NBCC: Analysts awaiting a pick-up in project execution and share price

NBCC has seen its market capitalisation erode by nearly half since November 2017 highs, despite a healthy and growing order book. 

The key reason for the weak Street sentiment is that execution has not matched the rising order book, which is also reflecting in the firm’s flat revenues and earnings growth for fiscal year 2018. 

However, the situation is expected to reverse, with analysts seeing a pick-up in project execution and, consequently, the share price.

Being a Navratan public sector player undertaking Project Management Consultancy (PMC) works for various government entities, NBCC bags about 80 per cent of PMC works on a nomination basis. 

The current order book of close to Rs 800 billion is 11 times NBCC’s FY18 consolidated revenues and supports revenue growth visibility.

While the company has been looking at fast-tracking execution over the last few quarters and has given out substantial orders (about Rs 200-350 billion, say analysts) to contractors, the delays in some redevelopment projects, and noise around the same, have been factors adding to the Street’s concerns.

The good news is that the company has maintained its guidance of 30 per cent year-on-year growth in revenue for FY19, despite challenges faced by some of its redevelopment project, which provides some confidence. 

Analysts at Antique Stock Broking say that in the Rs 350-billion projects, only Rs 50 billion is attributed to redevelopment projects that are facing execution issues. 

The remaining Rs 300 billion, even if executed over next three years as against the timeline of 24 months, can comfortably generate 35 per cent compounded annual growth in revenue, they added.

NBCC is also planning to award another Rs 100 billion worth projects to contractors over and above the existing Rs 350 billion. If this happens, execution pace can improve further driving NBCC’s earnings. Meanwhile, it is targeting to add Rs 250 billion of new orders in FY19 and taking the over overall order book past the Rs 1-trillion mark.

While the expected improvement in execution and order book keeps analysts positive on earnings growth and longer-term prospects remain good, the government’s move to divest part of its stake in NBCC to meet its divestment targets is an overhang. This may keep a check on stock prices in the near-term.

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