India Midcaps

COMPANY UPDATE

NBCC
HSCC acquisition to expand bouquet of offerings
India Equity Research| Infrastructure - Construction

NBCC has been selected as the buyer for 100% strategic disinvestment of EDELWEISS RATINGS
HSCC (India) Limited (HSCC) for a bid amount of INR2.85bn. HSCC is Absolute Rating HOLD
primarily engaged in providing consultancy services in the healthcare Investment Characteristics Growth
space, and media reports indicate it has an order book of about
INR100bn. Since HSCC is a debt-free entity, we estimate the acquisition
will be EPS-accretive for NBCC; in addition, this will allow NBCC to MARKET DATA (R: NBCC.BO, B: NBCC IN)
expand its service offerings. All in all, the acquisition is positive for the CMP : INR 69
company in our view. Maintain ‘HOLD’ with target price of INR79. Target Price : INR 79
52-week range (INR) : 146 / 61
HSCC acquisition to strengthen presence in healthcare segment Share in issue (mn) : 1,800.0
M cap (INR bn/USD mn) : 120 / 1,677
NBCC had submitted a financial bid regarding the 100% strategic disinvestment of
Avg. Daily Vol. BSE/NSE (‘000) : 4,791.7
HSCC invited by the Department of Investment and Public Asset Management
(DIPAM). The company has now received a letter from DIPAM indicating that it has
SHARE HOLDING PATTERN (%)
been selected as the buyer for HSCC at a bid amount of INR2.85bn (share purchase
agreement yet to be signed). HSCC is a ‘Mini Ratna’ Government of India enterprise Current Q4FY18 Q3FY18
that provides comprehensive consultancy services in the healthcare sector, including Promoters * 73.7 74.3 74.5
hospital planning, design, PMC and procurement. According to media reports, it has an MF's, FI's & BKs 9.4 9.4 9.9
order book of about INR100bn. The company posted revenue of ~INR15bn in FY17 FII's 5.6 5.6 5.5
with an EBITDA margin of 2.6% and PAT of INR376mn (PAT margin of 2.5%). Others 10.7 10.7 10.1
* Promoters pledged shares : NIL
(% of share in issue)
Acquisition unlikely to strain balance sheet
NBCC is a net cash company (net debt:equity of (1.3x) at the end of FY18) with a cash PRICE PERFORMANCE (%)

balance of INR24.8bn at end-FY18. Hence, the INR2.85bn required for the HSCC BSE Midcap Stock over
Stock
Index Index
acquisition is not likely to strain NBCC’s balance sheet. HSCC is also a debt-free
company with a net debt:equity of (0.8x) at end-FY17; therefore, we expect the 1 month (2.0) (13.0) (11.0)
acquisition to be EPC-accretive for NBCC from the very beginning. 3 months (0.7) (26.8) (26.0)
12 months 0.1 (38.3) (38.5)
Outlook and valuations: Positive development; maintain ‘HOLD’
We believe HSCC’s acquisition is positive for NBCC—not only will it bolster the latter’s
capabilities in the healthcare segment, but would also add about INR100bn to order
book. We believe a quick resolution of the tree-cutting issue in the Delhi
redevelopment projects and a pickup in real estate monetization remains key triggers
for stock performance. We maintain ‘HOLD’ with a TP of INR79 (at 22x FY20E EPS).

Financials (Consolidated) (INR mn)

Year to March FY17 FY18 FY19E FY20E
Revenues 74,247 69,416 92,062 119,032
EBITDA 4,050 4,223 6,062 8,552
Adj profit 4,052 3,458 4,720 6,501
Parvez Akhtar Qazi
Dil. EPS (INR) 2.3 1.9 2.6 3.6 +91 22 4063 5405
Diluted P/E (x) 30.7 35.9 26.3 19.1 parvez.qazi@edelweissfin.com
EV/EBITDA (x) 25.0 23.5 15.5 9.8
ROAE (%) 23.2 19.9 23.2 26.8 September 14, 2018

Edelweiss Research is also available on www.edelresearch.com,

Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Infrastructure - Construction

Other highlights
 HSCC is a multi-disciplinary consultancy and procurement management service
organization in the healthcare and other social infrastructure development sectors. Its
services include conceptual studies, health-care facilities design, project management,
procurement and supply, logistics and installation, commissioning and skill
enhancement through training and retraining. HSCC's services have been utilized by
various organisations, both in public and private sectors, central government
departments, state governments as also international agencies like the World Bank,
WHO, among others for their projects in India and abroad.

