NBCC - A Quality Cash Bargain

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    11-Aug-2014

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A Wonderful PSU stock available at ridiculously cheap valuations !!

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  • NBCC Ltd - A Quality Cash Bargain with Growth
  • Content Index Our Research Desks views on the Stock Idea :- Slide #3 NBCC Limited Investment Snapshot :- Slide #9 NBCC Limited Business Overview :- Slide #11 Investment Arguments :- Slide #22 NBCC Limited Financials:- Slide #28 Concerns & Reasoning :- Slide #32 Conclusion:- Slide #34 Specialists in discovering Multibagger stocks
  • Dear Members, Before we get into the details of this Months Multibagger Stock - NBCC, let us understand the broad reasons for the recommendation of this idea through the following questions, - How many times do we see a company with a Cash Balance of 1646 Cr and no Debt, yet available at a Market Capitalization of 1520 Cr (Cash Bargains) ? - Have you seen a company which requires neither Fixed Assets nor Working Capital to grow its Business ? In fact, the business generates significant Floats through a Negative Working Capital cycle which adds to its Cash Reserves. - How many stocks can provide Growth Visibility in volatile times ? Company has a Strong Order Book (>3X FY13 Revenues) which provides visibility for decent growth going forward. Order Book Traction continues to strengthen. - How many Managements can boast a fantastic 10 Year Track Record on all parameters Revenues (18% CAGR), Operating Profit (27% CAGR), Profit after Tax (29% CAGR) and Net worth (41% CAGR) ? - How many stocks are available in this Market which has a Cash Surplus Balance sheet with ROCEs of > 50% and yet available at P/E multiple of 7X, EV/ EBIDTA multiple of 5X and provides a Dividend Yield of 3%. Our Stock Idea for this Month fits all the above descriptions. To give an Idea about the Business of NBCC, the company is primarily an Implementing agency of various Government departments. The company has a status of Public Works Organization which is parallel to CPWD (Central Public Works department). It does Project Management and Consultancy (PMC) for the Government department projects and gets a Margin of around 5-7% on the contract value. It outsources the Contracts to sub-Contractors for execution. The company gets Advances from the Client and pays these contractors with a delay which leads to a Negative Working capital cycle for the company. This ensures that the company generates strong Cash from operations and cost free liabilities to fund its other Investments. While PMC Is the main stay business. NBCC has recently become aggressive on its Real Estate Specialists in discovering Multibagger stocks Our Research Desks views on the Stock Idea
  • business where NBCC buys Government/ PSU lands (or) forms a JV with them to develop real estate projects. Looking at the Land Bank of the company and its past track record, we believe that Real Estate business division will be a significant value creator going forward. So, why is the Stock still available at ridiculously cheap Valuations ? We have been tracking the stock since its IPO last year and even then it was priced at extremely attractive levels. But some of our concerns overwhelmed us against Investing in the stock, most of which have gradually reduced now. Some of the common concerns include, - High Contingent Liabilities :- The company had a very high Contingent Liability of around 1500 Cr during its IPO last year. Currently, its Contingent Liabilities is less than 200 Cr and the run-down in these liabilities has been smooth with no impact on the companys Financials which makes us believe that, Contingent Liabilities is not a big risk. -Uncertainty over Capital Allocation by the Management :- Many Investors are concerned that the company may enter unrelated areas under the influence of Government and thus there is always a huge uncertainty over its excess cash. Investors also worry that Minority Investors would not be able to profit from this Cash generation and hence the stock can become a Value Trap. We differ on this point completely. The company has stayed away from all unrelated areas and also has been allocating its Cash reserves well to build up its Real Estate business which would be Value Additive. Also the Dividend Payouts have been increasing consistently over the years and thus we believe that the steep discount attributed to its Cash by Market participants is unwarranted. The Capital Allocation track record and Cash Flow Management of the company has been nothing short of impressive. Even the discipline in the way their Real Estate projects are structured gives us confidence. Specialists in discovering Multibagger stocks Our Research Desks views on the Stock Idea
