Two-line summary: NCC Ltd is engaged in the infrastructure sector, primarily in the construction of industrial and commercial buildings, housing, roads, bridges and flyovers, water supply and environment projects, railways, mining, power transmission lines, irrigation and hydrothermal power projects, real estate development, etc 1.
Business Summary 2 (May 2020)
Scale: Second largest Listed construction company in terms of revenues in India.
Order Book: 26,572 cr as on March 31, 2020. New orders of INR 7172 crs received up to March 31, 2020. Order book to sales ratio of 3x provides strong cash flow visibility for next 3 years
Geographically diversified: Key projects executed:
Agra Lucknow Expressways – Uttar Pradesh
ESI Hospital and Medical College, Gulbarga, Karnataka
Outer ring Road, Hyderabad Growth Corridor – Telangana
Infrastructure development, Ministry of Defence ‐ Arunachal Pradesh
Water Supply Project, Rajkot ‐ Gujarat
Nagpur Metro - Maharashtra
3 AIIMS - Himachal, Bihar, Punjab (page 18)
3 Airports
BESCOM, KENGERI Bangalore
Diversified Order book and revenue stream: across different types of constructions undertaken:
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Comparison with Peers on Key Financials
| NCC Ltd | Prestige Estates Projects Ltd | KNR Constructions Ltd | Larsen & Toubro Ltd | |
|---|---|---|---|---|
| Market Cap | 2009.39 | 7594.16 | 2927.59 | 130367.73 |
| Stock P/E | 5.57 | 20.04 | 10.70 | 13.56 |
| Dividend Yield | 4.56 | 0.79 | 0.24 | 1.08 |
| ROCE | 22.32 | 10.11 | 19.23 | 13.46 |
| Sales Growth (3Yrs) | 10.62 | -2.21 | 24.35 | 11.72 |
| PEG Ratio | 0.03 | 10.89 | 0.31 | 0.95 |
| Debt to equity | 0.38 | 1.61 | 0.53 | 2.15 |
| Interest Coverage Ratio | 1.79 | 1.77 | 3.94 | 2.30 |
| Price to book value | 0.41 | 1.42 | 1.87 | 1.95 |
| Dividend Payout Ratio | 15.57 | 13.53 | 2.08 | 28.35 |
| Pledged percentage | 34.18 | 0.00 | 0.00 | 0.00 |
| Sales growth 3Years | 10.62 | -2.21 | 24.35 | 11.72 |
| Operating cash flow 3years | 1572.51 | 2347.80 | 842.15 | -8092.61 |
| Price to Free Cash Flow | 6.98 | 22.11 | 38.68 | -23.84 |
| OPM | 12.10 | 28.89 | 25.39 | 16.93 |
| Asset Turn Ratio | 1.77 | 0.41 | 1.11 | 0.75 |
| Receivables to Sales | 0.31 | 0.18 | 0.07 | 0.28 |
Key Conclusions from Peer comparison:
Things going for NCC: Low debt/equity ratio, high dividend payout, free cash flows, Asset light model: high asset turnover, low P/E and P/B ratios
Things not going for NCC: Low Operating profit margins, high promoter pledge
Reason to Invest:
Reasons to Avoid:
Disc: Invested and forms about 4% of my discretionary stocks portfolio. Will look to add more at lower levels or post Quarterly results.
Invite fellow s comments and thoughts.
24 Likes L&T - Bluechip, Value play, Digital giant in making starpointer97 2A small point in favour of NCC is that Mr. Jhunjhunwala has a 7% stake in the company.
1 Like informer 3 sahil_vi:Nagarjuna Construction Company
Good post.
Based on a quick look, another negative seems to be a low promoter holding at only 19.57%. Would have liked to see a higher one here.
As per screener, as of March 2020, the Big Bull actually has a 10.32% holding.
nithin_Shenoy 5Government has already lot of issues currently with liquidity and reviving economy
Their current set of receivable’s are growing and are on credit - would we except to get this return? is the management good enough to get this back?
NCC :
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HCC :I understand that HCC has its own set of problems with respect to Lavasa and am not sure whether the story might to be as same as HCC? - can some expert help me understand this?
