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NCC
No near-term relief in sight
Higher-than-expected interest expenses led to a 10% PAT disappointment in
1QFY12. With interest rates expected to remain elevated in the near term,
affecting the core business and subsidiaries alike, we cut our TP 19% but
maintain a Hold.
High interest cost dented the healthy EBITDA
In 1Q, the standalone company reported a 44% yoy decline in PAT, driven by high interest
expenses (up 118% yoy and 11% qoq). EBITDA came in at Rs1.17bn, up 10% yoy on the
back of a 5% yoy increase in sales. Lower raw material cost led to an EBITDA surprise of
9%, with margins at 10.2% (up 47bp yoy). However, higher-than-expected interest expense
resulted in a 10% PAT disappointment for us. Net debt rose 5% qoq to Rs24.6bn.
Consolidated PAT declined 43% yoy, again on higher interest costs, despite a 15% increase
in consolidated sales.
We cut our EPS forecasts 16% for FY12 and 19% for FY13
Our EPS forecast cuts are driven mainly by increased interest expense forecasts as we build
in 1) a higher interest rate and 2) higher-than-expected debt levels. Apart from this, we also
raise our depreciation forecast and cut our FY13 sales growth forecast, due to a slightly
lower rate of execution. Our FY12 sales growth forecast of 11% is still lower than
management guidance of 15%. However, we built in a marginally higher margin for FY12.
Macro headwinds may continue to trouble in the near term
NCC’s core construction business may continue to underperform on higher interest costs.
Management indicated that interest costs are expected to rise an additional 50bp in the 2Q
after a recent rate hike by the Reserve Bank of India (RBI). Debt levels remained higher
during the 1Q, which should have a further impact on profitability. The prevailing higher
interest rates and inflationary environment should also have an impact on NCC’s real estate
subsidiary. We reduce our SOTP-based target price 19% to Rs68.70 from Rs84.40,
reflecting the EPS cut, a lower multiple for its core construction business due to slower
growth expectations and execution delays, and a lower valuation of its real estate subsidiary.
We maintain a Hold.
PAT continued to decline
Despite a healthy recovery in margins, NCC’s standalone profit declined 44% both yoy and
qoq. The interest rate expense impact was higher than we estimated due to an increase in
loans and interest rates. We cut our EPS forecasts 16-19% and our TP 19%. Hold.
High Interest expenses led to PAT disappointment despite EBITDA surprise
Despite a better-than-expected EBITDA, PAT came in below our expectation due to higher
interest rate expenses. What follows are highlights of the 1QFY12 standalone results.
Net sales came in at Rs11.4bn, up 5.1% yoy but down 21% qoq. The RBS forecast was
Rs11.8bn.
EBITDA came in at Rs1.17bn, up 10% yoy but down 11% qoq. The RBS forecast was
Rs1.07bn, so the result was 9% above our expectation.
The EBITDA margins surprised us by 120bp due mainly to lower-than-expected raw material
costs that declined 195bp qoq as a percentage of sales. Management clarified during its
recent analysts conference call that lower raw material expenses were mainly due to a lower
contribution from low-margin road projects.
Depreciation for the quarter came in at Rs197m, up 26% yoy and 6% qoq. The RBS forecast
was Rs185m.
Interest expenses came at Rs640m, up 118% yoy and 11% qoq, and 23% above our forecast
of Rs520m. The higher-than-expected interest rate and high debt level were the main reasons
behind this surprise.
The effective tax rate came in at 33.3% vs 31.1% in 4QFY11 and 33.2% in FY11. The RBS
forecast was 33%.
Normalised PAT came in at Rs233m, down 44% both yoy and qoq. The RBS forecast was
Rs258m.
Normalised standalone EPS was Rs0.89 for the quarter.
The order book as of the end of the 1Q was Rs161.9bn, almost flat qoq.
Consolidated results: Normalised PAT declined 44% yoy and 51% qoq to Rs313mn despite
a 14.6% yoy increase in revenue (down 7.5% qoq). EBITDA for the quarter rose 119% yoy,
mainly due to receipt of an annuity related to a build on transfer (BOT) project. However,
interest expenses and depreciation related to the project eroded most of the benefits at the
PAT level.
Management conference call highlights
Order book break-up: Building 37%, Transportation 4%, Water & Environment 13%, Irrigation
10%, Power 10%, International Business 13%; Electricity 3%; Metals 3%, and Others 7%.
