Despite strong order book, muted profitability a major concern for NBCC

The 29-per-cent revenue growth by NBCC during the December quarter has not impressed the Street, given the stock continues to trade near its 52-week lows. Revenue growth in the quarter was led by its largest project management and consultancy (PMC) services segment, which reported a strong growth of 33.5 per cent. However, operating performance disappointed. 

Margins for PMC segments continue to be impacted by the Ind-AS 115 accounting change. Fees pertaining to design and preparatory work for PMC projects are accounted for during the execution of projects, and not upfront, as was case earlier. Its subsidiaries further pulled down operating profits, which declined 16 per cent year-on-year, and margins slid 160 basis points to 2.9 per cent.

The declining margin trajectory of the firm is one reason for caution. However, the company’s order backlog of more than Rs 850 crore is impressive and more than 10 times its FY19 estimated earnings. The issue, however, is on the execution front. 

Analysts at Edelweiss say the order book is strong, but its execution is contingent on the pace of real estate monetisation in the ‘self-revenue generation’ or redevelopment projects (50 per cent of the order book), which has been lacklustre and, in their view, unlikely to pick up in the near term. 

It is the market-wide liquidity concerns that bode ill for the large self-funded colony redevelopment projects, involving real-estate monetization, which has led the company to lose more than half its market cap in the last one year. 

Analysts at Antique Stock Broking, too, raised similar concerns on redevelopment projects, and said that almost none of them were contributing to revenue. With the extension of the Chairman and Managing Director’s tenure hitting a new road block, and fate of the cash-guzzling inorganic expansion like that of Jaypee Infratech unclear (potential bid by NBCC for Jaypee Infratech), NBCC could pass through a renewed phase of uncertainty, according to Antique Stock Broking. 

A positive for the company is that two of its three colony redevelopment projects have been cleared by the court and work is expected to commence shortly, while the third is due for hearing in courts. 

Further, after consolidating its 100 per cent stake in Hospital Services Consultancy, among other entities, the management hopes synergies will materialise in the coming quarters. Analysts said the valuations are not expensive and seem to largely factor in the concerns.