NBCC to launch IPO in this fiscal

The state-run National Building Construction Corporation (NBCC) has said that it is going to come out with its initial public offering (IPO) by the end of FY 2012. The govt. plans to offload 10% of its stake through this IPO. While the management has not divulged any details on the amount that would be raised or the price band, market sources say that the exchequer may net a sum of around Rs 130-150 crore through this stake sale, translating into a price band of Rs 110-125 per share.

The total offer comprises of 1.2 crore equity shares, of which 120,000 equity shares would be kept aside for the employees and the remaining 1.18 crore shares would be kept for retail and institutional investors on a proportionate basis, as prescribed in the Draft Red Hearing Prospectus (DRHP). After the recently-announced ONGC auction, this current NBCC offer will form part of the govt.’s total disinvestment outlay of Rs 40000 that it has laid out for FY12.

Business Overview

NBCC, which is more or less similar to the Central Public Works Department (CPWD) in terms of its business dynamics, is a public sector company engaged in the business of:

• Project Management Consultancy (PMC) Service for Civil Construction Projects
• Civil Infrastructure for the Power Sector
• Real Estate Development

Under the PMC business, the company undertakes all project management activities ranging from providing consultancy services to undertaking turkey jobs majorly for govt.-owned companies and ministries. With a widespread portfolio across 23 states, NBCC has successfully completed 43 PMC projects, and currently has 130 ongoing projects and an additional 59 forthcoming ones. The total value of its ongoing and forthcoming projects is Rs 10302.69 crore, which comprises 97% of the total order book of Rs 10622.6 crore. As a percentage of the total revenue, the PMC business vertical contributed over 93% of NBCC’s revenues as on Sept 30, 2011. Hence, one can see that the company is heavily concentrated towards the PMC division for its revenue and order source.

Under its Civil Infra for the Power Sector business, NBCC is involved in the implementation of power plant equipments such as chimneys and cooling towers, and engages in various other structural work. Though it boasts of a strong clientele including NTPC, BHEL and other state power corporations, the total contribution of this segment to its total order book and revenues is very low, at 3% and 2% respectively.

The real estate business, where the company is recognised as a land developer, also contributed a mere 6% to the total revenues as on Sept 30, 2011. The company has a land reserve of around 125 acres as on Jan 15, 2012, which is mainly spread across the north eastern part of India, including Kolkata. Of this land reserve, around 47% of the land is owned by the company, while the remaining is either under govt. allocation or jointly developed with various partners.

Despite being engaged in the real estate business, the company has developed only 8 commercial projects so far, but has another 19 projects (commercial and residential) coming up that are under various stages of construction and development. As per our interaction with the management, NBCC mainly develops mid-sized real estate projects catering to the middle class segment, and the pricing of such projects is comparatively lesser as compared to that of other land developers.

Financials & Valuation

Over the past 5 years, NBCC’s topline has recorded a CAGR of 21% and bottomline of 15%. For the 6 month period ended FY12, the topline stood at Rs 1276.5 crore and the bottomline is at Rs 74.97 crore. As mentioned earlier, the prime source of income is through the PMC division, followed by the real estate and power sectors. The company is debt-free and has high cash reserves of Rs 1368 crore as on Sept 30, 2011. It does pay a marginal portion of interest. On the valuations front, based on our assumed price band, the shares of NBCC would command a PE multiple of 10.45-12.05x of its annualised EPS of Rs 12.44.

Observation

Based on our initial interaction with the management, NBCC can be said to be a predominantly PMC company with a minor presence in power and real estate. It enjoys preferred status in the eyes of various govt.-owned companies and ministries.

Besides undertaking various projects for its govt. clients on a domestic level, the company has extended its reach overseas by constructing an office building for the Ministry of External Affairs. It also boasts of a good list of contractors like L&T, Ramky Infra and Shapoorji Pallonji, etc., with whom it has maintained a long-standing relationship. The management has said the top 10 contractors, including them, carry out about 70% of its construction work.

Going forward, the company plans to foray into other infrastructure segments such as roads, railways and ports, if the opportunities present themselves. As of now, though, the management has not given any concrete comments on the same.

Conclusion

This article is based on our initial observations about the company and the subsequent interaction with the management. This is not a recommendation to subscribe to the IPO offer. We shall provide updates in this regard when the company announces its IPO offer.