why no further discussion in NBCC since Oct 2013…considering the Cash end of last year: 5,093 Cr. and Market Cap: 6,183 Cr. …does it make sense to invest in this counter at 34-35/share?
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NBCC Q3 Results!
Our operating income during the quarter three INRl,265 crores as compared to INRl,098 crores in second quarter. So as compared to second quarter there has been an increase of about 15% in the operating income. Profit after tax has been INR35 crores against a loss of INR29 crores recorded in second quarter. And another good news is that we have been able to sell under INR103 crores worth of real estate inventory. These have not been booked in revenue because of accounting standard and it’s likely to be book shortly. Our provisions against ECL have come down drastically as compared to last year. Last year in first nine months it was around INR80 crores, this year in first nine months it’s about IN R48 crores. One of the reasons for the low properties the new tax law due to which is about INR 100 crores worth of tax effect has to be return now. This is all about opening remarks. Our major projects of Nauroji Nagar Redevelopment that is under court, but final hearing has been held in November, and we are expecting the results to be out very soon. And that will give a big flip to our revenue.
The total order book as on date is INR72,000 crores approximately. Out of which, around INR34,000 crores is PMC and balance INR37,000 crores is redevelopment.
Next year, we are targeting around INR 9,000 crores, including the revenue from re -developmental projects. This year we are targeting around INR 6,500 crores.
The businesses model of NBCC is like a project management consultant for which we’re paid 10% of the actual cost of the project. We do not get any upside on the difference between sale revenues and gestation cost, that is passed on to the land owner, which is the Government of India.
We have three business verticals; one is real estate; which we own the land and we own our properties and we sell it in the market. From that component, INR 103 crores has been mentioned. We’ve sold our own properties. That is your redevelopmental work. Redevelopment work is on behalf of the landowner, the Government, which is not being sold by NBCC.
regarding interim Stay on further construction in Nauroji Nagar Redevelopment Project by NBCC (India) Limited (NBCC), the Hon’ble High Court of Delhi has given its final judgment in favour of NBCC vide its Order dated February 25, 2020 (Received on February 27, 2020).
If they are targeting 6500 for this year and we already have revenue of around 5500 cr. then we might be heading towards the biggest loss nbcc will post in its lifetime.
Is it true or am i missing something?
I see that CASH available on balance sheet is 50% more than Market Cap with 0 debt. As I missing anything here?
@makreddy Yes.
Firstly, that is the total cash available on a consolidated level
And secondly, of the around 5k cr cash you see for March 2019, only 1907cr is company’s cash and rest 3185cr is categorized under “Other Bank Balances” which might be the cash from advances of revenue received from its clients. (As per AR 2019).
Others on this thread might be able to help with more clarity over the exact sources of those other bank balances.
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Actually of the 4500 Crores growth lying in the balance sheet most of the balances belong to the
clients only and They have cash to the extent of 500 Crores only
Agreed but why can’t we treat it as float? You are still receiving dividends and interests on the cash that you owe to others?
That it is cash flow rich (albeit with high liabilities) looks like a feature of the business and not a bug, looking at the previous years.
read in one of the conf call as far as i can re- collect.
Thanks for this great discussion.
Pros of the NBCC:
- Status as a PWO, thus helping it to get contracts on a regular pace with government.
- No debt
- Huge Asset value in form of Land Mass it has brought over the years.
- Redevelopment Projects & Central Government projects are high margin.
However, there are few issues I am facing
- They have a contingent liability of 2522.93 Crore
- Earning include an other income of 211 Crore
- Cash flow from operating activities has reduced by 22%
Source: Screener and the annual report.
I think these are big -ve for me in this stock which surpass all the +ve. Does anyone has any view on the same. Also, if someone can help me understand what is this ‘Liabilities’ accounted for and I couldn’t find what is this other income.
