NCC's Q3FY18 results (Outperformer) - Margin improvement adds strength to improved growth prospects

Q3FY18 result highlights

• NCC’s Q3FY18 results were strong led by higher margins and receipt of early completion bonus of Rs730m (EBITDA impact of Rs600m and PAT impact of Rs420m). PAT after accounting for provision of Rs30m for diminution in value of investments in the middle-east construction business grew 72%yoy to Rs1bn (est: Rs784m).
• Reported revenue declined 2.8%yoy to Rs18.5bn (est: Rs21.5bn) but adjusted for change in representation post GST implementation, it grew ~8%yoy. Adjusted for margin of Rs600m on early completion bonus, EBITDA grew 12%yoy to Rs2bn (est: Rs2.1bn) and EBITDA margin grew 180bp yoy to 11% (est: Rs9.6%; reported margin: 13.8%).      
• Interest costs grew 3.4%yoy (+18%qoq) to Rs1bn led by interest on mobilization advances and Rs1.1bn qoq increase in debt to Rs21.4bn. 
• NCC has reported record order inflow of Rs216bn during 9mFY18 (Rs129bn in Q3) and order backlog grew 54.5%yoy to Rs316bn (Rs294bn, ex-mining and international orders, 4x TTM revenue). NCC expects further order wins of ~Rs40bn in Q4FY18. The company is L1 in orders worth Rs21bn.   
• NCC has maintained its revenue guidance at flat yoy in FY18 and has guided for a minimum 30% revenue growth in FY19. The management indicated the adjusted Q4FY18 EBITDA margin of 11% is sustainable. 
• NCC has guided for capex of Rs2.5bn in FY18 (Rs2.3bn in 9mFY18) and Rs2bn in FY19 to support the execution of high order backlog.
• NCC has raised Rs5.5bn through QIP by issuing 44.7m equity shares at Rs123/share. The proceeds will be used to meet the working capital requirements and capex to support future growth.   

Key positives: Record order inflow and improved margins.

Key negatives: Lower execution and impairment of investments in the international subsidiaries (additional provisions of Rs200-500m likely). 

Impact on financials: Upgrade of 37.6%/35.8%/48.7% in FY18E/ FY19E/FY20E EPS led by robust order wins and margin improvement.   

Valuations & view

NCC with its scale and diversified presence in buildings, water, highways and metro rail is well placed to benefit from continued infrastructure investments. Strong order wins YTD FY18 have materially improved the company’s growth trajectory. The on-going unwinding of the international construction business and demonstrated focus on sale of investments in land will improve NCC’s leverage and return profile going forward. Maintain Outperformer with revised TP of Rs183.