NBCC's Q4 earnings miss estimates

Operating margins were hit by one-offs in the March quarter

At a time when real estate demand is low in the country, National Buildings Construction Corporation or NBCC is among the few to see steady order flows. Being government owned (90 per cent holding) has helped it get orders from various public sector entities. But, with timely and sizeable order flows, analysts’ expectations were also high, which NBCC failed to meet in the quarter ended March 2016.

While revenues at Rs 2,241 crore grew 38 per cent year-on-year (y-o-y) in the quarter, a tad ahead of the Bloomberg estimates of Rs 2,234 crore, net profit (Rs 139 crore) grew just 3.5 per cent y-o-y. Operating margin declined to eight per cent, from 10.2 per cent in the year-ago period. The management, however, attributes the fall in margins to a few one-offs. Employee expenses went up 10 per cent y-o-y due to Rs 27 crore incurred on account of medical benefit expenses and additional pay-out, as NBCC attained ‘Navarathna’ status in financial year 2015-16. Likewise, other expenses at Rs 38.4 crore trebled in the March quarter because of a Rs 15-crore provision for doubtful debts.

Going by segmental performance, it appears investors may have to settle for single digit margins. Project management and consultancy (PMC or redevelopment business) division, which accounts for about 92 per cent of total revenues, posted a 45 per cent growth y-o-y in the quarter to Rs 2,060 crore. However, Ebit (earnings before interest and tax) margins dipped by 65 basis points y-o-y to 7.8 per cent. Real estate, a relatively high margin business, historically accounted for 10 per cent of revenue. However, its contribution now accounts for just two per cent of revenues. In the March quarter, while the real estate division’s revenues grew 58 per cent to Rs 50 crore, Ebit margins shrank from 41.7 per cent in the year-ago period to 31.6 per cent, indicating the impact of increasing competition. Even as revenues from engineering-procurement-construction division (five-six per cent of revenues) grew 47 per cent y-o-y, Ebit remained flat at Rs 16 crore; again, Ebit margins came under pressure falling to 12.1 per cent against 17.6 per cent in the year-ago period.

The positive commentary on order book was the only take away. With an order book of Rs 37,000 crore and incremental order flow of Rs 25,000 crore, earnings visibility remains robust. The PMC division constitutes 90 per cent of the order book. Rohit Natarajan of IDBI Capital feels as the share of redevelopment orders stands high, operating margins may improve. Results of the June quarter will indicate if the March quarter was really a one-off.