NBCC IPO Analysis

National Building Construction Corporation, a public sector undertaking under the Ministry of Urban Development (MoUD), Government of India, is engaged in the business of (i) project management consultancy (PMC) services for civil construction projects, (ii) civil infrastructure for power sector, and (iii) real estate development.

PMC for civil construction projects is the major business of the company, accounting about 90.8% and 97.4% of the total revenue in H1 of FY 2012 and FY 2011. On the other hand, the share of civil infrastructure for the power sector stood at 3.3% and 2.1%, respectively. The share of realty was at 6% and 0.5% in H1 of FY 2012 and FY 2011.



The PMC business of the company includes providing management and consultancy services to a range of civil construction projects including buildings including hospital buildings, infra projects including roads and water as well realty and redevelopment of buildings and colonies. On the other hand, civil infrastructure for the power sector segment includes providing engineering and construction services for power projects, including design and execution of civil and structural works for power projects, cooling towers, and chimneys.

The New Delhi headquartered company was incorporated in November 1960 and currently has 10 regional/ Zonal offices across India, with projects across 23 states and 1 Union Territory in India. In addition, the company has also undertaken projects overseas.

A substantial portion of orders is from government-owned or government-controlled entities, both central and state, especially in the commercial construction and housing sector. For instance, the major clients of the company's PMC business were ESIC, Ministry of Defense, Ministry of Home Affairs (including security forces like CRPF, CISF, NSG, BSF), Ministry of External Affairs, MoUD, Ministry of Commerce and Industry, Ministry of Corporate Affairs, Ministry of Finance, Haryana Urban Infrastructure Development Board, IIT Roorkee, IIT Kharagpur, IIT Patna, and SVNIT among others. Similarly, the company undertakes for NTPC, BHEL, APGENCO, MAHAGENCO, Uttar Pradesh Rajya Vidyut Utpadan Nigam, and Karnataka Power Corporation the civil and structural works on their power projects.

The company undertakes both residential as well as commercial projects and currently has project across 10 states. The company's land reserves as of January 31, 2012, aggregated to approximately 125.245 acre spread across Delhi, Ghaziabad, Uttar Pradesh, Patna, Gurgaon, Kolkata, Kochi, Alwar and Lucknow.

This initial public offer being offer for sale by the government of India, the company will not get any proceeds from the offer.

Strengths

Unexecuted order book (of PMC and power sector civil orders) of the company as of January 31, 2012 stood at Rs 10613.682 crore. Of this, 28.46% comprises hospitals, 30.33% infrastructure, 28.85% institutional construction, 9.67% commercial construction and 2.74% residential construction. The unexecuted order backlog includes the value of forthcoming orders worth Rs 3040.767 crore. Unexecuted order backlog of PMC vertical (ongoing projects) stood at Rs 7280.072 crore and that of the power sector stood at Rs 292.853 crore. The company expects to complete the order backlog in next 24-36 months, thereby giving strong revenue visibility. Moreover, the focus of company's PMC business is largely the buildings segment such as hospitals and educational institutes, and housing for military/paramilitary forces, where there is not much slowdown in order finalisation compared to other verticals of the construction industry. Though the construction space is getting crowded, it will not affect the company, which is a project management consultancy player involving design, packaging, getting approvals, tendering, and appointing sub-contractors.

Being a public sector undertaking under the MoUD, the company has the benefit of priority/ nomination business for the PMC business as well as real estate businesses. In case of PMC projects, the orders come mostly through nominations from old/prospective clients, largely Government departments and PSUs, or either through participation in tenders or through own business development efforts.

In case of real estate, the existing land bank of the company is a mix of land acquired (either owned or through long leases from the government on a nomination basis or through competitive bidding process or auction or from private owners or through joint venture arrangements). However, the power sector orders are largely through tender route.

The company, with over 50 years of experience, has undertaken diverse construction-related projects and constructed residential and commercial complexes, institutions, hospitals and other buildings, sewage treatment plants, roads; cooling towers, chimneys and balance of plants for power plants giving strong experience and track record in both PMC and civil construction for power sector space. Over these years the company has built strong customer relations. Moreover, the company's strong PMC experience/knowledge is also of late leveraged to build successful real estate portfolio. The company has even undertaken joint development with private landowners.