  • - Change in Government Policy can bring the Business down :- Many Investors including us believe that the company doesnt really add any significant value to deserve such attractive Margins and Terms of trade. Therefore the general concern is that there might be a change in Policy for Government Ministries to outsource contracts directly to subcontractors by bypassing NBCC, thereby making the companys operations redundant. However, we would like to differ on this point a little bit. NBCC continues to be looked upon as an In-House construction division of the Government which will get the work done efficiently. Companys parentage and continuing recognitions from the Government such as PWO, Mini- Ratna unit etc ensures that the company would continue to be the nodal agency for the construction activities of all Ministries and PSUs. Most of these Government entities dont have the manpower, skill sets etc to conceptualize and deliver on these projects and thereby outsourcing them to a Co-PSU such as NBCC makes sense. Also, NBCC is recognized one of the few well run PSUs and recent Orders clearly shows that NBCC would be a clear beneficiary of all new Government constructions like Education Institutions, Hospitals, Housing Complexes, Re-Development projects, Power Contracts, Sewage Treatment plants, Commercial complexes etc. Only area where we might be concerned over the Long Term is the companys ability to maintain attractive Margins and Terms of Trade on contracts received through such Nomination basis. Till now the company has been able to maintain Good Margins and Strong Negative Working capital cycle, as can be seen from Incremental Orders. We would like to look at a change in this Terms of Trade as a Low Probability High Impact event which is already more than priced in the Market. We continue to estimate that the company will be able to make 5-7% Margins on its PMC business (with better Product mix) and continue to earn similar levels of Free Float. All in all, Governments patronage for NBCC looks strong to continue and can help the company grow by piggybacking on the increased spending by Government in New Construction across sub-sectors. With the increased allocation in Government departments, the companys order book continues to swell. Now lets understand some of the inherent positives of the companys Business model and see why the current price may be a stealer even after discounting for some of the Issues. Specialists in discovering Multibagger stocks Our Research Desks views on the Stock Idea
  • Our Research Desks views on the Stock Idea Large Growth Opportunity in PMC Business :- While all segments of PMC business can grow at a decent pace on the back of increased Government spending, the most interesting aspect comes from the re-Development of Old colonies in Delhi. Government has had a successful experience of redeveloping colonies like Moti Marg and East Kidwai recently. The re-Development is done in an interesting Self-Sustainable Revenue model where the construction costs are funded by 15% commercial exploitation of Land. The successful completion of these projects by NBCC has opened up massive prospects for future orders in other colonies. Each of the Re-Development project which NBCC has executed (or) in the Pipeline are huge projects with value of over 5000 Cr each. Continuous success in Re-Development can open as many as 30 such projects going forward. Company is able to bill 10% of construction costs as its PMC charges in these projects which indicates the growth potential in this area of business and also the future profit potential from Re-Developments. Mix of Low Margin-PMC Business and High Margin-Real Estate business :- Companys PMC business is a Cash cow where NBCC generates strong cash flow from both operations as well as Floats. The Margins in this business is considerably low and since there is no capital requirement for growth, the company continues to Invest its excess capital in its Real Estate projects which have strong Margins and provide adequate return on Capital employed (ROCE). For example, 2013 balance sheet of NBCC shows a Negative Capital Employed of 860 Cr in PMC business and a Positive Capital employed of 633 Cr in Real Estate business. Thus one business generates significant cash which is being deployed in a business with decent return ratios. This would help the company to earn better returns for every rupee invested in the company and also grow its business. Growth Potential in NBCCs Real Estate business & Ambitious Management :- NBCCs Real Estate business has a mix of two kinds of projects Projects developed on its own land purchased at Market prices and Projects developed on a Partnership basis by forming JVs with PSUs and Departments with excessive Land holdings. The company has been able to build a Land Bank of around 130 Acres which will help it to Specialists in discovering Multibagger stocks