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In comparison with HCC : this is a same case where they are awaiting for cash to come in and might take longer than expected
NCC Management is paying the debt and the debtor days has substantially reduced - which is a good sign in terms of construction company
1 Like sahil_vi 6 informer:Based on a quick look, another negative seems to be a low promoter holding at only 19.57%. Would have liked to see a higher one here.
In the May 2018 Concall (Page 13 of pdf), Executive VP Y.D. Murthy said : “The idea is the promoters would like to maintain their
shareholding in NCC at around 20%”. So it is a stated objective that they would like to maintain promoter holding near 20%. The holding is low, yes, but it is relatively stable. This gives me some confidence.
Their current set of receivable’s are growing and are on credit - would we except to get this return? is the management good enough to get this back?
In the latest concall Mr YD Murthy says : “…the secretariat from Amaravati to Vizag they are likely to b€ canceled, they are put on hold for
the time being but we are having a dialogue with the government on all these matters and some
cases they have agreed lo return lhe bank guarantees so that our bank guarantees limits will be
available and also we requested them lo set off the mobilization advance against receivables
pending to be paid to us that also will release the mobilization advance bank guarantees…” As we can see the management is using some ingenious techniques to reduce trade receivables.
To better understand receivables position, I will add a new column to original post peer comparison table.
Please note that L&T who is the industry leader has 40k cr of receivables against latest sales of 1,45,000 crores. This is a sector where receivables are in general high. I dont think the receivables position would change depending on management much (modulo the smart moves management is already moving) it would depend on the liquidity position of Governments of India. (since they seem like largest clientele base for NCC). To that extent, I’m expecting the receivables to be improving when india gets on to a high growth path.
and am not sure whether the story might to be as same as HCC? - can some expert help me understand this?
Apologies for my ignorance. Can you please point out what the story is with respect to HCC? Please do link to any specific post from any existing threads if that helps.
The thing which i find interesting about NCC is that despite the receivables being high company is generating good cash flows (even free cash flows) which is a rather rare feat for a construction company.
nithin_Shenoy:NCC Management is paying the debt and the debtor days has substantially reduced - which is a good sign in terms of construction company
This coupled with the debt reduction means that the free cash flows can be expected to be improved in the near-term future. Interesting tidbit on the debt-restructuring from the recent (may 2020) concall i have linked before:
Question: Have we availed the moratorium which is the facility which is available?
Answer (Mr YD Murthy): we have not availed. We have paid the interest for the month of March and April also. May also we are planning to pay but recently the Reserve Bank has come out with another three months of moratorium up to August and also they have put a clause thal the moratorium that is granted for six months can be converted into FITL- Funded interest Term Loan and that directs the banks to convert those interest amounts into FITL and give it as a separate loan to be repaid on or before March 31,2021 Now each bank is to take up at the board level, set up a facility and convey to
companies like us whoever are likely to take advantage of that because the cash flows will
improve and in all probability these loans may carry a lesser rate of interest and also I would like
to bring to your notice based on the RBI directions all the banks are giving COVID loans up to
10% of the working capital limits. If I am enjoying a limit of Rs. 100 Crores, Rs. 10 Crores is
given as a COVID loan at MCLR without any mark up, which is they are giving at a very good
rate. We got loans at 8%. we got loans at 7.25%, some are in the pipeline likely to be sanctioned
now since we have Rs 208 Crores of fund based limit presuming that all the banks in the
consortium due to this COVID loan we are likely to get a cash flow of about Rs. 208 Crores that
too at a concessional rate.
the cash flows will
improve and in all probability these loans may carry a lesser rate of interest
This is the year over year interest cost of the company and debt present on book at that particular year.
