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NCC's Q2FY19 results (Outperformer) - Robust performance

Q2FY19 result highlights

• NCC’s Q2FY19 results were sharply above estimate led by robust execution and higher margins. Recurring PAT grew 119.0%yoy to Rs1.7bn as against estimate of Rs1.2bn.
• Reported PAT was lower at Rs1.27bn after including exceptional loss of Rs475m (adverse arbitration award in an international project of ~Rs400m (net of amount under appeal) and ~Rs75m impairment of mobilisation advance given to international subsidiary)
• Revenue grew 139%yoy (albeit on low base) to Rs31bn (est: Rs25bn) led by robust order inflows and strong order backlog position. Despite robust execution during H1FY19, the working capital cycle has improved from 169 days in Mar-18 to 146 days in Sep-18. EBITDA grew 194%yoy to Rs3.65bn and was sharply above our estimate of Rs2.9bn. EBITDA margin expanded 220bp yoy to 11.8%, above estimate of 11.5%, largely led by better order mix and operating leverage.
• Interest cost grew 21.9%yoy to Rs1.08bn (up 6.5% qoq). Gross debt reduced from Rs18bn in June-18 to Rs16.6bn in Sept-18. Receivables grew from Rs24.4bn in June-18 to Rs27.6bn in Sep-18. 
• Order inflow in Q2FY19 stood at Rs46.9bn taking NCC’s total order backlog to Rs330bn (ex-mining and international orders; 3.3x TTM revenue). For H1FY19, order inflow stood at Rs83.6bn and the company is on track to meet its FY19 order inflow guidance of Rs140bn. Also, NCC has maintained its FY19 revenue guidance of ~Rs110bn.
• Consolidated revenue grew 116%yoy to Rs32.4bn. Consolidated PAT at Rs1.2bn on reported basis includes exceptional loss of Rs400m as against standalone PAT of Rs1.27bn.  

Key positives: Strong execution and margins and reduced losses in the international construction business.

Key negatives: Adverse arbitration award in Dubai project. 

Impact on financials: Earnings upgrade of 24.1%/5.1% in FY19E/FY20E led by upward revision in revenues and EBITDA margins.  

Valuations & view

NCC continues to witness robust order inflows securing strong growth momentum for the company. Despite strong execution during the quarter, the working capital cycle improved in Q2FY19. Furthermore, the management has maintained its revenue guidance of Rs110bn for FY19 and it is on right track to meet it. With strong order backlog position and improved EBITDA margins, we expect revenues/earnings to grow at 29.7%/ 22.2% CAGR over FY18-20E. Valuation at 9.4x FY20E earnings looks attractive. Maintain Outperformer with revised price target of Rs150.