The Director of Finance during the Q4 conference call confirmed that Rs.350 Cr. is company’s own cash(other than customer advances). Order book size is - Rs. 70,000. For Netaji Nagar and Sarojini Nagar projects, all approvals are in place except from the approval from Forest. Current year revenue guidance - Rs.6.500 Cr. on standalone basis. PMC margins on new projects are reduced to 5-7% from earlier 7-9%. Work in progress on Rs. 13.000 Cr. projects. Rs. 24,500 Cr. new projects will be started during FY20-21.
Company is going to acquire JP infra, The remaining houses will be built from buyer’s money and hiving of highway assets of JP infra. The benefits that NBCC can expect from JP Infra is from the land size of 1,500 Acre land. The surplus land is in vicinity of proposed airport in Greater Noida. However currently company would not have big monetary benefit. It will get the houses built for about 22,000 buyers.
Total market cap is Rs.4,600 Crs. Leaving the cash outside. And assuming company can return to the earnings of Rs. 450-500 Crs. from FY22(as it was having prior to 2018). The company is available at 9-10 PE. Potentially the future dividend yield of 5% (assuming Rs. 1 dividend from FY22).
Execution is a key risk though. However order book, debt free status do offer comfort. Stock price near Rs.20 would offer a decent margin of safety.
Please feedback if any aspect is incorrectly perceived.
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Conference Call - Key Takeaways:
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COVID Update: Execution was impacted across project segments during the lockdown
as well as post lockdown period. Out of total 40,000 labourers, NBCC could manage to
remobilize only 18,000 labourers across project sites. As of now, the company restarted
works at 127 out of 170 under execution projects at 35-40% pace. The management expects
complete remobilization of labourers by Sept’20, with which the pace of execution will be
accelerated. -
Order Book Profile: Its standalone order book currently stands at Rs700bn (13.5x of FY20
revenue), out of which 47% belongs to PMC + EPC and the rest are developmental projects.
Out of total order book, Rs130bn is under execution and Rs240bn of additional work is
expected to commence in the current fiscal. -
Delhi Re-development Projects: Nauroji Nagar: Stay order on this project was lifted in Feb’20 and currently it is back to execution after Unlock 0.1. It has sold properties worth ~Rs45bn so far in this project. Netaji Nagar and Sarojini Nagar: These two projects (Rs210bn) are yet to obtain forest clearance, which is expected to be obtained by Diwali.However, it has awarded one small tender from Netaji Nagar so far.
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Jaypee Infra Project: NBCC is likely to complete acquisition of Jaypee Infratech Ltd. (JIL)
shortly. The management reconfirmed that no debt obligation will come to NBCC. Without
quantifying the long-term gain of this acquisition, the management cited that completion of
22,000 houses would be the priority in the initial period. It further stated that the land parcels,
which pass through the upcoming Greater Noida Airport project, have huge value potential. -
Amrapali Project (Rs75bn): NBCC has fast-tracked the project and so far two projects have
been handed over. Works on eight projects are progressing well and it expects to award 11
more projects shortly, for which tenders were already invited. NBCC built 8% PMC margin
from this project. -
Revenue Guidance: The management expects standalone revenue to grow by 25% YoY to
Rs65bn in FY21E, which at consolidated level is seen at Rs100bn. However, it does not expect margin to reach 7-8% level, as new orders (secured through competitive bidding) carry lower margin. Also, the company is not getting projects on nomination basis nowadays.Absence of meaningful pick-up in execution of Delhi re-development projects impacted the company’s performance. Further, a sum of Rs2.65bn (receivable from government clients) went to litigation during the quarter.
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Not till now, can anyone help me understand the contingent liability on the books?
Also, @bhaskarbora67 Is this 2.65 bn in your last point a writeoff or Is NBCC expect to receive it at a later date.
After many quarters, the big higher-margin projects (Amrapali/7 GPRA) which have been an overhang on the stock are seeing a meaningful pick-up in execution. Apart from better execution in Amrapali, monetization of commercial real estate (RE) inventory has also improved significantly, which would expedite execution of the redevelopment projects.