The project management and consultancy business is less capital intensive and majority of the construction work is executed through sub-contractors. Thus, the ability of the company to grow its top line largely depends on the business it garners rather than capacity buildup or capital infusion. With this business model, with little capacity infusion, the company can expand its revenue manifold.

It is a cash-rich company with cash balance end September 2011 standing at Rs 1368.19 crore. This is in spite of the working capital intensive nature of business of the company.

The company maintains a dividend payout ratio of 20%, which is in line with the guidelines stipulated by the Ministry of Finance for profit making central PSUs.

Weaknesses

Of the three business segments of the company, the PMC projects have relatively steady revenue but lower operating margin, whereas real estate projects have volatile revenue but tend to have higher operating margin. So if the share of revenue from realty is higher the operating martin too will be higher. Hence, for FY 2008 and FY 2009, the OPM stood at 15.7% and 7.5%, when the share of the real estate revenue was higher at 29.7% and 10.2% compared to almost negligible in FY 2011 and about 6% in H1 of FY 2012. So the profit margin can be volatile depending on the revenue mix for that quarter/year.

The company has embarked on development of three commercial real estate projects with a total developable area of 0.4 million sq ft and another 6 commercial projects with a developable area of 2.3 million sq ft. Since the commercial project involves upfront capital outlay, the borrowing is set to increase. Similarly, the company also contemplates to undertake PPP projects, which are capital intensive.

The company also contemplates to take advantage of opportunities in overseas markets for PMC projects. While the company has already undertaken and executed projects in Maldives, its experience in Botsvana was bitter. In Botsvana, it formed a JV (Jamal–NBCC International) with a local partner and as the JV was not seeing much progress. Due to non-compliance of JV agreement provisions by the local partner, the company has served JV termination notice. In case of the termination of the JV, the company has to provide for diminution in the value of investment of Rs 0.34 million in the JV.

The company has developed two commercial real estate projects, i.e., NCC Plaza at Pushp Vihar and NCC Place at Pragati Vihar, both in New Delhi, on the land allotted by the government. But the lease deed/conveyance deed for the same is yet to be executed. Since the lease deed is pending execution, the occupancy certificate for the building is not yet issued. If any of the third parties to whom the space sold claims damage, it will affect the financials of the company to that extent.

Of the total land bank, the company is yet to get the conveyance/lease deed executed (despite land allotment by the government) for one ongoing project, i.e., the commercial complex at Hemanta Basu Sarani, Kolkata, and five other forthcoming projects: 1)Residential-cum-Commercial Complex (Phase-I) at Bahadurpur, Patna; 2) Phase-II at Bahadurpur, Patna; 3) Commercial Complex on five-acre land parcel at Action Area –III, Rajarhat, Kolkata; 4) Group Housing Project, Alwar, and 5) Commercial Complex , Lucknow.

About 40.7% (or Rs 264.137 crore) of the company's accounts receivable as on September 2011 were outstanding for a period of more than six months.

The share of other income in PBIT has zoomed from 49.6% in FY 2011 to 68.6% in the six months ended September 2011.

Valuation

Sales of the company for the half-year ended September 2011 stood at Rs 1305.15 crore and net profit was Rs 74.69 crore. Since the revenue and profit do not accrue evenly across all the quarters of the fiscal and empirically the second half of a fiscal is strong for a construction company, annualisation of H1 of FY 2012 EPS will not truly reflect the performance of the current fiscal. The revenue and net profits of FY 2011 was up by 5% (to Rs 3126.77 crore) and 18% to Rs 140.47 crore. The EPS stood at Rs 11.7. The offer price band of Rs 90-106 gives PE of 7.7-9.1 times its FY 2011 EPS. There is a 5% discount for retail bidders

There is no comparable listed peer with focused presence in the PMC business for civil construction of buildings and non-complex infra projects. The nearest comparables are the construction companies operating in this vertical and some of them are sub-contractors offering civil construction services for the company. NCC (formerly Nagarjuna Construction Company) quotes at a P/E of 6 times of its FY 2011 earnings, and JMC Projects and Era Infra 7.8 times and 11.5 times, respectively.