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NCC's Q2FY20 results (Outperformer) - Guidance revised downwards to amid uncertainty

Q2FY20 result highlights

• Revenue for the quarter declined sharply by 44% yoy to Rs17.3bn, (vs. est of Rs24bn) on account of NIL execution on orders  from  Government of Andhra Pradesh (GoAP) projects, and heavy and prolonged monsoon.
• EBITDA margin came in at 13.5% (+169 bps yoy) in Q2FY20 primarily due to settlement of claims of Rs310m for earlier projects and higher execution in roads and mining segment.
• Adjusting for income from sale of Land (Rs.443m) and impairments from investments in associates (Rs165m), the adjusted PAT for the quarter was Rs523m (decline of 70% yoy).
• Execution of work on orders related to Andhra Pradesh contract worth of Rs120bn has come to halt. NCC expects work on housing projects from APTIDCO worth Rs31bn to commence from Q3. It also expects part of orders from other projects worth Rs66bn from Andhra Pradesh to pick up in next few months.
• Order inflow in Q2FY20/H1FY20 was Rs15.2bn/Rs21.5bn (vs Rs47bn/Rs84bn). Order book at end of Sep-19 was Rs332bn (i.e 3.1x book to bill ratio)
• Due to prevailing uncertainty related to order from AP projects, NCC has revised the revenue guidance to Rs95-100bn (vs Rs110bn) while order inflow guidance has been maintained at Rs140bn. The EBITDA margin guidance is in range of 11.2% - 11.5% for the FY20.

Key positives: Order inflow guidance maintained at Rs140bn

Key negatives: Decline in revenue guidance for FY20 to Rs95-100bn.

Impact on financials: Downgrade our earnings estimates for FY20E/FY21E by 26%/13% due to slow execution on GoAP contracts.

Valuations & view

NCC order book had declined to Rs335bn led by cancellation of contracts. While the execution has suffered in H1FY20, a well-diversified and robust order backlog of 3.1x provides visibility of medium term growth from FY21 onwards. Working capital/debt levels have deteriorated in H1FY20 due to slow execution on GoAP contracts; we expect it to improve in rest 6 months led by increase in execution and better collections. We expect earnings to decline by 38% in FY20E. However, current valuation at 6x FY21E earnings is compelling. Maintain Outperformer with a revised price target of Rs94 (9xFY21E earnings)