 The acquisition of HSCC is part of the government’s decision to merge public sector
undertakings (PSUs) to create large state-owned companies. In addition to HSCC, NBCC
had also bid for the acquisition of Engineering Projects India (EPI), whose results are
awaited.

Table 1: HSCC – A financial snapshot

Particulars FY13 FY14 FY15* FY16* FY17
Revenues (INR mn) 338 392 4,900 10,218 15,112
Revenue growth (%) NA 16.0 1,150.3 108.5 47.9
EBITDA (INR mn) 118 163 171 645 392
EBITDA margin (%) 34.8 41.7 3.5 6.3 2.6
Reported profit (INR mn) 226 240 245 546 376
PAT margin (%) 66.8 61.2 5.0 5.3 2.5
Net worth (INR mn) 1,059 1,208 1,393 1,742 1,983
Debt (INR mn) - - - - -
Net Debt/Equity (x) (1.0) (1.2) (1.0) (0.9) (0.8)
Source: Edelweiss research
* Revenue recognition policy for FY16 has been changed; however, there is no change in
profitability due to change in accounting policy.
FY15 revenue has been restated in accordance with the new accounting policy.

 NBCC has a proven track record of acquiring PSUs and improving their financial
performance. It had earlier acquired Hindustan Steelworks Construction (HSCL) from
the Government of India. HSCC was struggling with muted revenue growth and low
operating profitability at the time of acquisition and had posted a loss of INR173mn in
FY17. Within a year of acquiring it, NBCC turned around HSCL, which posted a profit in
FY18 and paid dividends to NBCC too. This gives us confidence that NBCC will be able to
reap synergies from the HSCC acquisition.

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 NBCC

Company Description
NBCC is a Navratna PSU with a presence largely in the following segments:

Project Management Consultancy: NBCC does project management and consultancy (PMC)
work for projects awarded by various government arms such as the Ministry of Home
Affairs, Ministry of Corporate Affairs, Ministry of Urban Development, Ministry of Power
and Ministry of External Affairs. The company bags ~80% of the PMC works on a nomination
basis and the balance on a competitive bidding basis. Its competitors in this segment include
IRCON, WAPCOS, Engineering Projects India Limited (EPI) and Hindustan Prefab Limited.

EPC work for infra projects: In this segment, NBCC provides EPC services for power projects.
It undertakes design and execution of civil and structural works for power projects, cooling
towers, and chimneys. Projects in this segment are awarded on a competitive-bidding basis.
Major competitors in this segment are L&T, Gammon and Paharpur Cooling Tower.

Real estate development: NBCC develops realty projects on owned-land. Over the years,
surplus cash has been invested in buying land from government agencies. Currently, NBCC
owns a total of ~130 acres.

Investment Theme
NBCC is a Navratna public sector undertaking (PSU) in the construction space, which mainly
undertakes PMC work for government organisations. The company’s PSU status ‘ensures’
that about 80% of its PMC projects are on a nomination basis. NBCC’s diversified capabilities
make it the preferred choice for executing large-size projects.

The company’s experience in the real estate development space (the only PSU PMC player
with this capability) means it has a near-monopoly in redevelopment of government
colonies/development of government land.

Key Risks
Sub-contractor risk
NBCC sub-contracts actual construction work. Even when the work is sub-contracted on a
back-to-back basis, the ultimate responsibility for project completion rests with the
company. Any issue with the sub-contractor not being able to execute the project efficiently
can thus adversely impact project timelines and NBCC’s profitability.

