Initiating coverage | Infrastructure

November 16, 2015

National Buildings Construction Corporation

BUY

CMP

`893

New Opportunities to unearth growth potential

Target Price

`1,089

National Building Construction Corporation (NBCC) a ‘Navratna’ company, is

Investment Period

12 Months

one of the largest Public Sector Enterprises (PSEs) in the construction space. Its

Project Management Contract (PMC) division (~85% of FY2015 revenues) is a

Stock Info

cash cow business, which gets large orders on nomination basis and enjoys a

Sector

Infrastructure

negative working capital cycle.

Market Cap (` cr)

10,721

Huge opportunities in the pipeline…

Net debt (` cr)

(1,067)

NBCC reported an order book of `30,000cr as of 2QFY2016-end, reflecting 5.8x

Beta

1.5

last twelve month (LTM) revenues. Of the `30,000cr order book, the PMC

52 Week High / Low

1215/683

segment accounted for a major 92% (includes ~`3,500cr Kidwainagar re-

Avg. Daily Volume

69,293

development project), whereas the remaining is from Real Estate (5%) and EPC

Face Value (`)

(3%) segments. Considering the emerging bid pipeline for re-development works

from Delhi and other State governments, and with ‘Smart City’ projects to take-off

BSE Sensex

25,611

shortly, we expect NBCC’s order book to grow 2-fold during 1HFY2016-18E to

Nifty

7,762

`59,440cr.

Reuters Code

NATO.BO

Revenues and PAT to report 26.7% & 32.7% CAGR during FY2015-18E

Bloomberg Code

NBCC@IN

We expect NBCC to report a 26.7% revenue CAGR during FY2015-18E (to

`9,506cr), mainly driven by an estimated 29.3% revenue CAGR from the PMC

Shareholding Pattern (%)

segment, where re-development projects would contribute the maximum. We

Promoters

90.0

expect NBCC to report 41.5% EBITDA CAGR during the same period, led by

increased contribution from the PMC segment, which is likely to experience

MF / Banks / Indian Fls

1.0

margin expansion (PMC segment’s EBIT margin to expand from 7.3% in FY2015

FII / NRIs / OCBs

2.5

to 8.9% in FY2018E). Owing to lower other income growth assumption, we expect

Indian Public / Others

6.5

NBCC to report a 32.7% PAT CAGR during FY2015-18E to `653cr.

Long term story; recommend BUY…

Abs. (%)

3m 1yr 3yr

We have a strong positive view on NBCC, given its growth prospects as reflected

by its strong order book of `30,000cr (5.8x LTM revenues). Also, emerging

Sensex

(8.8)

(8.7)

38.6

opportunities in the re-development space, government’s initiative of developing

NBCC

(12.7)

15.5

480.7

‘Smart Cities’, and the company’s cash rich status, should aid its growth. Given

the bid pipeline and huge order book, we are convinced about the strong

3 year price chart

earnings growth potential of the company for the next few years. Accordingly, we have

1,400

conservatively assigned 20.0x P/E multiple to our FY2018E EPS of `54/share; we

1,200

1,000

arrive at a price target of `1,089. Given the 22% upside potential in the stock from

800

the current level, we initiate coverage on the stock with a Buy recommendation.

600

400

Key Financials (Consolidated)

200

Y/E March (` cr)

FY2014

FY2015

FY2016E

FY2017E

FY2018E

Net Sales

4,070

4,674

5,816

7,382

9,506

% chg

14.8

24.4

26.9

28.8

Net Profit

257

278

355

478

653

% chg

8.1

27.6

34.6

36.7

Source: Company, Angel Research

EBITDA (%)

5.9

6.2

6.9

7.7

8.6

EPS (`)

P/E (x)

41.6

38.5

30.2

22.4

16.4

P/BV (x)

9.4

8.0

6.7

5.4

4.3

RoE (%)

22.6

22.5

24.1

26.7

29.1

RoCE (%)

36.2

39.3

42.3

45.2

47.5

Yellapu Santosh

EV/Sales (x)

2.3

2.1

1.6

1.2

0.9

022 - 3935 7800 Ext: 6811

EV/EBITDA (x)

39.5

33.0

22.5

15.4

10.2

[email protected]

Source: Company, Angel Research; Note: CMP as of November 13, 2015

Please refer to important disclosures at the end of this report

Initiating coverage | NBCC

Investment Arguments

NBCC to gain from redevelopment opportunity in Delhi

Delhi houses commercial office and residential quarters of various government

bodies and entities. Notably, most of these government buildings constructed are

over 40 years old. Given the infrastructure bottlenecks (such as, increased

congestion, growing traffic and requirement for more office space in key localities)

faced by

30 government colonies (Commercial+Residential) spread across

~1,190 hectares in Delhi, there exists potential for re-development. These 30

redevelopment projects, in our view, are an opportunity size north of

~`100,000cr, which could come up for awarding in the next 5-7 years.

