NBCC: from concept to creation

NBCC (India) Ltd (NBCC) is one of fastest and largest growing Central Public Sector Enterprises (CPSE), which has built a niche business model, backed by stellar credentials, vast client base and exemplary execution track record. The company’s unique business model is underpinned by negative working capital cycle and robust return ratios (25%+). NBCC’s stellar credentials and vast expertise have grabbed the government’s attention and its PWO status has helped it to win various prestigious projects over the years. We believe that NBCC will report strong revenue/PAT CAGR of 29%/30% over FY18- FY20E, led by a healthy order book of Rs750bn, primarily driven by the PMC business. In our view, armed with a robust balance sheet, healthy cash flow generation and limited capex, NBCC is expected to report return ratios of 28%/31% in FY19E/FY20E.  PWO status gives critical edge vs peers; leads to robust order book, stable margins and strong return ratios Bestowed with the “PWO status”, NBCC has built a niche business model, backed by strong credentials, vast clientele and exceptional track record on execution. We believe that NBCC’s growing significance among the government agencies and the open book tendering process safeguard operating margin the range of 6-8% with minimum downside risk. The distinct business model is underpinned by a negative working capital cycle and robust return ratios (25%+), which along with minimal capex lend solidity as the entire construction work is outsourced to private players. Redevelopment model to accelerate growth NBCC has taken big leaps in the redevelopment segment after bagging the redevelopment of New Moti Bagh in New Delhi. It has bagged 3 marquee redevelopment projects in New Delhi accounting for 80% of total size (Rs320bn), which will further accelerate growth. Further, in our view, the scope of redevelopment projects is expected to magnify as other states such as Orissa, Rajasthan, West Bengal etc. are looking to explore this opportunity. We believe that NBCC is well positioned to capitalize on the emerging opportunities given its strong pedigree in design and execution capabilities.  Based on its unique asset-light business model, enviable PWO status, healthy return ratios, negative working capital cycle and robust order book, we foresee strong revenue visibility for NBCC going ahead. At CMP, the stock trades at P/E of 39.3x on FY19E EPS and 30.7x on FY20E EPS and at an EV/EBITDA of 28.8x on FY19E and 22.4x on FY20E. We have assigned a premium multiple to NBCC, valuing it at 40x on its FY20E EPS of Rs7.9, arriving at a TP of Rs318. We initiate coverage with a BUY rating on the stock.