Execution risk
The average size and complexity of projects handled by the company is increasing.
Completion of such projects within stipulated time and costs is paramount to maintaining
profitability.

Rising exposure to real estate development business

NBCC’s investments (in acquiring land bank) have been steadily increasing. With the real
estate industry facing a slowdown in many cities, the company may have to rejig its plan to
monetise this land bank.

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 Infrastructure - Construction

Financial Statements (Consolidated)

Key Assumptions Income statement (INR mn)
Year to March FY17 FY18 FY19E FY20E Year to March FY17 FY18 FY19E FY20E
Macro Income from operations 74,247 69,416 92,062 119,032
GDP(Y-o-Y %) 7.1 6.7 7.3 7.6 Direct costs 66,475 59,933 79,301 102,056
Inflation (Avg) 4.5 3.6 4.5 4.5 Employee costs 2,513 3,264 4,145 5,121
Repo rate (exit rate) 6.3 6.0 6.8 6.8 Other Expenses 1,209 1,996 2,555 3,303
USD/INR (Avg) 67.1 64.5 70.0 72.0 Total operating expenses 70,197 65,193 86,000 110,480
Company EBITDA 4,050 4,223 6,062 8,552
Raw Material (% net rev) (1.9) (1.1) (1.1) (1.1) Depreciation 54 51 52 53
Order intake (INR bn) 436 210 212 214 EBIT 3,996 4,172 6,009 8,499
Y-o-Y growth (%) 150.3 (51.9) 1.0 1.0 Less: Interest Expense 289 249 272 320
Book-to-bill ratio (x) 8.9 11.5 10.0 8.5 Add: Other income 1,506 1,543 1,949 2,409
Order backlog (INR bn) 659 800 920 1,015 Profit Before Tax 4,708 5,555 7,687 10,587
Order backlog growth (%) 121.4 21.3 15.0 10.3 Less: Provision for Tax 1,454 1,839 2,729 3,758
Revenue growth (% yoy) 27 (7) 33 29 Less: Minority Interest (292) 174 238 328
Other mfg(as % of sales) 91.4 87.4 87.2 86.8 Add: Prior period items 165 89 - -
Salary (% of revenues) 3.4 4.7 4.5 4.3 Add: Exceptional items (669) - - -
Depreciation rate (%) 5.5 3.8 3.8 3.8 Associate profit share 1 6 - -
Dividend per share 0.9 0.8 0.7 0.9 Reported Profit 3,547 3,547 4,720 6,501
Inc. in invts (INR mn) (1,615) (467) - - Prior Period(Net of Tax) 165 89 - -
Tax rate (%) 32.0 33.6 35.5 35.5 Exceptional Items (669) - - -
Capex (INR mn) 670 40 18 20 Adjusted Profit 4,052 3,458 4,720 6,501
Debtor days 126 134 114 113 Shares o /s (mn) 1,800 1,800 1,800 1,800
Inventory days 86 101 80 79 Adjusted Basic EPS 2.3 1.9 2.6 3.6
Payable days 152 186 261 199 Diluted shares o/s (mn) 1,800 1,800 1,800 1,800
Other creditors days 113 183 115 110 Adjusted Diluted EPS 2.3 1.9 2.6 3.6
Provisions days 134 201 233 234 Adjusted Cash EPS 2.2 1.9 2.7 3.6
Incremental debt (53) - - - Dividend per share (DPS) 0.9 0.8 0.7 0.9
Dividend Payout Ratio (%) 41.4 42.9 26.8 25.7

Common size metrics

Year to March FY17 FY18 FY19E FY20E
Operating expenses 94.5 93.9 93.4 92.8
Depreciation 0.1 0.1 0.1 -
Interest Expense 0.4 0.4 0.3 0.3
EBITDA margins 5.5 6.1 6.6 7.2
Other income 2.0 2.2 2.1 2.0
Tax 2.0 2.6 3.0 3.2
EBIT margins 5.4 6.0 6.5 7.1
Adjusted Profit margins 5.5 5.0 5.1 5.5

Growth ratios (%)

