NCC: Extremely undervalued

[sahil_vi]

Hi Ansh,

@Ansh_Gupta

Construction industry does seem attractive in the long run, coupled with the fact that most of the stocks in this industry were hammered pretty badly in the crash.

To me the attractive part comes from the fact that we have a severe lack of infrastructure. Government wants to execute projects worth 100 lakh crores in next 5 years as a part of national infrastructure pipeline. The industry tailwinds are palpable but have not manifested themselves in the numbers yet. Yet, the stock market seems to be moving in anticipation already. (or could also be due to the very bad beating that these infra stocks got). I cannot comment much on the vagaries of the stock market, but as per my understanding, infrastructure and construction companies will make a come-back, as the infra-spending cycle turns.

@Ansh_Gupta

What I want to understand is, except the financials, how does NCC differ with its peers like PSP Projects or KNR Constructions? (in case you have some idea about it)

NCC is very very diversified. The 1st post i had added covers this well. Diversified across geographies, across types of constructions, size of orders, and so forth. KNR is only into road constructions, NCC is diversified and constructing buildings is largest part of their revenue and order book. PSP is not very well diversified, they are mostly into Gujarat and do not have diversity in order book due to small size of company.

@Ansh_Gupta

Which leads to a similar but broader question- What exactly is the key differentiator in this industry? Low Cost? Order book size? Or intangibles like execution strategy?

Why do we assume there has to be a differentiation? As far as my limited understanding goes, there isn’t any real differentiation. The perception of a moat is generally much more common than a real moat.

@Ansh_Gupta

Also, comparing it to PSP Project which has a P/E of ~14, what is it that the market sees in that company which it doesn’t in the others?

One thing is definitely the rate at which they’re growing their business and earnings and profits. They do not depend a lot on government for their orders (private businesses form a large part of order book). But is this model sustainable? Can private business spend billions of dollars on construction every year? Remember, for government the primary motive is job creation. For a company it is profit maximization (and hence cost restrictions).

Having said that, one thing which really blew my mind is their asset turns. Their OPM is roughly the same as NCC (10-12%) but their asset turns is 2.8 versus NCC’s 1.7 (which is itself high compared to L&T’s 0.75). What makes PSP churn our more revenue per unit of capital invested? this is the next thing one can look at, in order to better understand competitive advantages.

Sources of my knowledge:

1. https://www.youtube.com/watch?v=Wcw38MUQs2U
2. https://www.youtube.com/watch?v=K0vXa6GM__Q
3. PSP Projects Ltd financial results and price chart - Screener
4. PSP Projects - Construction Company

Disc: invested. Full portfolio here.