Pace of order execution crucial for NBCC

It is necessary to justify premium valuations for the company

A shift in focus from order accretion to order execution has put the spotlight on NBCC. 

The company’s fast-growing order book at Rs 75,000-80,000 crore (about 13 times its FY17 revenue) is impressive and has been a key driver of its stock and premium valuations. However, for sustenance of valuations and gains on the bourses, faster execution of orders is crucial. At Rs 220.75, the stock is currently trading at 43 times its FY18 earnings estimates.

The central government-owned company, which undertakes project management consultancy (PMC), real estate development and EPC (engineering, procurement and construction) contracting, had witnessed a flat revenue growth during the June quarter. This was mainly due to slower growth in the PMC segment (over 90 per cent of top line), despite a large order book. As a result, many analysts had rated the NBCC stock as ‘neutral’. 

Analysts at Anand Rathi had said without undermining its leading position in the PMC space, some of NBCC’s large projects were taking much longer than expected for revenue to materialise and hence, had raised concerns on rich valuations. 

After the results, the management had highlighted that it intends to add orders of Rs 25,000-30,000 crore in FY18 (at least), and considers about 30-40 per cent revenue growth as achievable in the current financial year. It had expected some of its colony redevelopment projects like Nauroji Nagar Colony in Delhi to start contributing shortly and two other projects by early next year. Given this, growth in FY19 was also projected to be healthy. 

The recent news of completion of the tendering process for the Rs 2,000-crore contract for Nauroji Nagar, the contract for Phase I of Pragati Maidan project being awarded to Shapoorji Pallonji for about Rs 2,000 crore, and awarding of the Rs 870-crore Ghosikhurd irrigation project has increased the Street's confidence. 

The NBCC stock had seen a fresh high of Rs 228.50 on September 21 and continues to trade near these levels.

Analysts at Edelweiss said NBCC was now geared to award design-build/turnkey contracts of over Rs 1,000 crore and prune execution time frame to 18-24 months (from 24-30 months). 

The burgeoning public sector spending on building construction is triggering significant order accretion for NBCC. Analysts expect the company to commence work on large-value projects in the next six-nine months, and expect the revenue growth to step up in FY19.

Santosh Yellapu at India Nivesh, said the stock was trading at rich valuations and investors could enter the same on corrections. The company’s fundamentals and order inflows remained strong and it could see more gains over time. However, analysts said the pace of work on various projects would determine the stock performance. Any faltering on the same could hurt the sentiment, as there are fewer margins to miss expectations.