Exhibit 1: Details of Government colonies to be redeveloped in Delhi

30 re-development projects in Delhi,

Colonies to be re-developed

Comments

with opportunity north of ~`100,000cr,

TPC- `3,500cr; Covers 86 acres and is expected to start

would come up for awarding in the next

East Kidwai Nagar

in 2HFY2016 and complete in 4 years there-on

5-7 years.

Govt. has allocated these 3 colonies to Central Public

Sarojini Nagar

Works Dept. (CPWD); Cabinet approval is pending;

Srinivaspuri

NBCC expects to get the project from CPWD soon; TPC

of these 3 projects would be in the range of ~`7,000-

Mohammadpur, South Delhi

8,000cr

TPC- `12,000cr; 75 acres project to be executed over the

Karkardooma, East Delhi

next 3-4 years; Engineering Work already started. In the

process of selecting architect and engineering companies

TPC- `2,000cr; Spread across 25 acres, this project in

Sanjay Lake, Trilokpuri, East

our view would be executed in the next 2-3 years;

Delhi

Engineering Work has been started. In the process of

selecting architect and engineering companies

Ramakrishnapuram (R K Puram)

Netaji Nagar

TPC- `12,000cr; Cabinet approval is pending; Awarding

Kasturba Nagar

at advanced stages; NBCC expects these 3 projects to be

awarded by 4QFY2016;

Thyagraj Nagar

Laxmibai Nagar

Netaji Nagar

Lodhi Road

West Kidwai Nagar

New Moti Bagh

Source: Company, Angel Research, Media Articles

Post successful completion of Old Moti Bagh re-development project, the

government has started working on re-development works of ~15 colonies across

Delhi. Notably, of these 15 colonies, ~10 are either awarded or are close to

getting awarded. The total cost of these projects is north of `50,000cr.

10 Re-development projects valued at

Following Delhi government’s re-development model, Orissa, Madhya Pradesh,

over `50,000cr are either awarded or

West Bengal and Rajasthan governments have started exploring re-development

are close to getting awarded.

potential across their states. For re-development works, NBCC has formed a JV

with Rajasthan State Government, while it is in discussion with Orissa government

to re-develop 2 properties spread across 100 acres each. Further, discussions are

on with Madhya Pradesh and West Bengal governments to re-develop properties

spread across 20-30 acres each. On the whole, we expect opportunities in the re-

development space to grow multi-fold in the years to come.

November 16, 2015

Initiating coverage | NBCC

We are of the view that NBCC is well positioned to gain substantially from the

opportunities emerging in the government re-development projects space. This

would be on account of following factors (1) NBCC is notified as a Public Works

Organization (PWO) covered under revised Rule 126 [2] of GFRs, as per which

Government Department(s)/ PSUs and Autonomous Bodies award work to NBCC

on nomination basis, and (2) NBCC is the only PSU with a long execution track

record of developing/ re-developing/ selling government real estate properties.

Exploring opportunities from ‘Smart Cities’ space…

To benefit from government’s

100

NBCC is currently exploring potential opportunities emerging from 100 Smart

Smart Cities & AMRUT Scheme

Cities & Atal Mission for Rejuvenation & Urban Transformation (AMRUT) scheme

announced by the Ministry of Urban Development (MoUD).

Exhibit 2: 98 Smart Cities Identified by the Government

Smart Cities

Port Blair

Hubballi-Dharwad

Ludhiana

Allahabad

Vishakhapatnam

Tumakuru

Jalandhar

Lucknow

Tirupati

Davanegere

Amritsar

Varanasi

Kakinada

Kochi

Jaipur

Ghaziabad

Pasighat

Kavaratti

Udaipur

Agra

Guwahati

Bhopal

Kota

Rampur

Muzaffarpur

Indore

Ajmer

Dehradun

Bhagalpur

Jabalpur

Namchi

New Town Kolkatta

Biharsharif

Gwalior

Tiruchirapalli

Biddhannagar

Chandigarh

Sagar

Tirunelveli

Durgapur

Raipur

Satna

Dindigul

Haldia

Bilaspur

Ujjain

Thanjavur

Aligarh

Diu

Navi Mumbai

Tiruppur

Saharanpur

Silvassa

Nashik

Salem

Bareilly

New Delhi Municipal Council

Thane

Vellore

Jhansi

Panaji

Greater Mumbai

Coimbatore

Kanpur

Gandhinagar

Amravati

Madurai

Aizawal

Ahmedabad

Solapur

Erode

Kohima

Surat

Nagpur

Thoothukudi

Bhubaneshwar

Vadodara

Kalyan-Dombivali

Chennai

Rourkela

Rajkot

Aurangabad

Greater Hyderabad

Oulgaret

Dahod

Pune

Greater Warangal

Dharamshala

Karnal

Imphal

Agartala

Ranchi

Faridabad

Shillong

Moradabad

Mangaluru

Belagavi

Shivamogga

Source: Company, Angel Research, Ministry of Urban Development

`48,000cr has been earmarked by the

government for “100 Smart Cities”

Scheme, to be invested over the next

5 years. Although the design and

development framework for ‘Smart Cities’ in India is at an early stage, we expect

execution to pick-up once requisite approvals are in place and issues pertaining to

financing are addressed. We expect awarding in the ‘Smart Cities’ Scheme to start

in 1HFY2017E.

