NCC :: Avendus 2012 top ideas

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Market price ignoring value of BOT assets
 NJCC’s current market cap of INR9bn ignores the true value of the
INR7.5bn it has invested as equity in road and power projects. Our
Dec12 TP of INR52 ‐ arrived at after taking a discounted P/B of 0.7x for
BOT assets ‐ implies an upside of 60%. The power project has received
sanction letters from lenders, and a likely stake sale to PE investors
would help unlock value. Even excluding the power project value in the
worst case, there would be a 26% upside in the stock. We cut our
FY12f‐FY14f EPS by up to 17%, factoring in lower order inflows and
execution. Our TP is rolled over to Dec12 and cut to INR52 on factoring
in lower earnings and the value of investments. Maintain Buy.
60% upside even after valuing BOT assets at discounted P/B of 0.7x
NJCC’s current market cap of INR9bn ignores the value of the INR7.5bn invested
as equity in road and power projects ‐ on increased risk aversion to the sector.
Our Dec12 TP of INR52 implies a 60% upside. Our TP is based on 0.7x P/B for
BOT assets ‐ a discount to: (i) P/B of 1.5x and above at which PE deals for road
and power assets have been concluded in the past 12 months and (ii) one‐year
forward P/B of 0.9x for IL&FS Transportation Networks (ILFT IN, Hold). Assuming
a P/B of 1.0x, (a c29% discount to our implied P/B target for ILFT’s BOT assets),
the potential upside would be higher at 94%.
Underperformance driven by fall in profitability and uncertain outlook
Higher interest rates and a slow down in orders have led to increasing pressure
on profitability. A rise in working capital has led to an increase in gearing and a
slow down in execution – leading to significant contraction in net margins and a
sharp y‐o‐y fall of up to 77% in PAT over the past few quarters.
In worst‐case, investments in real estate and power may be sunk
Assuming at worst that the power project fails to take off, the potential upside
would reduce to 26%. NJCC also has large exposure to the real estate business
in the form of equity (c15% of parent networth) and advances (c17% of parent
borrowing). In case of a sharp downturn in the real estate market, the company
may need to write off some investments or provide additional funding support.
Stake sale in power and road assets a catalyst for value unlocking
NJCC has received sanction letters from lenders for the 1320MW power project
and financial closure is likely by Mar12. The company would need to infuse
another cINR6bn in the power project. Given its limited resources, a PE stake
sale in assets is imperative and would help form a benchmark for valuations.
Cut TP to INR52; maintain Buy
We cut our FY12f‐FY14f EPS by up to 17%, factoring in lower order inflows and
execution. We value the standalone business at INR23/share, based on the
average value arrived using a P/E of 5.0x and EV/EBITDA of 5.0x. We ignore the
value of the real estate business (0.5x P/B earlier) and value the BOT assets and
international business at INR29/share using a 0.7x P/B multiple (1.0x earlier).
Based on the SOTP method, we arrive at our Dec12 TP of INR52 (INR72 earlier)
– implying an upside of 60%. Maintain Buy. Prolonged high interest rates and a
decline in the investment rate are the key risk factors.


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