| | Mar-08 | Mar-09 | Mar-10 | Mar-11 | Mar-12 | Mar-13 | Mar-14 | Mar-15 | Mar-16 | Mar-17 | Mar-18 | Mar-19 | Mar-20 |
|—|—|—|—|—|—|—|—|—|—|—|—|—|—|—|
|Interest | 128 | 208 | 250 | 271 | 645 | 596 | 654 | 737 | 642 | 513 | 460 | 522 | 554 |
|Total Debt | 1548 | 2697 | 3252 | 4580 | 5316 | 3909 | 3914 | 3390 | 3208 | 2572 | 2061 | 2691 | 1873 |
|Interest rate | 8% | 8% | 8% | 6% | 12% | 15% | 17% | 22% | 20% | 20% | 22% | 19% | 30% |
During 2008 till 2011, interest cost was normal (<=8%). For 2012-14, it ranged between 12-17%, increasing year over year. In last 5 years, the rate has been very high consistently higher than >20%, and in recent financial year, it touched 30%. The cost of borrowing seems to be too high. Either the company is reporting lower debt numbers, borrowing in-between and hence paying higher debt or the lenders are charging them very bad. The cost of borrowing has been going up, even though there was interest rate broadly for some time no @sahil_vi What is your view about this?
Another aspect of business is Retention Money and its effects. Retention money is required to be paid by developers for contract work in progress currently, which means that more number of contracts in progress, more amount of money to be deposited and hence kept away from company in the form of retention money.
| | Mar-09 | Mar-10 | Mar-11 | Mar-12 | Mar-13 | Mar-14 | Mar-15 | Mar-16 | Mar-17 | Mar-18 | Mar-19 |
|—|—|—|—|—|—|—|—|—|—|—|—|—|
|Retention Money| 490 | 695 | 816 | 1095 | 1248 | 1272 | 1500 | 1668 | 1691 | 2099 | 2214 |
| Revenue | 4786 | 5897 | 6229 | 6665 | 6968 | 7271 | 9512 | 9527 | 9000 | 8390 | 12895|
| RM % of Revenue |10% | 12% | 13% | 16% | 18% | 17% | 16% | 17% | 19% | 25% | 17% |
| Total Asset| 6,789| 8,497| 10,546| 12,069| 11,190| 12,115| 12,545| 12,321| 11,109| 12,408| 14,660| 13,812 |
|RM % of total asset | 7% | 8% | 8% | 9% | 11% | 10% | 12% | 14% | 15% | 17% | 15% |
Approx. 15% of total assets of the company is tied in Retention Money and is contractual (need not be returned if there is issues in construction quality). The Retention money amount seems to be increasing year over year both as absolute number and also as percentage of revenue (RM as 10% of revenue in 2010 to approx 20% in last few years). Why is it so? Are authorities demanding more retention money per project or there are amounts stuck over many years. Retention money problem implies that as company earns more and more revenue, more and more amount of money would keep getting tied and doing nothing productive for the company. This creates issues for company as it needs to borrow the amount to deposit with authorities. This not only creates receivables issue, but also might be the reason of very high interest rate.
As a construction company recognizes sales based on percentage of completion method (judgement of management) and so revenue numbers should not be relied upon wholly. Similarly reported profit can not be consistent for such companies, which shows large variation in NCC’s PAT over years. So asset based valuation might make sense, Out of total assets of Rs 13,812 Cr, 11,935 Cr is in other assets (cash of just 389 Cr). 83% of company is in other assets which are non-cash and in the form of Retention Money, Trade Receivables and so on. Hence I am unable to identify what should be the value of such assets. @sahil_vi, Can you shed some light on how you are valuing this company and what should be the fair value of the company, given such constraints in the nature of business.
12 Likes sahil_vi 11Hi @jhasuraj, this is a great question. Let me dive deep into it.
jhasuraj:This is the year over year interest cost of the company and debt present on book at that particular year.
I went through the annual reports to get a deeper dive into the company’s financials. In this case, the screener data seems a bit wrong. Screener includes in interest costs, non-interest costs as well. Around page 123-133 of AR 2018-19 contains the consolidated financial statement. Going over the notes for the individual items is very useful for an investor to understand the various line items.
The company doesn’t have a line item called interest in its consolidated P&L statement, it only has “Finance costs” which is explained in Note 35.
Going over to note 35 (Pg 174 of pdf) one will observe that interest costs are each of the type of loans are actually 6-11% (i’m using a broad range since i have not calculated exact numbers for each of them. Largest portion of debt is (working capital demand loans + cash credit) for which interest cost is 184 cr for total borrowings of 1637 cr. (Note 23) This works out to 11%).