November 16, 2015

Initiating coverage | NBCC

Gearing up to the emerging opportunities and strengthening its position, NBCC

has already entered into 3 MoUs/ JVs, ie (1) with CDBIH, Malaysia (to gain access

to new technologies, which would be helpful in the development of smart cities),

(2) with IBM (to work on smart cities), and (3) with a Korean Company (to work on

Smart Cities).

Exhibit 3: NBCC’s scope of works in a Smart City

NBCC's prior experience-

Yes/ No

Transportation Projects

Yes

Power Generation/ Transmission Projects

Yes

Integrated Water Management

Yes

Solid Waste Management

Yes

Multimodal Logistics Parks

Yes

Telecommunications

Water Supply Distribution/ Sewerage & Storm Water Drainage

Yes

Solar Power Projects

Yes

Recycling of Waste for Industrial Use

Yes

Business Parks/ Industrial Parks/ Warehousing and Distribution

Yes

Telemedicine/ Telehealth/ Hospitals & Medical Centres

Yes

Eco Logistics System

Yes

Source: Company, Angel Research

NBCC is amongst the few Indian

NBCC has worked either individually or through the JV route on all the key areas

companies to have experience on all

integral to develop a Smart City (except Telecommunications). It therefore stands a

the key areas integral to develop a

fair chance to get a good chunk of the orders awarded from FY2017E onwards.

Smart City (except Telecommunications)

Our view of the company enjoying a strong market positioning also stems from the

fact that the company is the only listed player which has executed large scale re-

development projects on the ‘Smart City’ guidelines. NBCC executed the 105 acre

Moti Bagh redevelopment colony on the ‘Smart City’ lines in 2012. Successful

execution of works across Waste Water Management, Solar Heating & Lighting,

and Rain Water Harvesting in the past should help the company understand the

‘Smart City’ execution dynamics very well. In order to further gain experience,

NBCC is negotiating with MoUD to deploy Wi-Fi, Fibre-to-Home concept, 6-layer

Security, IP TV, Smart Energy, Smart Electricity, Parallel policing, IP Security,

Emergency Response, Periphery Security, and Integrated Building Management

System. On these lines, the company is working on upgrading the Moti Bagh

colony. Also, NBCC has set-up a separate 5-6 member internal team, which is

constantly interacting with respective state government authorities to work on the

‘Smart City’ projects.

NBCC has signed Memorandum of Understanding (MoU) with Delhi Development

Authority (DDA) to develop the first smart sub-city at Karkardooma, East Delhi. The

first phase of this project is spread across 30 of the total 75 hectacres, and is

Company working on the Karkardooma

expected to be executed in the next 36 months. This is India’s first Transit Oriented

project, which is India’s first Transit

Development (ToD) project, which aims to promote access to amenities within

Oriented Development project. This

walking distance, thereby de-congesting city roads and ensuring a cleaner

gives it an early mover advantage for

environment.

the upcoming ‘Smart Cities’ Scheme.

Taking into consideration, (1) the company’s early mover advantage in the ‘Smart

City’ projects segment, (2) tie-ups with international players to strengthen its range

November 16, 2015

Initiating coverage | NBCC

of offerings, (3) execution track record of re-development works, (4) past track

record of having worked with state governments across the country, and

(5)

Management’s optimistic guidance of winning

12-15 ‘Smart City’ projects

(indicating 15% market share), we expect a huge spurt in NBCC’s order book,

going forward.

Entry in Omanese markets to support growth…

In order to de-risk its business model geographically and identify new areas of

growth, NBCC has started exploring international markets, mainly in the Middle

East region. As a first step, NBCC has tied-up with Al Naba Services LLC, Oman,

to form “NBCC Gulf LLC”. NBCC has 70% stake in the newly formed entity, with

the remaining 30% being held by Al Naba Services LLC. This newly formed entity

will carry out commercial construction of buildings, roads, airport, harbour, water

Entry into Oman to support future

sewerage, and electricity network in Oman. NBCC has already opened its local

growth…

office in Oman. The Management sounded optimistic towards the company

reporting order wins from Oman, from 2HFY2016E onwards.

New Avenues to contribute to Order Book growth…

In addition to opportunities emerging from re-development works of government

colonies and development of ‘Smart Cities’, NBCC is also exploring other avenues

to grow its order book. These include (1) re-development works for NAWADCO,

the Waqf Board (MoU already signed), (2) development/ re-development of land

bank at Railways, Air India and other ailing sick units.

NBCC has already bagged its first development project from Gulistan Shadi

Mahal, MasjideMavalli, and Dargah Hazrat Attaullah Shah, all 3 from Bangalore;

and Takiya Chand Shah, Jodhpur (Waqf Board) across 4 locations worth `398cr.

The Management guided that it expects more orders from Waqf board, going

forward.

