NCC Ltd (Rakesh Jhunjhunwala Portfolio Stock) Recommendation By HDFC Sec

Going strong

We maintain BUY on NCC with a TP of Rs 170/Sh (EPC business at 15x FY21E EPS). We have tweaked our finance cost estimate lower and increased our FY20/21E EPS by 2.2/0.4%.

HIGHLIGHTS OF THE QUARTER

 Strong year despite 4QFY19 top line miss: Despite coming in 5% below our estimate, NCC posted lifetime high quarterly revenue of Rs 33.9bn (+45/5% YoY/QoQ). EBIDTA/APAT beat stood (5.4%)/5.9%.

 FY20E muted rev growth guidance a dampener; we expect 10%+ growth: With new government in place NCC expects two months delay in execution of AP orders (~33% of order book, Rs 140bn). Besides it aims to consolidate on FY19 base after robust 62.4% YoY growth. NCC refrained from giving any guidance (beyond matching FY19’s performance). We believe with robust order backlog 11.9% growth is achievable.

 Debt reduction a big positive: Gross debt reduced by ~Rs 1.7bn QoQ to Rs 19.9bn. This was aided by ~Rs 4bn recovery from debtors and ~Rs 1.5bn repayment from subsidiaries. Group advances have reduced by ~Rs 0.7bn and investments by Rs 0.4bn. Total exposure now stands at Rs 13.9bn (~Rs 4.7/9.2bn in
advances/ investments). Further receipts of Rs 1.5-2bn in FY20E will help keep a check on debt (NCC expects further Rs 3bn debt reduction in FY20E).

 Update on claims: SembCorp arbitration is delayed by 6 months and the outcome is now expected by Mar-20. In the TAQA case, NCC is appealing in the higher courts and expects an outcome over the next 12mths.
STANCE

NCC’s strong order book is well diversified across segments and geographies and lends revenue visibility over the next 2 years. Apart from 2-3 months delay in some projects, NCC does not envisage execution to suffer as a result of the elections. We expect net working capital levels to remain stable (100days) leading to strong free cash flows of ~Rs 3.3/5.1bn in FY20/21E.

We have built in muted APAT growth over FY20-21E led by high interest costs, depreciation and pressure on margins. Re-rating is contingent on the pace of reduction of the ~Rs 13.9bn group exposure and real estate monetization. We maintain BUY.

Key risks (1) Adverse ruling on ongoing arbitrations; (2) Slow down in government capex; (3) Deterioration in NWC days; and (4) Weak real estate monetization.