 12.9 Dividend Yield (%) 0.7 0.5 0.7 1.0 Per Share Data (Rs) EPS (Basic) 4.0 4.1 5.3 6.2 EPS (Diluted) 4.0 4.1 5.3 6.2 CEPS 6.0 6.1 7.4 8.5 DPS 0.6 0.4 0.6 0.8 Book Value 61 65 69 75 Returns (%) RoCE 15.1 12.4 14.4 15.1 RoE 6.7 6.4 7.8 8.6 Turnover ratios (x) Asset Turnover (Gross block) 6.6 5.8 5.9 5.9 Inventory (days) 73 69 69 69 Receivables (days) 58 71 71 71 Payables (days) 93 129 129 129 WCC (days) 38 10 10 10 Solvency ratios (x) D/E (x) 0.49 0.4 0.3 0.3 Current Ratio (x) 0.8 0.6 0.6 0.6 5

Rating Guides Rating Expected absolute returns (%) over 12 months >10% HOLD -5% to 10% REDUCE >-5% Reliance Securities Limited (RSL), the broking arm of Reliance Capital is one of the India s leading retail broking houses. Reliance Capital is amongst India s leading and most valuable financial services companies in the private sector. Reliance Capital has interests in asset management and mutual funds, life and general insurance, commercial finance, equities and commodities broking, wealth management services, distribution of financial products, private equity, asset reconstruction, proprietary investments and other activities in financial services. The list of associates of RSL is available on the website www.reliancecapital.co.in. RSL is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014 General Disclaimers: This Research Report (hereinafter called Report ) is prepared and distributed by RSL for information purposes only. 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