NBCC signed a MoU with Air India to develop its land parcel. Modalities of how

Re-development opportunity emerging

the execution would be done are being worked upon. Air India could possibly

from Waqf Board, Indian Railways, Air

explore development/ re-development of following properties in the near-term: (1)

India and Sick PSUs gives improved

3.5 acre land parcel at Baba Kharak Singh Marg, New Delhi

(2)

1.3 acre

visibility on the growth prospects…

commercial plot in Anna Salai, Chennai, and (3) 3 lakh sq ft of Air India office

space at Nariman Point, Mumbai, amongst others.

Currently, there are ~65 sick Public Sector Undertakings (PSUs) in India (as of

March 31, 2015). NBCC is negotiating with the government to develop/re-develop

the idle lying land parcels of all these sick units. Following are some of the sick

units, where NBCC could be exploring land parcels for development- Bharat

Yantra Nigam Ltd, Bharat Ophthalmic Glass Ltd, STCL Ltd, Bihar Drugs & Organic

Chemicals Ltd, Indian Oil Technologies Ltd, Brushware Ltd, Pyrites Phosphastes &

Chemicals Ltd, National Instruments Ltd and Bharat Yantra Nigam Ltd.

On the whole, NBCC’s strategy to focus on identifying new growth avenues, such

as exploring to work with sick units/ Air India/ Indian Railways/ Waqf Boards is in

the right direction.

November 16, 2015

Initiating coverage | NBCC

Real Estate business with land parcels spread across India

NBCC diversified its business model by entering the Real Estate space. Here, the

company has followed a different business model, ie focus on quicker construction

and faster sales. This differentiates NBCC from other peers, which tend to hold the

land parcels for longer duration and execute entire projects over a 5-7 year cycle.

NBCC usually buys land from state governments, local municipal bodies and other

government entities. It currently has a land bank of over 178 acres (with total land

cost at `600cr) well spread across Tier I and II cities, like, Delhi, Gurgaon, Jaipur,

Kochi, Kolkata, Ahmedabad, Lucknow, Bhubaneshwar, Patna, Alwar, Faridabad,

Coimbatore, Ghazaibad and Naya Raipur. The Management highlighted that this

land bank has potential saleable area of ~1.4cr sq ft. (with over 1.0cr of unsold

inventory).

Among the few players in Real Estate

NBCC’s Management highlighted that it targets revenue contribution from Real

space to pursue Asset light business

Estate segment to reach ~20% levels in the long run (vs the current 16-17% levels).

model…

Asset light business to support future growth…

NBCC’s business model in recent years has evolved from being highly dependent

on the EPC business to diversifying across various types of Real Estate models.

These Real Estate models are reported under segment heads - Real Estate (share to

consolidated revenues increased from 2.9% in FY2012 to 11.0% in FY2015) and

PMC (captures re-development works; share to consolidated revenues increased

5.4% in FY2012 to 84.6% in FY2015).

Exhibit 4: Types of Real Estate Business models followed by NBCC

Possible Areas of Differentiation

Project

Reported

Upfront

Approval

Possibility of

Risks exposed

Margins

Model

Under

Investment

Delays

Realization Growth

Land

30-50% of project cost is

Potential to gain

Exposed to Execution as

Land Bank

Possibility for delays

Real Estate

Acquisition

locked-in towards the

from realization

well as Marketing risks

Model

exist

Cost

project

growth

@ 10% margins on final

project cost (includes

Exposed to only

construction and

Low, as approvals

Least, as sale

Marketing risks. Sale is

Re-development

development costs,

are taken by

PMC

Nil

happens on pre-

on 30 yrs. lease and not

Model

excludes land cost); plus

Consultants (NBCC

notified prices

additional 1-2%

appointed)

outright basis.

marketing fees on sale

value

Source: Company, Angel Research;

Real Estate and re-development works have seen strong order inflows in the recent

quarters on the back of favorable government announcements. Order inflow

growth in recent quarters has been mainly driven by re-development project order

wins. These re-development projects are basically premised on joint development

agreements (JDAs) with government bodies. As per JDA, the respective government

body contributes land to the project (not an outright sale, but on 30 years lease)

and NBCC brings its expertise towards the construction and marketing of the

project. Here, NBCC gets a flat fixed margin of 10% of the project value as a fee

towards project execution and 1-2% as marketing fee on the sale value. We view

November 16, 2015

Initiating coverage | NBCC

this business model to be favourable and asset light in nature in comparison to the

traditional land banking model, where the capital invested gets blocked over the

entire life cycle of the project. This asset light business model is better as more

projects get executed with minimal capital deployed. This also de-risks the

company from excessive dependence on any one project.

Exhibit 5: Order Book Mix (%) as of 2QFY2016

Exhibit 6: FY2015 Consol. Revenue mix (%)

Real Estate

EPC

PMC (inc. Redevelopment works)

Real Estate

EPC

PMC (inc. Redevelopment works)

Source: Company, Angel Research

NBCC executed its first re-development project at East Kidwainagar, Delhi where

NBCC was asked to put ~`200cr seed money towards the project with assured

15% p.a. returns. At the time of starting the project NBCC invested ~`90cr. Given

the project mix attractiveness and its location advantage, the project got sold within

3-4 months of the launch. As a result, NBCC was able to make 15% p.a. returns

on its ~`200cr of investments.

