Recommendation from Construction - Infrastructure 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.

NCC LTD: A PARTNER IN INFRASTRUCTURE DEVELOPMENT

HERE IS WHY
✓Strong order book
✓Government’s emphasis on strengthening infrastructure
✓Good cash flow management

Infrastructure which includes power, bridges, dams, highways, and urban infrastructure development plays a pivotal role in the economic growth of a country and India is no exception. Hence, our low price scrip recommendation for this issue is NCC, which plays a vital role in infrastructure development in India. NCC is one of India’s largest construction companies, specialising in civil construction in the areas of transportation, water and irrigation, buildings, power, transmission and distribution. The company has also expanded into the railway and metals sectors. The building and housing segment makes the largest contribution to its order book. 

The segment consists of construction of industrial buildings, commercial buildings, housing projects and IT parks, among others. As of Q2FY23 the order book for this segment stood at ₹25,269 crore, contributing 63 per cent to the total order book. The water and environment segment consists of water supply projects, water treatment plants, distribution networks, underground drainages and lift irrigation schemes with an order book of ₹6,797 crore, contributing 17 per cent of the total order book. The other segments includeroads, electrical, irrigation, international, mining, railways and others contributing 20 per cent of the total order book with an order value of `8,004 crore

During H1FY23 the company reported net sales of ₹6,694.78 crore with YoY growth of 44.11 per cent from ₹4,645.67 crore in H1FY22. The company’s PBIDT, excluding other income, stood at ₹617.98 crore compared to ₹477.70 crore, indicating YoY growth of 29.37 per cent. Net profit has jumped by 55.74 per cent YoY to ₹271.68 crore compared to ₹174.44 crore in H1FY22. Both the top-line and bottom-line performanceshave improved significantly in H1FY23 compared to H1FY22. The company’s current order book is at ₹40,020 crore which is 3.2x its trailing 12-month revenue in Q2FY23 as the order inflow has increased by 27 per cent YoY to ₹7,117 crore in H1FY23.

Orders received from Andhra Pradesh were to the tune of ₹3,153 crore in Q2FY23, down from ₹3,300 crore in Q1FY23. The management has forecast an order inflow of ₹16,000 crore in FY23 owing to strong traction in water projects, the Jal Jeevan Mission and opportunities in affordable housing, roads and motorways, and metro and railway. Due to higher working capital requirements for its ongoing projects, the gross debt has increased to ₹1,985 crore in H1FY23. As a result, the total interest cost has increased to 4.1 per cent of the revenue, up from 3.67 per cent in the previous quarter. The management expects its debt to be reduced to ₹1,500 crore in FY23 due to improved profitability and better cash flow management. 

The company has entered into a share purchase agreement with GRPL Housing Ltd. to sell its entire stake in NCC Vizag Urban Infra for a consideration of ₹200 crore. The company has already received ₹47 crore, with the balance amount expected to be received in December 2022, March 2023, and H1FY24. NCC is currently trading at a PE of 8.49x over its long-term average PE of 11.8x with current ROE and ROCE of 9.60 per cent and 15.10 per cent, respectively. The company has a strong balance-sheet with a debt to equity ratio of 0.21x and interest coverage of 2.32x. It has a strong order book and healthy balance-sheet with timely execution of its orders. Considering all these factors, we recommend BUY.