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Event update: NCC (Outperformer) - Annual report takeaways; earnings cut on slower execution

Key highlights of NCC’s FY18 Annual Report

• Operational details: i) Standalone revenues declined 4.2% yoy to Rs75.6bn on reported basis but grew ~5% yoy after adjusting for accounting impact of GST implementation, ii) EBITDA margin expansion of 360bp yoy was driven by GST implementation (+160bp), +70bp on early completion bonus for Agra-Lucknow road project and +130bp margin expansion of on-going projects and receipt of claims relating to old projects, iii) Order inflow grew 174% yoy to Rs253bn and consolidated order backlog stood at Rs325bn, iv) Consolidated PAT (adjusted) of Rs2.9bn was below standalone PAT (adjusted) of Rs4bn, due to operating and fair market valuation losses in the international business.
• FY19 guidance: Order inflow of Rs140bn and 45% revenue growth.
• Debt and working capital: i) Standalone gross debt fell to Rs13bn from Rs15.7bn in Mar 2017, mainly due to debt repayment of Rs5.5bn from QIP proceeds and higher mobilization advances, ii) Consolidated gross debt declined to Rs20.6bn from Rs25.7bn in Mar 2017, iii) Standalone net D/E stood at 0.3x with consolidated net D/E at 0.5x. iv) Net working capital (NWC) (ex-L&A to subsidiaries) rose to 137 days versus 118 days in Mar 2017, due to sharp rise in receivables and BG encashment of Rs3.4bn, offset partly by 67% rise in mobilisation advances to Rs14.2bn.
• Capex and investments: i) Capex of Rs3.2bn, ii) Gross equity invested in key subsidiaries was Rs1.2bn and after impairment of Rs872m, net increase in investment was Rs343m, iii) Total investments were flat at Rs10.2bn, iv) L&A to subsidiaries/associates grew Rs464m to Rs6.1bn.
• Contingent liabilities: i) Dispute with Sembcorp: Total amount carried in balance sheet is ~Rs7bn towards BG invoked and net receivables. Arbitration proceedings are currently underway and are likely to be completed by Mar 2019 ii) Dispute with TAQA: Of the ~Rs2.2bn claim (including interest) awarded by a Singapore arbitration centre, NCC’s counter claim of ~Rs1bn is not provided for. NCC is in the process of appealing against this award in Singapore High Court.

Valuation and view

Earnings cut; valuations attractive: NCC’s robust order wins in FY18 (+Rs37bn in Q1FY19) provide the company with the much-needed thrust to accelerate growth momentum. However, we believe NCC will miss its FY19E revenue guidance of Rs110bn (+45%), given slower-than-budgeted start of its large buildings and housing projects (NBCC, AP affordable housing). As a result, we have cut our revenue estimates for FY19E/FY20E by 6.8%/4.5% to Rs98.3bn/Rs122.8bn, respectively, leading to 13.7%/8.6% downgrade in earnings. Our revised target price of Rs150 is based on 15x FY20E earnings (versus 17x earlier on residual execution risks). But, the recent correction (19.8% in 1 month) has rendered valuations to turn attractive at 11.9x/8.9x FY19E/FY20E earnings, respectively, and limit further downside in the stock. Maintain Outperformer. Key risks – unfavourable outcome on Sembcorp and TAQA disputes.