Order Book to grow 2-fold, gives strong revenue visibility

Order book to grow over 2-fold during

NBCC’s order book has grown at 17% CAGR during FY2010-15, mainly reflecting

1HFY2016-18E to `59,505cr…

almost doubling of the yearly order inflows (to ~`6,200cr in FY2015). Surge in the

order inflow numbers during the same period is mainly on account of development

project wins (shown under the PMC segment). Going forward, we expect the order

book to grow 2-fold during 1HFY2016-18, mainly on account of huge order wins

from re-development work and Smart City orders. NBCC at 2QFY2016-end is

sitting on an order book of `30,000cr, reflecting order book/ LTM revenues of

5.8x, which is impressive.

November 16, 2015

Initiating coverage | NBCC

Exhibit 7: Order Inflows & yoy growth

Exhibit 8: Order Book (OB) & OB/ LTM ratio

30,000

27,399

400

70,000

7.8

350

59,505

60,000

25,000

342.3

300

7.7

49,376

7.4

19,500

50,000

250

20,000

18,050

4.8

4.9

38,640

200

40,000

15,000

150

82.7

3.4

30,000

4.7

100

10,000

28.7

7,188

7,273

17,000

6,194

8.0

20,000

15,427

12,163

3,934

8,162

5,000

10,000

1.2

(14.8)

(50)

(34.1)

(100)

FY2012

FY2013

FY2014

FY2015 FY2016E FY2017E FY2018E

FY2012

FY2013

FY2014

FY2015

FY2016E FY2017E FY2018E

Order Inflows (` cr)

yoy change (%)

Order Book (` cr)

OB/ LTM (x)

Source: Company, Angel Research

Expect 26.7% revenue CAGR during FY2015-18E

We expect NBCC to report 26.7% revenue CAGR during FY2015-18E to `9,506cr,

mainly driven by 29.3% revenue CAGR from PMC segment, where re-development

projects would contribute the maximum. EPC and Real Estate segments would

restrict the overall growth of the company. EPC segment revenues are expected to

grow at 17.3% CAGR on a lower FY2015 base to `334cr. Further, we expect the

Real Estate business to remain flattish in FY2016E and gradually pick-up from

FY2017E onwards. We expect the Real Estate segment to report 9.1% revenue

CAGR during FY2015-18E.

As highlighted, our expectation of 29.3% PMC segment revenue CAGR captures

2QFY2016 order backlog of `27,500cr and strong re-development projects bid-

pipeline of `10,000cr.

PAT to report 32.7% CAGR during FY2015-18E

Led by the huge Order book, we expect

Till FY2015, NBCC was getting ~81% of its revenues from PMC projects. Notably

NBCC to report 26.7% and 32.7% top-

revenue contribution from the re-development segments was insignificant.

line & bottom-line CAGR, respectively,

However, considering the recent order wins and the emerging bid pipeline, we are

during FY2015-18E…

optimistic that the revenue contribution from re-development projects vis-a-vis PMC

segment revenues and as a proportion of overall revenues would catch up.

Given the ‘fixed 10% margins + 1-2% marketing fees’ format being followed by

NBCC towards redevelopment of Government colonies, we expect PMC segment’s

gross margins to improve, going forward. These development projects in our view

are accruing at least 200-300bp higher margins than other contracts executed

under the PMC segment. With a shift in the PMC segment’s order book, we expect

segment level EBIT margins to improve by ~150bp during FY2015-18E.

We expect EBITDA of the company to report 41.5% CAGR during FY2015-18E,

mainly driven by increased contribution from PMC segment, which is likely to

experience sharp margin expansion. We expect PMC segment’s EBIT margins to

expand from 7.3% in FY2015 to 8.9% in FY2018E.

We expect NBCC to report 32.7% PAT CAGR during FY2015-18E to `653cr, after

factoring in lower other income assumption. Our lower other income assumption

November 16, 2015

Initiating coverage | NBCC

captures our conservative stance that re-development projects executed would

fetch lower/zero interest on advances made.

Company to gain from limited competition

NBCC is notified as a Public Works Organization under the revised Rule 126 (2) of

General Financial Rules (GFR), by virtue of which, government department(s), PSUs

and autonomous bodies can award works on nomination basis. Also, NBCC has

been designated as implementing agency for Jawaharlal Nehru National Urban

Preferred and nominated by various

Renewal Mission (JNNURM), Pradhan Mantri Gram Sadak Yojna (PMGSY), Solid

Ministries/ PSUs/ Government entities

Waste Management (SWM) and other developmental work schemes in the North

over other private players…

Eastern Region.

NBCC has a strong track record of developing government buildings and re-

development of government colonies. Considering entry barriers for competition,

the company’s fast growing market share, and the preferential nomination it gets

from government clients, we are optimistic that the company should continue to

post robust growth, going forward.