Management said the higher interest rates are expected to remain a worry for its bottom line
at its core business, apart from higher working capital and loans.
Debtor days increased to 108 by the end of the quarter from an already-high level of 105 at
the end of FY11. However, management hopes to collect receivables at a faster pace going
forward and expects reductions in debtor days and working capital.
The company is seeing good traction in the building and water and environment sectors. It
expects an internal engineering, procurement, construction (EPC) order of Rs50bn from its
power subsidiary during the year. Management stated that the National Highway Authority of
India is also increasing its activities in the road sector.
Management said it is looking for stake dilution in its BOT subsidiary NCC Infra by way of
private equity investments. The move is aimed at releasing funds for its equity funding
requirements in its power and road projects and easing its debt situation.
The company’s total equity requirement guidance for FY12 is Rs2.5bn, and its total capex
guidance is Rs1bn.
Management said it has entered into a power purchase agreement (PPA) with the Andhra
Pradesh government for about 500MW power off-take from its 1,320MW Krishnapatnnam
power plant at Rs3.70/unit.
We cut our EPS forecasts 16% for FY12 and 19% for FY13
Our revised EPS forecasts drop mainly due to higher interest rate assumptions. We believe the
interest rate will remain at a relatively higher level vs last year as inflation in India remains high.
We are reducing our revenue growth forecast for FY13 by about 2% to 15% yoy as order
execution remained slow in the 1Q. Our FY11 revenue growth forecast of 11% is already below
management guidance of 15%.
Stock could remain under stress; we maintain a Hold
We have reduced our target price by 19% to Rs68.70 from Rs84.40. The main reasons for the
reduction in our target price are:
a lower EPS forecast for FY12 and a lower PE multiple on account of lower-than-expected
EPS growth; and
a lower valuation of its real estate subsidiary as a high interest rate and high inflation
environment has begun to have an impact on demand (and therefore pricing) of real estate
projects.
The stock is currently trading at around 0.6x one-year-forward price to book value, but may retest
the FY09 low levels of 0.4x as its core construction business continues to remain under pressure
due to macroeconomic factors. We maintain our Hold rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
NCC
No near-term relief in sight
Higher-than-expected interest expenses led to a 10% PAT disappointment in
1QFY12. With interest rates expected to remain elevated in the near term,
affecting the core business and subsidiaries alike, we cut our TP 19% but
maintain a Hold.
High interest cost dented the healthy EBITDA
In 1Q, the standalone company reported a 44% yoy decline in PAT, driven by high interest
expenses (up 118% yoy and 11% qoq). EBITDA came in at Rs1.17bn, up 10% yoy on the
back of a 5% yoy increase in sales. Lower raw material cost led to an EBITDA surprise of
9%, with margins at 10.2% (up 47bp yoy). However, higher-than-expected interest expense
resulted in a 10% PAT disappointment for us. Net debt rose 5% qoq to Rs24.6bn.
Consolidated PAT declined 43% yoy, again on higher interest costs, despite a 15% increase
in consolidated sales.
We cut our EPS forecasts 16% for FY12 and 19% for FY13
Our EPS forecast cuts are driven mainly by increased interest expense forecasts as we build
in 1) a higher interest rate and 2) higher-than-expected debt levels. Apart from this, we also
raise our depreciation forecast and cut our FY13 sales growth forecast, due to a slightly
lower rate of execution. Our FY12 sales growth forecast of 11% is still lower than
management guidance of 15%. However, we built in a marginally higher margin for FY12.
Macro headwinds may continue to trouble in the near term
NCC’s core construction business may continue to underperform on higher interest costs.
Management indicated that interest costs are expected to rise an additional 50bp in the 2Q
after a recent rate hike by the Reserve Bank of India (RBI). Debt levels remained higher
during the 1Q, which should have a further impact on profitability. The prevailing higher
interest rates and inflationary environment should also have an impact on NCC’s real estate
subsidiary. We reduce our SOTP-based target price 19% to Rs68.70 from Rs84.40,
reflecting the EPS cut, a lower multiple for its core construction business due to slower
growth expectations and execution delays, and a lower valuation of its real estate subsidiary.
We maintain a Hold.