What inflates the finance costs is the “Interest expense on Mobilisation Advance: 131.59 cr” and “Other Borrowing Costs: Commission on - Bank Guarantees: 97cr”.
A quick Google Search leads us to this quora answer clearly explaining what mobilization costs are. Having said that, I am also clueless what this mobilization advance interest expense is.
As far as bank guarantees are concerned, i don’t understand it well but would urge other s to contribute so that together we can figure out what this is.
Going over notes 19 and 23, we can see that the interest costs for company’s borrowings are in the 6-11% range.
jhasuraj:Approx. 15% of total assets of the company is tied in Retention Money and is contractual (need not be returned if there is issues in construction quality).
You are right. Here is note 44 reproduced to highlight what you are saying
“Consequent to the encashment of Bank Guarantees (BGs) of ` 343.10 crores in the year 2017-18 by one of the customer, NCCL invoked the arbitration clause and submitted a claim of 1,571.41 crores towards refund of retention money, refund of BGs amount, payment of pending bills, additional works done and cost incurred on prolongation of the project by the customer. Against which, the customer has filed a counter claim of 1,071.46 crores towards liquidated damages, turbine replacement, balance works, etc.
As per the management assessment and legal advise, no provision is required for the subject matter and arbitration proceedings are expected to be completed in a year’s time.”
This seems to be the nature of the business though. I feel there are 2 aspects to this: Sector specific and company specific. We need to tease them apart to understand the merits of investing in the sector and also the company. Also, as investors we can and should certainly question the management about these things to get a deeper understanding into how things work in this sector and for this company.
jhasuraj:So asset based valuation might make sense, Out of total assets of Rs 13,812 Cr, 11,935 Cr is in other assets (cash of just 389 Cr). 83% of company is in other assets which are non-cash and in the form of Retention Money, Trade Receivables and so on. Hence I am unable to identify what should be the value of such assets. @sahil_vi, Can you shed some light on how you are valuing this company and what should be the fair value of the company, given such constraints in the nature of business
I disagree with this. I dont think we can or should value construction companies on assets. Just because construction companies recognize revenue on a percent completion basis, i dont think it is a good enough reason to avoid revenue based valuation completely. Im sure management uses some leeway in recognizing revenue. But this is a nature of the business. This means that there would always be some degree of uncertainty in the revenue number. If management claims revenue is 10,000 cr it could potentially be in [8,000-12,000] range, unless we distrust the management entirely. There are two approaches to investment one can take:
I fall more in the second camp. Falling in 1st camp really restricts what one can invest in.
jhasuraj:. @sahil_vi, Can you shed some light on how you are valuing this company and what should be the fair value of the company, given such constraints in the nature of business
Estimating the fair value of a company is a herculean task and I do not claim to have any expertise in it. What i can say is that it is undervalued. Is it undervalued by 100% or 300% or 1000%? I do not kno
The metrics I use for valuation are MarketCap/Free Cash Flow and MaketCap/Revenue. The very fact that a construction company generates free cash flow is what makes me salivate when looking at NCC. It is not often that we find a construction company generating free cash flo Forget free cash flow, L&T has not been able to generate even positive operating cash flows for the last 4 years: .aspx
(the fourth year (FY20) data I got from its filings).
How the company decides to structure its liabilities and operate are more fine grained details. One can and should certainly deep dive into financials But there is always a concern that Analysis Paralysis might plague the investor in such cases.
Btw one thing i wanted to point out is that IMO looking for undervalued growth-oriented companies fundamentally requires us to look for sectors with tailwinds. I would vastly prefer investing in an undervalued company which is good (but not great) but exists in a sector with tailwinds as against a great fairly-valued company which faces headwinds at a sectoral level. And I do believe construction sector has great tailwinds. Covid has thrown government’s current plans out of the picture, but we are at the fag end of capex cycles as well. I expect India’s GDP growth, and subsequently the government’s ability to execute the NIP to improve drastically 2021 onwards. All these tailwinds would IMO result in NCC earnings to grow (construction company earnings are very closely tied to GDP and infra and capex growth), for NCC to become a turn-around story and hence get rerated (whichever valuation metrics one is using).