We are of the view that various ministries prefer working with NBCC and not with

private players owing to:

a) Cost escalation issues with private players

b) Avoid concerns over the due diligence process

c) Safeguard themselves by delegating the accountability part to NBCC

d) Avoid the scrutiny of government authorities such as CAG, CBI

Healthy Return Ratios…

NBCC undertakes Project Management & Consultancy works for Government

departments/ PSUs for various types of projects. Once a project is signed, NBCC

Cash rich Balance sheet status…

gets 10-25% of the total project cost as upfront advance, on which it earns interest.

potential to generate strong cash flow

Further, the company closely monitors construction progress, gets work certified;

from operations…helps it generate

and on attaining the respective milestone, makes payment to contractors. Hence,

healthy RoEs of over 20%

we are comforted that PMC contracts (contributed ~85% of FY2015 revenues)

require minimal capital investment, and have the potential to generate higher

return ratios.

November 16, 2015

Initiating coverage | NBCC

Understanding the Business Model

Project Management Consultancy to drive growth…

The PMC business is the largest segment contributor for NBCC (~85% of FY2015

sales and ~73% of FY2015 EBIT). NBCC is a notified Public Work Organization

under revised Rule 126 (2) of General Financial Rules (GFR), which positions it to

get projects on nomination basis by various Ministries, government bodies and

other PSUs. We are of the view that most government organisations are not well

equipped to handle Project Management Works of a civil project. Being 90% held

by the Government of India (GOI), NBCC fits into this need of government bodies

and plays the role of a third-party project manager, which co-ordinates between

the awarding government bodies and the contractors.

Exhibit 11: Advances from Clients & Earnest Deposits as % of Sales

2,000

60%

51.8%

1,800

50%

1,600

43.8%

46.3%

38.4%

1,400

40%

1,200

35.4%

1,000

30%

800

20%

600

400

10%

200

FY2011

FY2012

FY2013

FY2014

FY2015

Adv. from Clients & Earnest Deposits (` in cr)

As % of sales

Source: Company, Angel Research

The Management indicated that a major 70-80% of the orders it wins are on direct

nomination basis and face very little competition. As a result, NBCC enjoys better

terms and conditions, which result in better operating margins. This when coupled

with the point that NBCC commands 10-25% of the total project cost as advance

amount from the client, indicates how well the company is positioned to manage

its cash flows. Given that no cash gets deployed in to business, coupled with the

advances received from clients, positions NBCC as an asset light player, with

potential to generate high return ratios (reflected in its financials).

Management bullish on Real Estate development business…

The Real estate business involves development of residential and commercial

projects on Government/ PSU land bank, through the joint development or land

bank development model. NBCC has 178 acres of land parcel spread across

Delhi, Gurgaon, Kolkata, Kochi, Alwar, Meerut, Ghaziabad, Faridabad, Lucknow,

and Patna, amongst other cities. Its Real Estate business contributed ~11% of

FY2015 sales and ~28% of FY2015 EBIT.

NBCC’s Management highlighted that the company would pursue Real Estate

business by being selective on acquiring land parcels either individually or through

the JV model. In the near term, the company is exploring alternatives to buy 1/2

November 16, 2015

Initiating coverage | NBCC

Slum Rehabilitation related land packages. The company’s Management expects

this segment to report strong growth, going forward.

As a strategy, the Management has made its intent clear that rather than

depending on debt, it would re-deploy the profits generated back into the business

to purchase land parcels.

As a strategy to avoid purchasing land banks with high value (mainly in Tier I

cities), NBCC has shifted its focus on Tier II and III cities. As a result, purchase of

land parcels is resulting in less capital outflow. Also, NBCC’s Management claims

that being a government company, it has an edge in being able to procure land at

cheaper rates from various state and central governments and also get faster

approvals. The Management claims that this puts NBCC in an advantageous

position to launch and scale projects quickly at attractive rates (usually 7-12% less

than the competition; ie from private developers). Such attractive pricing strategy

and faster churn translate into large upfront sales (in some projects, owing to high

demand, the company had to depend on lottery-based mechanism) for the

company. Also, the faster churn translates to minimal cash requirement for project

execution, as well as lowering the risk of unsold inventory.

EPC business to gain traction…

NBCC was incorporated 1960, as a pure play EPC company, where the scope of

works was to provide execution, engineering and construction services for projects

such as chimneys, cooling towers, various types of power plant works, and projects

from Sewerage & Water Treatment space. Over the years, the company has

diversified across other areas and its dependency on this segment has declined.

The EPC segment contributed ~4% of FY2015 sales. Growth across this segment

in the last few years has remained subdued. However, with government shifting its

priority towards infrastructure spending, we are optimistic that NBCC would gain

from here-on. The company as a diversification strategy has started looking at

politically stable Middle East countries for EPC business. As an entry strategy,

NBCC formed JV with a local player in Oman and expects to win an order in

2HFY2016E itself. Also, its ‘Navratna’ status gives flexibility for the company to

take investment decisions up to `1,000cr. Even though international revenues

contribute negligibly to the current business, the Management expects revenues

from the international business to contribute by ~5% in the long-run.

