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NCC's Q4FY18 results (Outperformer) - Strong growth ahead

Q4FY18 result highlights

• NCC’s Q4FY18 results were above estimate led by higher margins and accounting for claim of Rs500m (Rs210m EBITDA impact). PAT before exceptional items grew 51.4%yoy to Rs1.3bn (est Rs1.14bn). Reported PAT after provision of Rs300m towards impairment of investment in NCC Infrastructure grew 61.2%yoy to Rs1bn. 
• Revenue grew by a modest 11.9%yoy to Rs23.9bn, below estimate of Rs26.5bn, due to execution delays caused by GST implementation and delayed start of new projects. EBITDA margin grew 460bp yoy to 12.7% (adjusted for claim: 12.1%) due to improved job mix, operating leverage and positive effect of netting off of GST from the revenue. EBITDA grew 74.8%yoy to Rs3bn (adjusted: Rs2.8bn, in line).     
• Interest costs declined 2.4%yoy (-4.4% qoq) to Rs1bn led by lower debt levels. Gross debt declined from Rs23bn in Dec-17 to Rs13bn in Mar-18 due to debt repayment from QIP proceeds of Rs5.5bn and higher mobilization advances. Receivables grew Rs5bn from Sept-17 levels to Rs47bn due to delayed payments in electrification contracts and delays caused by GST implementation. WC level (ex-L&A to subsidiaries) grew to 130 days of revenue from 118 days as on Mar-17.   
• NCC’s FY18 standalone order inflow was robust at Rs233bn (net of GST) and order backlog doubled to Rs300bn (4x FY18 revenue). FY19 guidance: Revenue; +45%yoy to Rs110bn, EBITDA margin; ~10.5%, Order inflow; Rs140bn, Capex; Rs2.6bn.
• NCC’s FY18 consolidated revenue declined 7% to Rs84bn and PAT came in at Rs1.4bn (Rs84m in FY17) including provision of Rs1.2bn towards impairment and goodwill (on net basis). NCC has approved issue of convertible warrants of upto Rs1.1bn to the promoters in order to restore their pre-QIP shareholding of 20% (18.1% currently).      

Key positives: Record order inflow, strong margins & strong guidance.

Key negatives: Lower execution & impairment of investments in NCC Infra. 

Impact on financials: No material change in earnings.   

Valuations & view

NCC’s strong order wins in FY18 have materially improved the company’s growth trajectory. While the recent incidences of BG encashment and unfavourable arbitration outcome for two of its previously completed projects have stretched its working capital levels (by ~Rs7bn) and impacted standalone profits (by Rs650m), NCC expects to gain substantial relief through its appeals/counter claims and recover most of its dues/restrict its liability. Maintain Outperformer with price target of Rs183 (unchanged).