Year to March FY17 FY18 FY19E FY20E
Revenues 27.4 (6.5) 32.6 29.3
EBITDA 28.6 4.3 43.5 41.1
PBT 14.6 18.0 38.4 37.7
Adjusted Profit 40.1 (14.7) 36.5 37.7
EPS (6.6) (14.7) 36.5 37.7

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Balance sheet (INR mn) Cash flow metrics

As on 31st March FY17 FY18 FY19E FY20E Year to March FY17 FY18 FY19E FY20E
Share capital 1,800 1,800 1,800 1,800 Operating cash flow 7,111 2,072 5,124 9,665
Reserves & Surplus 15,138 17,855 21,326 26,106 Financing cash flow (44) 9 9 9
Shareholders' funds 16,938 19,655 23,126 27,906 Investing cash flow (945) (427) 18 20
Minority Interest 2,381 1,522 1,760 2,088 Net cash Flow 6,122 1,654 5,151 9,694
Long Term Liabilities 1,945 978 1,015 1,054 Capex (670) (40) (18) (20)
Def. Tax Liability (net) (1,228) (1,396) (1,396) (1,396) Dividend paid 2,018 1,776 1,487 2,049
Sources of funds 20,036 20,760 24,505 29,652
Gross Block 1,311 1,350 1,370 1,390 Profitability and efficiency ratios
Net Block 1,235 1,226 1,193 1,160 Year to March FY17 FY18 FY19E FY20E
Capital work in progress 2 2 - - ROAE (%) 23.2 19.9 23.2 26.8
Total Fixed Assets 1,237 1,227 1,193 1,160 ROACE (%) 31.6 28.2 34.6 39.8
Non current investments 272 278 278 278 Inventory Days 97 95 94 93
Cash and Equivalents 23,049 24,819 30,163 40,135 Debtors Days 118 116 115 114
Inventories 15,713 16,582 23,774 27,752 Payable Days 118 120 120 120
Sundry Debtors 25,674 25,426 32,081 41,621 Cash Conversion Cycle 97 91 89 87
Other Current Assets 13,486 22,578 29,351 32,229 Current Ratio 1.3 1.3 0.9 0.9
Current Assets (ex cash) 54,872 64,586 85,206 101,602 Net Debt/Equity (1.4) (1.3) (1.3) (1.4)
Trade payable 30,871 35,296 65,879 64,935 Interest Coverage Ratio 13.8 16.7 22.1 26.5
Other Current Liab 28,523 34,854 26,455 48,588
Total Current Liab 59,395 70,150 92,335 113,523 Operating ratios
Net Curr Assets-ex cash (4,522) (5,564) (7,128) (11,921) Year to March FY17 FY18 FY19E FY20E
Uses of funds 20,036 20,760 24,505 29,652 Total Asset Turnover 3.6 3.4 4.1 4.4
BVPS (INR) 9.4 10.9 12.8 15.5 Fixed Asset Turnover 80.1 56.4 76.1 101.2
Equity Turnover 4.3 3.4 4.0 4.3
Free cash flow (INR mn)
Year to March FY17 FY18 FY19E FY20E Valuation parameters
Reported Profit 3,547 3,547 4,720 6,501 Year to March FY17 FY18 FY19E FY20E
Add: Depreciation 54 51 52 53 Adj. Diluted EPS (INR) 2.3 1.9 2.6 3.6
Interest (Net of Tax) 200 167 175 207 Y-o-Y growth (%) (6.6) (14.7) 36.5 37.7
Others 9,800 (1,617) 1,777 7,736 Adjusted Cash EPS (INR) 2.2 1.9 2.7 3.6
Less: Changes in WC 6,490 76 1,601 4,832 Diluted P/E (x) 30.7 35.9 26.3 19.1
Operating cash flow 7,111 2,072 5,124 9,665 P/B (x) 7.3 6.3 5.4 4.5
Less: Capex 670 40 18 20 EV / Sales (x) 1.4 1.4 1.0 0.7
Free Cash Flow 6,441 2,033 5,106 9,645 EV / EBITDA (x) 25.0 23.5 15.5 9.8
Dividend Yield (%) 1.4 1.2 1.1 1.4