November 16, 2015

Initiating coverage | NBCC

Outlook & Valuation

Strong bid pipeline, huge order book,

NBCC during FY2011-13, reported an order book CAGR of 26%, whereas slower

growth in earnings profile, coupled with

execution translated to 14.1% PAT CAGR during FY2013-15.

strong balance sheet comforts us to

assign 20.0x FY2018E P/E multiple to

NBCC as of 2QFY2016 is sitting on a huge order book of `30,000cr. Considering

arrive at value of `1,089/share. Given

this and with an uptick in re-development projects (which draw higher margins vs

the upside, we initiate coverage on the

other contracts from the PMC segment), we are optimistic towards NBCC reporting

stock with a Buy recommendation…

strong growth. We expect the company to post 26.7% top-line and 32.7% bottom-

line CAGR during FY2015-18E to `9,506cr and `653cr, respectively.

Exhibit 12: PE Band and financials

FY2011-13

FY2013-15

FY2015-18E

OB Growth - 26.0%

OB Growth - 18.2%

OB Growth - 51.8%

PAT Growth - 21.3%

PAT Growth - 14.1%

PAT Growth - 32.7%

Source: Company, Angel Research

Also NBCC is sitting on cash balance of `1,042cr (as of 1HFY2016-end), which

further gives comfort that growth would not get hindered due to unavailability of

capital, which has been the case for some of the other infra companies.

On considering the company’s cash rich status and strong potential to generate

further cash, we expect NBCC to report impressive FY2017/18E RoEs of 26.7%/

29.1%, respectively.

Exhibit 13: PE Band

Exhibit 14: One year forward avg. PE Band

1,400

1,200

1,000

800

600

400

200

Price

10x

18x

26x

34x

P/E (x)

Avg. P/E (x)

Source: Company, Angel Research

November 16, 2015

Initiating coverage | NBCC

At the current market price of `893/share, NBCC is trading at FY2017E and

FY2018E P/E multiple of 22.4x and 16.4x.

Given the strong bid pipeline, huge order book, strong earnings growth profile,

coupled with strong balance sheet comforts us to conservatively assign 20.0x

FY2018E P/E multiple to arrive at a business value of `1,089/share. Given the

upside the stock has from the current levels, we initiate coverage on the stock with

a BUY rating.

Risks to our Estimates

NBCC executes PMC or redevelopment projects which are mostly funded

and approved by the government. Government inaction may result in

execution delays and can negatively impact our growth estimates.

Slowdown in real estate demand can negatively impact our growth and

balance sheet estimates.

Currently, NBCC gets redevelopment projects on a nomination basis. Any

switch in awarding process through competitive bidding route could lower

our growth and margin estimates.

Any expansion in the equity base of the company through announcement of

a FPO could act as an overhang on the stock’s performance.

November 16, 2015

Initiating coverage | NBCC

Company Overview

National Buildings Construction Corporation (NBCC) is a Navratna PSU company

engaged in the business of Project Management Consultancy (PMC), Engineering

Procurement and Construction (EPC) and Real Estate development.

PMC business contributed ~85% of FY2015 sales and ~73% of FY2015 EBIT.

NBCC works on the entire project cycle, right from concept stage to commissioning

to civil construction works. NBCC gets PMC contracts on nomination basis, as it is

notified as Public Work Organization under revised Rule 126 (2) of General

Financial Rules (GFR).

The real estate business involves development of residential and commercial

projects on Government/ PSU land bank, through the joint development or land

bank development model. NBCC has 140+ acres of land parcel spread across

Delhi, Gurgaon, Kolkata, Kochi, Alwar, Meerut, Ghaziabad, Faridabad, Lucknow,

and Patna, amongst other cities. The Real Estate business contributed ~11% of

FY2015 sales and ~28% of FY2015 EBIT.

NBCC also undertakes EPC contracts, which involve civil works in the power BOP

space, and Sewerage & Water Treatment space. This segment contributed ~4% of

FY2015 sales.

As of 2QFY2016-end, NBCC had an order book of ~`30,000cr, which is 5.8x its

LTM revenues.

Employees

NBCC has strength of 2,047 regular employees, well led by a qualified and

proven Management team. Majorly, 1,100+ of them are engineers and ~1,000

are C&D workers.

Exhibit 15: Employee Split (functionality-wise)

Finance, 6%

Engineers, 46%

C&D Works,

42%

HR & Admin, 6%

Source: Company, Angel Research

November 16, 2015

Initiating coverage | NBCC

Exhibit 16: List of recently won Projects

Order won

Order Val.

Project details

during

(` in cr)

Construction of Trade Facilitation Centre and Crafts Museum at Varanasi, U.P.

