Stock Pick from Construction & Engineering

LOW PRICE SCRIP

Here Is Why:

• The newly elected government has placed extra emphasis on infrastructure development.

• NCC contributes to India’s progress through landmark infrastructure projects.

• NCC has also established a strong foothold in Oman, UAE, other GCC countries, and Africa.

NCC: Posting A Great Performance

Infrastructure is the key driver for growth in any economy and particularly so in developing countries such as India. Keeping in view this vital fact, the newly elected government has placed extra emphasis on infrastructure development, which will be hugely positive for those companies engaged in such a line of business. One such well-diversified infrastructure company is NCC, which is engaged in the construction of industrial and commercial buildings, roads, bridges and flyovers, water supply and environment projects, housing, power transmission lines, irrigation and hydrothermal power projects, and real estate development.

NCC contributes to India’s progress through landmark infrastructure projects which demonstrate far-reaching impact - beyond the realm of construction. NCC has three decades of endeavour and commitment and has crossed the billion dollar mark in turnover and 4 billion dollars in the order book. NCC has also established a strong foothold in Oman, UAE, other GCC countries, and Africa. The company has international offices in Dubai and Muscat.

NCC reported a robust set of Q3 FY15 results, beating street expectations on all fronts. The company surprised stakeholders and investors with its topline of Rs 23.5 billion, registering 58 per cent growth. This revenue growth was predominantly driven by better execution in the power segment and was the highest ever quarterly topline reported by the company. Its EBITDA margins stood at 7.4 per cent at Rs 1.74 billion with more than 90 per cent yearly growth. However, the EBITDA margins contracted by 68 basis point on a sequential basis due to Rs 240 million additional provision for bad and doubtful debts.

On the positive side, NCC has paid its debt of Rs 5.15 billion from the money raised through the rights issue in October 2014. The repayment of debt has considerably reduced interest expenses on a sequential basis. The interest cost stood at Rs 1.44 billion, down by 9 per cent sequentially. The company is in the process to take final approval from the coal ministry and complete its stake sale in the Nelcast power plant. This may take another few months. The generated cash will be used to further reduce the debt levels.

On the industry front, improvement in execution, settlement of claims for previously incurred costs, and reduction in interest expenses will be the major triggers for the construction and infrastructure companies. Further, the infrastructure companies are looking for more clarity on the Land Acquisition Bill. The higher allocation for infrastructure in the recent Union Budget is expected to show an improvement in the order inflows of infrastructure companies.

Also, the reworking of the model of road project awards via EPC and the annuity mode is likely to encourage players shying away from BOT projects. The industry also saw an improvement in working capital cycles for most leading companies. We are thus considerable bullish on companies like NCC as they have a diversified portfolio and are set to benefit from revival in private sector investments.