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NCC's Q3FY20 results (Outperformer) - AP Slow moving orders removed from order back log; improves revenue visibility

Q3FY20 result highlights:

• Revenue in Q3FY20 declined sharply by 34% yoy to Rs21.2bn, (in line with our estimate) on account of slow execution on orders  from  GoAP projects, and prolonged monsoon. As a result EBITDA during the quarter declined by 36% yoy to Rs2.5bn (with EBITDA margin at 11.8%).
• Adjusting for impairment of investment in foreign business of Rs228m and tax credit related to previous years of Rs731m, the adjusted PAT for the quarter came in at Rs601m (decline of 63% yoy).
• NCC has removed slow moving orders of worth Rs71bn from the Government of Andhra Pradesh (GoAP) in Q3FY20. It has removed orders related to AP Capital region development authority projects of worth Rs63bn and APTIDCO projects of worth Rs33bn while it has added Rs24bn worth of AP projects (order has started moving). Overall, NCC has removed Rs132bn pertaining to orders from GoAP due to continued uncertainty.
• Order inflow in Q3FY20/9mFY20 was Rs12bn/Rs34bn (vs Rs45bn/Rs128bn). Order book at end of Dec-19 was Rs250bn (i.e 2.7x book to bill ratio) with total exposure on GoAP projects at Rs45bn. NCC has guided for Rs65bn-Rs70bn for FY20E. (from earlier guidance of Rs140-150bn)
• NCC has revised the revenue guidance downwards to Rs90bn (vs Rs100bn earlier) for FY20E. The EBITDA margin guidance is in range of 11.2% - 11.5% for the FY20E. By March 2020, the management expects to reduce the debt level from Rs23bn to Rs19bn.

Key negatives: Reduction in order book from Rs332bn to Rs250bn; increase in standalone debt.

Impact on financials: Downgrade our earnings estimates for FY20E/FY21E by 12%/17% due to slow execution on GoAP contracts; introduce our FY22E estimates.

Valuations & view

NCC order book had declined to Rs250bn led by cancellation of contracts. While the execution has suffered in 9mFY20, a well-diversified and robust order backlog of 2.7x provides visibility of medium term growth from FY21 onwards. We expect earnings to decline in FY20E while FY21E earnings are likely to rebound by on improved visibility. Stock is trading attractive at current valuation of 6.5x FY21E earnings. Maintain Outperformer with a revised price target of Rs80 (9xFY21E earnings).