2QFY2016

197

Re-development of Indian Institute of Public Administration (IIPA) campus at IP estate, New Delhi

2QFY2016

435

Development of Lake View Complex, on 25 acres DDA land at Trilokpuri, Delhi

1QFY2016

2,000

Construction of 2,400 seats Indoor Auditorium at Alipur, Kolkata

1QFY2016

418

Construct Medical College Campus & Upgrade Govt. Hospital at Bharatpur & Dungarpur, Rajasthan 1QFY2016

378

Develop 4 Waqf Board properties at Gulistan Shadi Mahal, Masjid-e-Mavalli, Dargah Hazrat

1QFY2016

398

Attaullah Shah (all 3 in Bangalore) and Takiya Chand Shah (in Jodhpur)

Develop 30 hectare land at East Delhi Hub, Karkardooma

4QFY2015

6,000

PMC business works from Indian Institute of Technology (IIT), Roorkee

4QFY2015

231

PMGSY works from Orissa

4QFY2015

1,237

Construction/ Improvement/ Maintenance of roads at Miao-Vijaynagar, Arunachal Pradesh

3QFY2015

1,850

Construct Engineering Core Lab, Research Complex (Phase-I) and retrofit Aerospace Engineering

3QFY2015

338

block Multi-storied building at IIT, Kanpur

Total Order Book (as of 2QFY2016)

30,000

Source: Company, Angel Research

November 16, 2015

Initiating coverage | NBCC

Profit and Loss Statement (Consolidated)

Y/E March (` cr)

FY14

FY15

FY16E

FY17E

FY18E

Net Sales

4,070

4,674

5,816

7,382

9,506

% Chg

14.8

24.4

26.9

28.8

Total Expenditure

3,831

4,386

5,416

6,816

8,689

Land & Materials Consumed

426

299

364

499

643

Work and Consultancy Expenses

3,169

3,835

4,734

5,921

7,564

Employee benefits Expense

182

195

248

308

378

Other Expenses

104

EBITDA

239

288

400

566

817

% Chg

20.8

38.8

41.5

44.3

EBIDTA %

5.9

6.2

6.9

7.7

8.6

Depreciation

EBIT

237

286

397

563

814

% Chg

20.5

38.9

41.8

44.5

Interest and Financial Charges

Other Income

134

147

155

169

172

PBT

349

393

507

683

933

Tax

115

152

205

280

% of PBT

26.3

29.2

30.0

PAT before Extraordinary item

257

278

355

478

653

Extraordinary item

PAT before Minority Interest

257

278

355

478

653

Minority Interest

Share of Profit/ (Loss) of Associates

PAT after MI, profit share from Associat.

257

278

355

478

653

% Chg

8.1

27.6

34.6

36.7

PAT %

6.3

6.0

6.1

6.5

6.9

November 16, 2015

Initiating coverage | NBCC

Balance Sheet (Consolidated)

Y/E March (` cr)

FY14

FY15

FY16E

FY17E

FY18E

Sources of Funds

Equity Capital

120

Reserves Total

1,021

1,218

1,485

1,860

2,391

Networth

1,141

1,338

1,605

1,980

2,511

Minority Interest

Total Debt

Long-term Liabilities

Total Liabilities

1,194

1,383

1,657

2,034

2,567

Application of Funds

Gross Block

Accumulated Depreciation

Net Block

Capital WIP

Investments

100

146

161

Goodwill

Current Assets

Inventories

1,020

1,173

1,274

1,604

2,140

Sundry Debtors

1,315

1,704

1,776

2,245

2,894

Cash and Bank Balance

1,201

1,067

1,571

1,839

2,221

Loans & Advances

515

612

685

926

1,125

Other Current Asset

Current Liabilities

3,013

3,381

3,877

4,813

6,054

Net Current Assets

1,047

1,192

1,451

1,828

2,360

Deferred Tax Asset

Total Assets

1,194

1,383

1,657

2,034

2,567

November 16, 2015

Initiating coverage | NBCC

Cash Flow Statement (Consolidated)

Y/E March (` cr)

FY14

FY15

FY16E

FY17E

FY18E

Profit before tax

334

391

507

683

933

Depreciation & Amortization Exp.

Other non-Cash Expenses

(122)

(158)

(171)

(177)

Change in Working Capital & Oth. Adj.

(619)

(342)

297

(61)

(97)

Cash Generated from Operations

(407)

(107)

648

454

661

Direct taxes paid

(32)

(47)

(165)

(220)

(298)

Net Cash Flow from Operations

(439)

(154)

483

234

363

(Inc)/ Dec in Fixed Assets

(7)

(1)

(4)

(3)

(Inc)/ Dec in Investments

718

(140)

(73)

(50)

(70)

(Inc)/ Dec in Other Investing Cash Flows

101

142

129

139

145

Cash Flow from Investing

818

(5)

Issue/ (Buy Back) of Equity

Inc./ (Dec.) in Loans

Dividend Paid (Incl. Tax)

(53)

(70)

(89)

(102)

(123)

Other Financing Cash Flows

Cash Flow from Financing

(53)

(70)

(89)

(102)

(123)

Inc./(Dec.) in Cash

327

(229)

449

218

312

Opening Cash balance & Oth. Adj.

569

896

667

1,116

1,334

Closing Cash balances

896

667

1,116

1,334

1,646

November 16, 2015

Initiating coverage | NBCC

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. Angel/analyst

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Disclosure of Interest Statement

NBCC

1. Analyst ownership of the stock

2. Angel and its Group companies ownership of the stock

3. Angel and its Group companies' Directors ownership of the stock

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Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15)

November 16, 2015