  • Our Research Desks views on the Stock Idea to grow going forward. Company doesnt have a policy of hoarding Land Banks and looks to buy lands selectively which can be commercially exploited within 1-3 year time frame. With the tag of a PSU, NBCC has been able to win the trust of people and most of its projects have been tremendous successes. But the big opportunity lies in the JV model of partnering with Land owners to develop their un-utilized land banks. Size of unutilized Land Banks which can be commercially exploited across Government Departments is huge and there has been increasing traction in several Ministries to monetize these assets for funding their Investments. We believe that NBCC has a huge advantage here to grow by capitalizing on its parentage, just like what Godrej Properties is doing on their Groups land parcels. An example of this can be seen from the recent Tie-Up with the Public Works department to develop their 250 acre Land Parcel in Ghitorni, Delhi with a construction area of around 2 Lakh Square feet. One more important thing which we like about the company is the Managements ambitions in growing its Real Estate business. Management targets to start Real Estate projects in almost all states going forward and has an internal target of developing 10000 Homes with an Investment value of 6000 Cr by 2018. Companys Accounting policy is conservative and Real Estate Profits could surprise :- Company continues to book most of its Land purchases as Expenses on the P&L statement which ensures in an insignificant Gross Block on its Balance sheet. We believe that the current Land Bank has been bought at attractive prices and once the projects starts commercializing, we will see strong profits flowing to the P&L statement. Company also has a conservative accounting policy on its Real Estate business with Sales based accounting which results in a lag in its profit realization. All these could definitely surprise the currently skeptic Markets. Extremely Strong Cash Position to support Real Estate growth :- We believe that the companys PMC business which generates strong Cash combined with its strong Cash Balances should help the company to fund its Real Estate growth. The strong growth ambition in Real Estate should Specialists in discovering Multibagger stocks
  • Our Research Desks views on the Stock Idea help the company from not getting distracted in other un-related diversification which will result in in-efficient utilization of its Cash reserves. The company has added almost 870 Cr Rs to its Balance sheet over the last 6 years indicating its strong cash flow generation ability. Cash flow from Core Operating activity after Tax (Ex-Interest Income) is almost 100 Cr every year. In addition to this there is almost a 150 Cr Interest Income which is a recurring revenue for NBCC. All of this leads us to believe that the company will generate enough cash to fund its profitable Real Estate growth. When you combine all of this with a Valuation of P/E ratio of 7X, its easy to understand the Margin of Safety in the stock at the current prices which can buffer some of the negative surprises. We believe that the current Dogma about PSU stocks has gone to an extreme and it will shift as Market sentiments change overtime. This along with consistently strong performance by the company will help the stock to discover its true value. We can safely conclude that at the current prices, the stock definitely looks attractive as a Pure Value play. We believe that any Investor with an Investment horizon of 3-5 years, can certainly expect a re-rating of the stock combined with good Earnings growth. We believe that of all this makes the stock a relatively Low Risk High Return bet with a strong probability of delivering strong profits for Investors. It is nowhere near the High Conviction Ideas of ours, but the stock certainly deserves a decent Allocation. We would be releasing Multibagger Flashback report during this Month with a special focus on Asset Allocation and the importance of Portfolio Management in creating Wealth in Stock markets. The Special Report will also show the High Quality Mid-Cap Ideas across sectors which should be a part of your Portfolio. We generally run our Portfolio with 10-20 stocks and would urge you to follow the same. Specialists in discovering Multibagger stocks Regards, [ Gokul Raj . P, Head Investment Research ]
  • NBCC Investment Snapshot (as on Nov 27, 2013) Recommendation :- BUY Maximum Portfolio Allocation :- 2% Investment Phases & Buying Strategy 1st Phase (Now) of Accumulation :- 80% Current Accumulation Range :- 115-130 Rs NBCC is a Graham style Cash Bargain with the added advantage of strong growth visibility and a decent Quality business. We would like Investors to slowly accumulate the stock on every dip and increase the allocation in case of correction. Stock can definitely generate Higher Risk-adjusted returns. Core Investment Thesis : We believe that the company could create strong Value for Investors through its Real Estate Investments which are funded from the cash generated through its PMC business. Its unique business model and strong patronage from Government can help the stock to unlock its hidden value. Current Market Price Rs. 131 Current Dividend Yield 2.82% Bloomberg / Reuters Code NBCC. IN/ NBCC.NS BSE / NSE Code 534309/ NBCC Market Cap (INR BN / USD Mn) 15.94 /257.03 [1 USD Rs. 62.0] Total Equity Shares [Mn] 120.00 Face V...