- Naoroji Nagar - Commercial RE inventory worth Rs. 1000 crores sold (vs Rs. 340 crores in Q1) and Rs. 5500 crores till date. At Q1 end, 50% was completed and upto Sept. '22, 64% completed.
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Sarojini Nagar - Started selling commercial RE inventory just a month ago (Rs. 64 crores so far). Work going on in all 3 projects. (This indicates that the commercial RE cycle is finally improving).
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Amrapali - Funding arrangements are finally in place. Again, this was an old project where only 3400 flats had been completed upto Aug. '22, but as of October '22, 6000 flats have been completed. The improvement can also be seen in the segmental revenue. Projects worth Rs. 4700 crores remaining and to be completed by FY 24.
The company had to face various execution headwinds over the past few years, but these are encouraging signs.
Disclosure: Invested
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Nice summary on the pessimism surrounding the stock:
“Many Public Sector Units (PSUs) have near-monopoly in large and growing sectors. And even as they easily grab big, lucrative orders, they execute at a gnawingly slow pace. And investors, who are often lured by strong revenue visibility to pay a premium, get impatient over time with concerns on the ground work. The stock loses its sheen and analysts don’t cover it, as it becomes a more-of-the-same story. But things change for the better and the giant flywheel picks up momentum. The National Building Construction Corporation (NBCC), a construction project and property development company, is one such PSU.”
Why you should buy the NBCC stock - The Hindu BusinessLine.pdf (517.3 KB)
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I worked on this investment note on NBCC (also enclosed as a PDF). At current prices, I think risk-reward looks attractive. Will appreciate any thoughts/counterpoints.
National Building Construction Corporation (NBCC)
Current Market Price: Rs. 36.6 (closing price as on 31/1/2023)
Market Capitalization: Rs. 6,597 crores
https://www.screener.in/company/NBCC/consolidated/#top (Financials)
Investment Summary
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Business Model: Asset-light business model and negative working capital cycle resulting in a debt-free balance sheet with sizable “cash float.” Most orders won on a ‘nomination basis.’
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Redevelopment of Government Properties: Large projects, higher operating margins and rising share in order book.
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Revenue Visibility: Consolidated order book of Rs. 55,000 crores, with an order book-to-revenue ratio of 6.5x.
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Major Execution Headwinds Subsiding: Improvement has started to show up in the recent results; continued improvement in execution and reversion-to-mean in operating margins could lead to doubling/tripling of earnings in the next 3-4 years.
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Valuation: At current prices, stock is available at an attractive 0.8x revenue. Stock peaked at 3x revenue in the last cycle, leaving sufficient scope for re-rating from current valuations.
Introduction
NBCC is a Central Government Enterprise under the Ministry of Urban Development, mainly focused on Project Management Consultancy (constituting 91% of FY 22 revenues), with EPC and Real Estate verticals accounting for the balance. The company acts as a “coordinating agency” for various government agencies and ministries. Under this arrangement, projects are awarded to NBCC on a nomination basis and the company assigns the projects to sub-contractors for execution while supervising project completion.
Key Business Segments
Conventional PMC Segment: In the conventional Project Management Consultancy (PMC) business model, NBCC acts as the nodal contractor for most government building projects and outsources the construction of the project to sub-contractors.
This is an asset-light business model - the Ministry gives NBCC a sizable cash advance of the value of the project and NBCC pays the sub-contractor on a milestone basis. NBCC therefore enjoys the cash “float” until the project is completed, earning interest on it.
Redevelopment Segment: Recently, redevelopment projects based on the self-financing business-model has become a new focus area. Essentially NBCC redevelops (again playing the role of a Project Management Consultant and outsourcing the construction to a sub-contractor) government properties like housing colonies by demolishing and reconstructing buildings on the same land in such a way that it significantly increases the Floor Area Ratio (FAR) – thus improving the utilization of land.
Instead of cash payment, the company receives a portion of the built-up commercial/residential space (which shows up as inventory on the balance sheet) in each of these projects, which it can either lease or monetize. The redeveloped apartments go to the government at no cost; the commercial space goes to NBCC and the difference is NBCC’s profit margin when it monetizes/leases out the commercial space. This model ensures there’s no funding support required from the government.