8 Likes jhasuraj 12As per quora answer posted above. It looks like Mobilization advance is the amount paid by government to the contractor to do the construction. But the government does not give advance without any collateral, they demand collateral, which is bank guarantee in this case. if found guilty of any malpractice, government can en-cash contractor’s bank guarantee without taking contractor’s consent. So company needs to avail bank guarantee service of banks. Also, it seems that company is paying interest cost on Mobilization advances received from government.
Now trying to assess how much company gets as advance. and how much company pays in return. For FY 2019,
Total advances = 1,955 Cr (1846 Cr)
Total Borrowings = 2,691 Cr (2061 Cr)
Total money raised = 4,646 Cr (3907 Cr)
Finance Cost items :
Interest on
Other Costs associated to borrowings
Total Finance cost = 522 Cr (460 Cr)
Interest rate = 11.2% (11.7%)
This explains the situation about higher interest cost. Actual borrowings should be considered as 4,646 Cr (3907 Cr) instead of currently reported 2,691 Cr (2061 Cr). Debt to Equity should be 0.65 (Reported 0.38).
Would Finance charges paid by company reduce if there are lower rate of interest? Out of 522 Cr paid, 233 Cr (Debenture, term loan and working capital loan) is directly linked with interest rate of banks and might reduce. Approx 50% of finance charges are either paid to government agencies or paid as fee to banks, which might not reduce even with reduction in rates. Unless there are changes from government side related to such guarantees. One can have a look at How exactly do banks calculate fees for bank guarantee to understand charges better.
This exercise above was to understand the situation better. The above complicated nature of arrangement seems to be the nature of construction sector. I still have some questions on this. What happens if government en-cashed such bank guarantee? will bank take such loss or will company take the hit? How much loss of asset can happen in those situations?
sahil_vi:One can and should certainly deep dive into financials But there is always a concern that Analysis Paralysis might plague the investor in such cases.
Not qualified to comment on this. I am a beginner and would rely on data more than my intuition.
7 Likes subhajit1801 13Disc: Invested around 4.2% of my PF.
I work with an MNC in Electrical industry and NCC is my customer. Let me share some real insights so that people can make better judgement.
In last 4 months, I have picked up 3 orders from them for their 3 building projects - IIT-Patna, IIT-Ropar, and AIIMS-Guwahati. In last 1 year we have taken another 4 orders - AIIMS-Bhatinda, Amravati (70% share of wallet), Lucknow Airport and Agartala Airport. We are also negotiating a deal for AIIMS-Bilaspur. Receivables to us were paid on time mostly (except for Amravati projects). They are still expecting around 500 cr from AP Govt. NCC is quite strong in Building & Factory segment. They have healthy order book and just next to L&T in this B&F segment. International Convention Center-Delhi project (a part) is also with them. So, in terms of potential on business is taken care of. The management is deeply engaged with couple of State Govt - U.P, Uttarakhand, A.P, Telangana. Shifting of Amravati to Vizag can not happen in total but NCC will be one of the beneficiaries in both cases
I am into the industry for last 15 years and have seen companies like Simplex, Punj Lyod, Lanco etc going bust due to high leverage and without able to collect money from their customers. NCC is far better in terms of Order picking and receivable collection which I believe are heart and lungs of the business.
Hence I am bullish about the company…
16 Likes sahil_vi 14Quarterly results declared:
2.31 MB
Revenued halved, overall a small loss on operating basis. Operating leverage working in the opposite direction.
Quarterly results conference call:
Will post my analysis/comments if I find anything interesting in it (yet to listen to it).
My Notes:
Thanks for sharing, A lot of comments made by Mr Murthy were repetitions of the concall. A few new things I learned:
PS: I am quite surprised that most indian business news channels focus a lot on margins, but not so much on asset turnover ratios (like Asset Turnover Ratio or Fixed Asset turnover Ratio).
PPS: It was a bit awkward to watch Mr Murthy answer in English for questions asked in Hindi. I hope they interview him on CNBC TV18 next time so that the questions can be in English too.