Peer comparison valuation

Market cap Diluted P/E (X) EV / EBITDA (X) ROAE (%)
Name (USD mn) FY19E FY20E FY19E FY20E FY19E FY20E
NBCC 1,677 26.3 19.1 15.5 9.8 23.2 26.8
Ahluwalia Contracts 270 12.9 10.3 6.5 5.0 21.5 21.7
Capacit’e Infraprojects Limited 239 16.5 12.7 6.8 5.3 13.0 14.8
Median - 16.5 12.7 6.8 5.3 21.5 21.7
AVERAGE - 18.3 13.8 9.5 6.7 19.3 21.1
Source: Edelweiss research

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Additional Data
Directors Data
Dr. Anoop Kumar Mittal Chairman and Managing Director Mr. Rajendra R. Chaudhari Director (Commercial)
Mr. Neelesh Shah Director (Projects) Mr. Ashok Khurana Independent Director
Major General Tajuddin Moulall Mhaisale Independent Director Mr. C Subba Reddy Independent Director
Mr. C. R. Raju Independent Director Mr. Rajendrasinh G. Rana Independent Director
Mr. Sairam Mocherla Independent Director Smt. Jhanja Tripathy Nominee Director
Mr. Manoj Kumar Nominee Director

Auditors - M/s Jagdish Chand & Co

*as per latest annual report

Holding – Top 10
Perc. Holding Perc. Holding
LIC 6.55 Nomura 1.60
ICICI Prudential 1.02 Vanguard Group 0.78
Credit Agricole 0.38 Jupiter Investment Management 0.34
HDFC AMC 0.34 HSBC 0.27
JP Morgan AMC 0.20 Kotak Mahindra 0.20
*as per latest available data

Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
11 Dec 2017 Societe Generale Buy 7331990 260.40
11 Dec 2017 Morgan Stanley France Sas Sell 7331990 260.40

*as per last available data

Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
10 Jul 2018 The President Of India Through Ministry Of Housing & Urban Affairs Buy 1124042.00
15 Jun 2018 The President Of India Sell 8009687.00

*as per last available data

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 NBCC

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com

ADITYA
Digitally signed by ADITYA NARAIN
DN: c=IN, o=EDELWEISS SECURITIES LIMITED,
Aditya Narain ou=HEAD RESEARCH, cn=ADITYA NARAIN,
serialNumber=e0576796072ad1a3266c27990f20
bf0213f69235fc3f1bcd0fa1c30092792c20,
Head of Research
NARAIN
postalCode=400005,
2.5.4.20=3dc92af943d52d778c99d69c48a8e0c89
e548e5001b4f8141cf423fd58c07b02,
aditya.narain@edelweissfin.com st=Maharashtra
Date: 2018.09.14 14:20:38 +05'30'

Coverage group(s) of stocks by primary analyst(s): Infrastructure - Construction

Ahluwalia Contracts, Ashoka Buildcon, Capacit’e Infraprojects Limited, Hindustan Construction Co., J Kumar Infraprojects, KNR Constructions, NBCC,
Nagarjuna Construction Co, PNC Infratech, Sadbhav Engineering, Simplex Infrastructures Ltd
`
Recent Research
Date Company Title Price (INR) Recos
05-Sep-18 Construction Road sector: Changing lanes;
Sector Update
31-Aug-18 Ahluwalia On track to achieve growth 313 Buy
Contracts guidance;
Visit Note
27-Aug-18 J Kumar Site visit soups up confidence 233 Buy
Infraprojects in growth potential;
Company Update

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period
* 1stocks under review
Hold appreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 156 62 11

One year price chart

150

130

110
(INR)

90

70

50
Dec-17

Aug-18
Oct-17

Apr-18
Nov-17

May-18
Sep-17

Feb-18

Sep-18
Jan-18

Mar-18

Jun-18

Jul-18

NBCC

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