PAT continued to decline
Despite a healthy recovery in margins, NCC’s standalone profit declined 44% both yoy and
qoq. The interest rate expense impact was higher than we estimated due to an increase in
loans and interest rates. We cut our EPS forecasts 16-19% and our TP 19%. Hold.
High Interest expenses led to PAT disappointment despite EBITDA surprise
Despite a better-than-expected EBITDA, PAT came in below our expectation due to higher
interest rate expenses. What follows are highlights of the 1QFY12 standalone results.
Net sales came in at Rs11.4bn, up 5.1% yoy but down 21% qoq. The RBS forecast was
Rs11.8bn.
EBITDA came in at Rs1.17bn, up 10% yoy but down 11% qoq. The RBS forecast was
Rs1.07bn, so the result was 9% above our expectation.
The EBITDA margins surprised us by 120bp due mainly to lower-than-expected raw material
costs that declined 195bp qoq as a percentage of sales. Management clarified during its
recent analysts conference call that lower raw material expenses were mainly due to a lower
contribution from low-margin road projects.
Depreciation for the quarter came in at Rs197m, up 26% yoy and 6% qoq. The RBS forecast
was Rs185m.
Interest expenses came at Rs640m, up 118% yoy and 11% qoq, and 23% above our forecast
of Rs520m. The higher-than-expected interest rate and high debt level were the main reasons
behind this surprise.
The effective tax rate came in at 33.3% vs 31.1% in 4QFY11 and 33.2% in FY11. The RBS
forecast was 33%.
Normalised PAT came in at Rs233m, down 44% both yoy and qoq. The RBS forecast was
Rs258m.
Normalised standalone EPS was Rs0.89 for the quarter.
The order book as of the end of the 1Q was Rs161.9bn, almost flat qoq.
Consolidated results: Normalised PAT declined 44% yoy and 51% qoq to Rs313mn despite
a 14.6% yoy increase in revenue (down 7.5% qoq). EBITDA for the quarter rose 119% yoy,
mainly due to receipt of an annuity related to a build on transfer (BOT) project. However,
interest expenses and depreciation related to the project eroded most of the benefits at the
PAT level.
Management conference call highlights
Order book break-up: Building 37%, Transportation 4%, Water & Environment 13%, Irrigation
10%, Power 10%, International Business 13%; Electricity 3%; Metals 3%, and Others 7%.
Management said the higher interest rates are expected to remain a worry for its bottom line
at its core business, apart from higher working capital and loans.
Debtor days increased to 108 by the end of the quarter from an already-high level of 105 at
the end of FY11. However, management hopes to collect receivables at a faster pace going
forward and expects reductions in debtor days and working capital.
The company is seeing good traction in the building and water and environment sectors. It
expects an internal engineering, procurement, construction (EPC) order of Rs50bn from its
power subsidiary during the year. Management stated that the National Highway Authority of
India is also increasing its activities in the road sector.
Management said it is looking for stake dilution in its BOT subsidiary NCC Infra by way of
private equity investments. The move is aimed at releasing funds for its equity funding
requirements in its power and road projects and easing its debt situation.
The company’s total equity requirement guidance for FY12 is Rs2.5bn, and its total capex
guidance is Rs1bn.
Management said it has entered into a power purchase agreement (PPA) with the Andhra
Pradesh government for about 500MW power off-take from its 1,320MW Krishnapatnnam
power plant at Rs3.70/unit.
We cut our EPS forecasts 16% for FY12 and 19% for FY13
Our revised EPS forecasts drop mainly due to higher interest rate assumptions. We believe the
interest rate will remain at a relatively higher level vs last year as inflation in India remains high.
We are reducing our revenue growth forecast for FY13 by about 2% to 15% yoy as order
execution remained slow in the 1Q. Our FY11 revenue growth forecast of 11% is already below
management guidance of 15%.
Stock could remain under stress; we maintain a Hold
We have reduced our target price by 19% to Rs68.70 from Rs84.40. The main reasons for the
reduction in our target price are:
a lower EPS forecast for FY12 and a lower PE multiple on account of lower-than-expected
EPS growth; and
a lower valuation of its real estate subsidiary as a high interest rate and high inflation
environment has begun to have an impact on demand (and therefore pricing) of real estate
projects.
The stock is currently trading at around 0.6x one-year-forward price to book value, but may retest
the FY09 low levels of 0.4x as its core construction business continues to remain under pressure
due to macroeconomic factors. We maintain our Hold rating.
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