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NCC Limited (NCCL.BO, Buy)
Close to trough valuations compensate for structural weakness – potential for substantial mean
reversion when the order inflow and rate cycle reverses
We continue to highlight NCC Limited (NCC) as our top-pick within the mid-cap construction space for its: (1)
relatively attractive valuation (68% discount to its historical P/B); (2) better visibility than its peers on nearterm
growth prospects, and (3) relatively strong balance sheet, with a lower equity requirement relative to its
peers (lowest proportion of captive projects in order book). We reiterate our Buy rating on NCC.
The company’s diverse order book makes it relatively safe to execute on problems on region and segmentspecific
issues (35% of its order book is in buildings and housing spread between 8 segments and 15% of its
order book is in its international division).
Although order inflows have been weak recently – FY11 inflow declined 23% and 1Q FY12 declined 33% – the
company’s previous track record of growing faster than the industry during 2005-2008 supports our mean
reversion argument for the stock.
Equity requirement over FY12E in the current BOT projects under construction of Rs2.75bn could be funded
through internal accruals, in our view. However, we think equity requirement to fund the Nelcast Power Plant
may require the need to raise additional capital (largely debt, though, in our view).
Catalyst
Start of toll collection on the new road projects over the next quarter will be key as these projects start to
contribute to revenue.
Financial closure for the Nelcast Power Plant will strengthen the company’s ability to tie up funds and
execute this large-scale project.
Valuation
Post the 62% decline in NCC’s stock price ytd, we believe the risk-reward for the stock is attractive. We
believe the recent decline in the company’s stock price is unjustified and more than factors in
concerns over regular equity dilution and its potential to improve capital efficiency.
We lower our 12-month SOTP-based target price to Rs76 (from Rs118), as we value the domestic construction
business on 6X average FY12E and FY13E EV/EBITDA (from 10X P/E earlier, in line with our target multiple for
construction peers), international business on 7X average FY12E and FY13E EPS (from 10X earlier, reducing
growth prospects and higher risk due to fixed cost contracts), and we continue to value BOT projects at cost
of equity of 15%.
NCC is trading at 7.6X 12-month forward P/E (parent basis), a 40% discount to its historical median. We lower
our FY12-FY14 EPS estimates by 10%-22% based on slower-than-earlier assumed order inflows and slightly
higher interest expenses.
Key downside risks
(1) Commodity and raw material price increases, (2) higher tax provisions, and (3) capex weakness.
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