NBCC currently has Rs. 30,000 crores of “redevelopment projects” in its orderbook, including 3 housing colonies in Delhi (Sarojini Nagar, Nauroji Nagar and Netaji Nagar). These projects are much larger than NBCC’s earlier redevelopment projects in Delhi and with higher operating margins than the conventional PMC vertical.
So Why Isn’t the Market Interested?
NBCC has been hit by various headwinds since 2019 – delay in execution of large projects (Sarojini Nagar and Netaji Nagar), pending approvals and litigation, Covid-19, lack of labour availability, lack of funds for the Amrapali project. Further, weak real estate scenario meant that NBCC couldn’t monetize the commercial real estate in the self-revenue generating projects, constraining execution.
After many quarters, the large projects (Amrapali/Netaji Nagar/Sarojini Nagar/Nauroji Nagar etc.) which have been an overhang on the stock are seeing a meaningful pick-up in execution.
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Funding arrangements are in place for the stuck Amrapali project, which Government had sent NBCC to complete in 2019. NBCC has been able to complete and sell more flats in recent months – 3400 flats had been completed up to August 2022 and 6000 by October 2022.
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The turning of the Real Estate cycle is aiding monetization of NBCC’s Real Estate inventory and unlocking of funds - Commercial Real Estate inventory worth Rs. 1000 crores sold in Nauroji Nagar in Q2, compared to Rs. 340 crores in Q1. Likewise, the company has also started selling commercial Real Estate inventory in the Sarojini Nagar project.
Valuation and Outlook
In the last cycle, revenue and earnings nearly doubled and the stock peaked at a valuation multiple of 3.4x revenue, significantly re-rating from 0.4x revenue when it got listed in April 2012. NBCC went from being virtually unknown to wildly popular, giving a 20x return.
Currently, the stock is trading at 0.8x revenue. Considering revenue, operating margins and valuation multiples are depressed, the downside looks limited at current prices. Improving execution will aid revenue growth, reversion-to-mean in operating margins and can lead to significant re-rating.
Key Risks
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Being a PSU, NBCC was asked to coordinate the construction of the stalled projects of the Amrapali group, where the government had to step in and do something for the hapless home-buyers. Private players mostly stay away from bidding for these projects. Lack of funding support from the government becomes a real challenge. Government sending out NBCC to take over more such projects in the future would be an overhang on the stock and negatively impact valuation multiples.
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While the commercial real estate market is reviving, any slowdown will reduce monetization of real estate in the redevelopment projects, thereby constraining execution.
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Contingent Liabilities worth Rs. 3,391 crores. The top 3 constituents are – Rs. 1524 crores for “Claims against the Group not acknowledged as debts,” Rs. 630 crores for “Bank Guarantees for performance, Earnest Money Deposits and Security Deposits” and Rs. 542 crores for “Value Added Tax Including Interest & Penalty as per demand notice order.” The first and third constituents are likely a result of certain stuck projects, so better execution and handing over the completed projects to these entities should protect NBCC from these risks. The second is required in the normal course of business in this particular industry and hence is not really a concern.
Miscellaneous
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NBCC is a lumpy business and is subject to vagaries (budgetary allocations made to various ministries, the state of the real estate market, execution delays). Hence, overlooking volatility in quarterly results and focusing on the overall trajectory would be important.
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The Indian Armed Forces (the largest landowner in the country), Indian Railways and PSUs have large parcels of unutilized/poorly utilized land across the country. Their redevelopment ensures availability of a larger housing pool on the same piece of land, without the original land owner having to spend money. At a time where the government is cash starved, such a model is ideal. Further, private real estate developers cannot participate and NBCC is the only PSU with the required expertise.
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The company is also involved in the modernization & redevelopment of Railway Stations on a self-financing basis, which can be an important business vertical in the future.
Investment Report - NBCC.pdf (116.9 KB)
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