NBCC IPO analysis: Strong foundation, reasonable valuation

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It is difficult to find a single construction or engineering company, which has negative working capital, zero debt, return on equity in double-digits, huge cash in its books and consistent dividend paying history, all under one roof. The company in question is National Buildings Construction Corporation (NBCC), which has launched an offer for sale (by the government) to raise Rs 108-127 crore.
In the last four years, NBCC’s profit has doubled and shareholders’ funds have gone up four-fold, and without raising any funds, including debt, thanks to its business model. The company gets its dues (money) from clients in about 100 days, whereas it pays to its creditors in about 300 days. These positives have helped NBCC attract an initial public offer (IPO) grade of four on a scale of five by ratings agency CARE, which indicates above-average fundamentals.

As regards the IPO, at the upper price band of Rs 90-106 it is priced at 8.5 times annualised earnings and 1.6 times book value. Additionally, the company has cash in its books of Rs 1,350 crore, of which Rs 300-350 crore can be termed surplus cash (equivalent to almost 27 per cent of its market capitalisation at the upper price band). Retail investors are entitled to a five per cent discount on the allotment price, which only adds to the offer’s attractiveness.

HEALTHY PROFIT GROWTH
In Rs croreFY10FY116MFY12*
Income from operations2,932.803,126.701,276.60
Ebitda (%)3.303.603.40
Net profit116.50140.3075.00
NPM (%)3.904.305.50
RoE (%)22.0022.00--
EPS (Rs)9.7011.706.25
PE (x) upper band (Rs 106)10.99.1--
* Half yearly figures, does not reflect the annual picture                    Source: RHP


Strong business model
NBCC, which operates under the ministry of urban development, provides management and consultancy services for several types of civil works to be undertaken by various ministries, such as home affairs, defence, external affairs, industries, urban development and education, among others. In that way, the ministries can continue focusing on their core areas of work while NBCC undertakes activities ranging from finding the best project executor to subcontracting the projects and getting these completed.

Thanks to orders from different ministries, the company has grown consistently, in terms of revenues and profits. Growth over the next few years will be driven by expenditure on building new infrastructure and planned allocation by different ministries. In the near term, growth will be driven by NBCC’s existing Rs 10,600-crore strong order book, which is almost four times its construction revenues in 2010-11. The company’s order book is well diversified in terms of geographical presence. Besides, real estate could be another positive trigger. The company has significant experience in real estate development - it has already completed eight real estate projects and four residential projects are under construction.

Besides, in future it will not only leverage on the land bank it owns, but it also has intentions to develop the land available with central and state government agencies and other private developers, if required, through the joint venture route. As on January 2012, the company had reported land reserves of 125.2 acres with saleable and leasable area of about 10.7 million square feet. Importantly, given the existing cash and free cash flow from operations, the company is well equipped for the funding of its projects. On the flip side, the risk to its business remains on account of delay in projects, contingent liabilities, a conservative management and government policies.

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