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NCC's Q1FY20 results (Outperformer) - Cancellation of contracts leads to uncertainty

Q1FY20 result highlights

• NCC reported a 19% yoy decline in revenue to Rs22bn (est: Rs27bn) and led by elections and uncertainty related to Government of Andhra Pradesh (GoAP) orders.
• EBITDA came in at Rs2.7bn (flat yoy, est: Rs3.0bn) aided by improvement in margins to 12.2% (+120bps higher than our estimates).
• Adjusted PAT declined by 22% to Rs813m led by higher interest cost related to increase in borrowing by Rs4bn
• NCC has removed the orders worth Rs61.5bn from order backlog. These orders were given by Andhra Pradesh government (GoAP).  GoAP is considering cancelling work orders issued by previous government prior to April 1, 2019 where works are yet to be started. Adjusting for Rs61.5bn order book, the order book declined from Rs412bn at end of March 2019 to an order book of Rs335bn.  AP government formed a committee to examine all works with a) less than 25% financial progress b) work orders issued but agreement not signed and c) work orders were issued, agreement signed but there is no progress on construction
• Orders from GoAP amount to Rs. 121bn accounting for 36% of remaining order backlog.  These projects are largely related to Amaravati capital city development and affordable housing segments and are currently at various stages of execution
• NCC has revised its revenue guidance for FY20 given the slow execution in orders from Andhra Pradesh. We are building 5% yoy decline in revenue for FY20 given the uncertainty in AP orders.    

Key positives: Order inflow guidance maintained at Rs145bn

Key negatives: AP government order to review infrastructure contracts

Impact on financials: Downgrade our earnings for FY19E/FY20E by 22%/15% due to decline in order backlog

Valuations & view

NCC order book has declined to Rs335bn led by cancellation of contracts. While the execution is likely to suffer in near term, a well-diversified and robust order backlog of 2.6x provides visibility of medium term growth from FY21 onwards. Working capital/debt levels have deteriorated in Q1FY20 due to elections; we expect it to improve in rest 9 months led by increase in execution and better collections. We expect earnings to decline by 20% in FY20E. However, current valuation at 6x FY21E earnings is compelling. Maintain Outperformer with a revised price target of Rs118 (10xFY21E earnings).