This Small Cap Infra Stock Can Surge Up To 67%, Buy For Target Price Of Rs 108: HDFC Securities

Stock Outlook & Returns

On August 12, the stock of the company opened at 65.70 apiece, currently trading at 64.60 apiece, 1.67% down from the previous close. The current market price of the stock is Rs 12.40 above the 52 week low of Rs 52.20 apiece level and Rs 22.90 below the 52 week high level of Rs 87.50 apiece.

In the past 1 week, the shares of the company moved up by 3.1%. Whereas in 1 and 3 months, 11.82% and 3.93%, respectively. On long-term investments, the shares didn't perform well and gave a negative return of 23.9% in the past 1 year, 5.54% in the past 3 years, and 21.97% in the past 5 years, respectively.

Financial highlights

according to the brokerage firm, NCC reported revenue of Rs 29.6bn (+56%/-5.6% YoY/QoQ, an 8.6% beat). EBITDA came in at Rs 2.8bn (+41% YoY, +5.4% QoQ, a 3% beat). EBITDA margin fell to 9.5% (-104/+99bps YoY/QoQ, vs. our estimate of 10%). RPAT/APAT came in at Rs 1.2bn (+132%/-51% YoY/QoQ, a 26% beat). On a conservative basis, NCC expects to achieve revenue growth of 15-20% YoY in FY23, with EBITDA margin at 9.5-10%, aided by lower commodity prices.

Robust OB; large waste water project signing underway

NCC secured Rs 44.6bn (including change of scope works) worth of orders in Q1FY23, taking the OB to Rs 406bn (~4x FY22 revenue), of which buildings/water & environment accounted for 62/16% and roads, electrical, irrigation, and mining constituted 2/7/3/10%. The Andhra Pradesh OB stood at Rs 32.8bn, as of Jun'22, with Rs 3bn worth of orders from the outstanding backlog expected to be executed in FY23. NCC has backed a major sewage treatment plant project in Mumbai, with an EPC component of Rs 38.3bn and O&M component of Rs 18.5bn. NCC is yet to sign the concession agreement and it does not expect any impact from a change in the government on the project.

Balance sheet robust; debt-free by FY25

Gross debt increased to Rs 17.1bn, as of Jun'22 vs. Rs 11.8bn, as of Mar'22, mainly due to Rs 5.5bn of WCDL availed in Q1. The total finance cost stood at 3.63% of revenue while the average cost of debt (interest rate) was 8.67%. The interest coverage ratio, as of Jun'22, stood at 2.88x vs. 2.05x in Mar'22. Of the Rs 2bn to be received from NCC Urban Vizag stake sell, Rs 470mn has been received and the rest will be realised in three equal quarterly tranches in Q2/Q3/Q4FY23. Rs 1.5bn from loans and advances to NCC Urban will be received in FY23 and the balance Rs 1.5bn will be received in FY24. These proceeds will be used to reduce debt and in working capital. Consequently, NCC expects to be debt-free by FY25. Capex incurred in Q1 stood at Rs 570mn. NCC has INR 5/2.4bn in net receivables/retention money from the Andhra government, as of Jun'22.

Execution pick-up augurs well, Buy for a target price of Rs 108

NCC's Q1FY23 revenue/EBITDA/APAT came in at Rs 29.6/2.8/1.2bn, beating our estimates by 8.6/3/26%. With order inflow (OI) of Rs 44.6bn in Q1FY23, the order book (OB) stood at Rs 406bn (~4x FY22 revenue). During the quarter, NCC secured a larger order-a major sewage treatment plant order in Mumbai with EPC component of Rs 38.3bn and O&M component of Rs 18.5bn. During Q1, NCC availed Rs 5.5bn of working capital demand loan (WCDL), which resulted in increased standalone gross debt of Rs 17.1bn, as of Jun'22 vs. Rs 11.8bn, as of Mar'22. The interest coverage ratio stood at 2.88 times. The average cost of debt during the quarter stood at 8.67%. Given the robust order book, pick-up in execution, stable balance sheet, and commodities price correction, we maintain BUY on NCC, with a Target Price of R 108 (9x Mar-24E).

About - NCC Limited

Nagarjuna Construction Company Limited (NCCL) a construction and infrastructure enterprise was established as a Partnership firm in 1978 and started its journey on 22nd March of the year 1990. The Company is engaged in the infrastructure sector and is undertaking turnkey EPC contracts as well as BOT projects on a Public-Private Partnership basis. The Company's range of verticals comprises Building & Housing Transportation Water & Environment Irrigation Power Electrical Metals and Oil & Gas and International business divisions. The Company has a cluster of regional offices in Delhi Ahmedabad Bhubaneshwar Kolkata Mumbai Bhopal Lucknow Hyderabad Chennai and Bangalore. