NCC Limited 1QFY12: Interest cost hurts :: Macquarie Research,

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NCC Limited
1QFY12: Interest cost hurts
Event
 NCC reported its 1QFY12 results. Revenues grew 5% YoY and earnings
declined 44% YoY mainly due to high interest costs.
 We  cut our standalone earnings by 17-18% and  reduce our target price to
Rs77 (from Rs111) as we change the valuation methodology from PER to
EV/EBITDA due to rising debt. We  think  that if an investor has to remain
invested in the midcap construction space, NCC is the preferred play.
Impact
 Revenue growth continues to lag, margins improve:  NCC reported
revenues of Rs11.4bn (up 5% YoY) with 10.2% EBITDA margin (50bps
improvement YoY). However, net earnings at Rs233mn were down 44% YoY
mainly due to a sharp increase in interest costs due to rising debt.
We are building revenue growth of 11% in FY12 against management’s
guidance of 15-16% with a 10% margin (against management’s guidance
of 10-10.5%).
 Debt situation remains grim, working capital needs to improve: Working
capital cycle has deteriorated significantly over FY11 due to poor revenue
growth and fund infusion into subsidiaries. Working capital rising from 180
days in FY10 to 203 days in FY11 has led to net debt: equity increasing from
1x to 1.05x. The management is targeting debt reduction by a stake sale in
real estate projects and fund raising in other assets which would reduce fund
infusion from the parent into subsidiaries.
 We remain lower than management guidance on order inflow: NCC had
order inflows of Rs13bn in 1QFY12 and is targeting Rs90bn order inflow
(excluding inhouse power project). NCC believes the roads and buildings
segment would drive 30% order inflow growth. However, we are building in
only 10% order inflow growth for FY12.
 Power plant nearing financial closure: NCC’s 1,320MW Krishnapatnam
power plant (55:45 JV with Nelcast) is nearing financial closure. NCC expects
to award a Rs50bn EPC order from this power plant over next 3-4months.
Earnings and target price revision
 We reduce our FY12-13 EPS by 17% and 18% mainly on account of higher
interest costs (due to higher interest rates). We change our target price to
Rs77 (from Rs111 earlier) as we change our valuation methodology.
Price catalyst
 12-month price target: Rs77.00 based on a Sum of Parts                                                            
Sum of parts methodology.
 Catalyst: pick up in execution and reduction in debt
Action and recommendation
 Debt remains the biggest worry, preferred pick in midcap space: NCC needs
to repair its balance sheet, especially on the working capital side. However, if an
investor needs to remain invested in the midcap construction space, NCC is our
preferred play. Our revised target price is Rs77 (from Rs111 earlier).