Recommendation from a Construction Sector

This section gives a recommendation of a stock having a stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon.


NBCC LTD. : ON A STRONG FOOTING

HERE IS WHY

✓No burden of debt
✓Impressive order book
✓Rise in net sales 

The real estate sector, consisting of housing, retail, hospitality and commercial sub-sectors, is experiencing growth due to office demand. The construction industry ranks third among major sectors in terms of direct, indirect and induced effects. In India, the real estate sector is the second-highest employment generator and is expected to attract more non-resident Indian (NRI) investment. The real estate market in India is expected to reach ₹1 trillion by 2030, contributing 13 per cent to the country’s GDP by 2025.

Retail, hospitality and commercial real estate sectors are also experiencing significant growth. In FY23, India’s residential property market reached an all-time high of ₹3.47 lakh crore (USD 42 billion), marking a 48 per cent year-onyear increase. The volume of sales also grew with a 36 per cent rise to 379,095 units sold. Taking all this into account, our low-price scrip for this issue is NBCC Ltd. 

National Buildings Construction Corporation (NBCC) was established in 1960 as a government-owned undertaking under the Ministry of Urban Development (MoUD). The President of India holds majority of the company’s equity share capital. It operates in three primary segments: project management consultancy (PMC), engineering procurement and construction (EPC) and real estate development. PMC focuses on executing landmark projects in various sectors, while EPC focuses on niche markets and constructing power sector chimneys and cooling towers.

In Q1FY24, on a consolidated basis the company reported a rise in net sales by 7.11 per cent to ₹1,913.79 crore as compared to ₹1,786.72 crore in the same quarter the previous year and sequentially decreased by 29.96 per cent. The decline in net sales was due to a slowdown in demand in the company’s key segments. The PBIDT excluding other income increased by 9.15 per cent to ₹57.16 crore as compared to ₹52.37 crore in the same quarter the previous year and sequentially decreased by 45.20 per cent. This was due to the decline in net sales and higher operating expenses.

The net profit increased to ₹77.47 crore from negative ₹5.79 crore, posting a rise of 1,437.12 per cent and sequentially decreased by 31.88 per cent. At TTM, NBCC is trading at a PE of 27.6 times, which is slightly lower than its three-year median PE. The company has maintained a three-year ROE and ROCE of 15.7 per cent and 20.7 per cent, respectively. It has a three-year compounded sales and profit growth of 9 per cent and 65 per cent, respectively.

Based on the above financial data, we believe that NBCC is trading at a reasonable valuation. The company has a strong track record of profitability and growth and is not burdened by any debt. NBCC (India) Ltd has a healthy order book of ₹55,000 crore on a consolidated basis and ₹45,000 crore on a standalone basis. Its major contracts include construction projects in Sarojini Nagar and redevelopment projects in Kerala and Mumbai. This is a good sign for the company, and it suggests that it is well-positioned to grow its revenue and profits in the coming quarters. The company is exploring international projects in Guinea, Djibouti and Zambia, and real estate projects in Patna, Coimbatore and Jaipur. These developments are expected to further boost its growth prospects. Considering all these factors, we recommend BUY.