Hi Sahil,
Thanks for starting a thread on this
Construction industry does seem attractive in the long run, coupled with the fact that most of the stocks in this industry were hammered pretty badly in the crash.
What I want to understand is, except the financials, how does NCC differ with its peers like PSP Projects or KNR Constructions? (in case you have some idea about it)
Which leads to a similar but broader question- What exactly is the key differentiator in this industry? Low Cost? Order book size? Or intangibles like execution strategy?
Also, comparing it to PSP Project which has a P/E of ~14, what is it that the market sees in that company which it doesn’t in the others?
3 Likes sahil_vi 19Hi Ansh,
Ansh_Gupta:Construction industry does seem attractive in the long run, coupled with the fact that most of the stocks in this industry were hammered pretty badly in the crash.
To me the attractive part comes from the fact that we have a severe lack of infrastructure. Government wants to execute projects worth 100 lakh crores in next 5 years as a part of national infrastructure pipeline. The industry tailwinds are palpable but have not manifested themselves in the numbers yet. Yet, the stock market seems to be moving in anticipation already. (or could also be due to the very bad beating that these infra stocks got). I cannot comment much on the vagaries of the stock market, but as per my understanding, infrastructure and construction companies will make a come-back, as the infra-spending cycle turns.
Ansh_Gupta:What I want to understand is, except the financials, how does NCC differ with its peers like PSP Projects or KNR Constructions? (in case you have some idea about it)
NCC is very very diversified. The 1st post i had added covers this well. Diversified across geographies, across types of constructions, size of orders, and so forth. KNR is only into road constructions, NCC is diversified and constructing buildings is largest part of their revenue and order book. PSP is not very well diversified, they are mostly into Gujarat and do not have diversity in order book due to small size of company.
Ansh_Gupta:Which leads to a similar but broader question- What exactly is the key differentiator in this industry? Low Cost? Order book size? Or intangibles like execution strategy?
Why do we assume there has to be a differentiation? As far as my limited understanding goes, there isn’t any real differentiation. The perception of a moat is generally much more common than a real moat.
Ansh_Gupta:Also, comparing it to PSP Project which has a P/E of ~14, what is it that the market sees in that company which it doesn’t in the others?
One thing is definitely the rate at which they’re growing their business and earnings and profits. They do not depend a lot on government for their orders (private businesses form a large part of order book). But is this model sustainable? Can private business spend billions of dollars on construction every year? Remember, for government the primary motive is job creation. For a company it is profit maximization (and hence cost restrictions).
Having said that, one thing which really blew my mind is their asset turns. Their OPM is roughly the same as NCC (10-12%) but their asset turns is 2.8 versus NCC’s 1.7 (which is itself high compared to L&T’s 0.75). What makes PSP churn our more revenue per unit of capital invested? this is the next thing one can look at, in order to better understand competitive advantages.
Sources of my knowledge:
Disc: invested. Full portfolio here.
8 Likes Sanjeev_Bansal 20Hello everyone,
I have been following NCC for more than 1.5 years now and I like NCC from business point of vie I also believe that it is undervalued at current prices but I want to know about it from Governance point of view and would appreciate if you guys can chip in.
The promoter holding is very low (<20%) and even that is being pledged (1/3rd of it is pledged). I also don’t see any big institutional investor holdings in the company (except Mr. Jhunjhunwala at >13%).
The strange part for me was that even during covid times (when share price was <20), promoters didn’t try to increase their holding.
Given how less skin the promoters have in the company, is it a good bet to rely upon? and what is the reason for it, are the promoters short of money?
Also, if anyone can give an idea on how the Governance standards have been in the past?
disc: invested
1 Like manoopatil 21From screener, it appears that promoters have increased stakes during Mar’20 and Sep’20 albeit marginally.
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1 Like Sanjeev_Bansal 22It was a very small buy at very low prices and that too was sold once the price hit >30 (stake went down in June quarter). They have bought some small amount once again but given the total low holding and a lot of it under pledge, it doesn’t give a lot of comfort.
sharemarketgen_ 23Very positive commentary. Government seems to have started paying on time,Ultratech said the same thing in it’s recent concall too. The surviving Infra companies might be in for a good time.
2 Likes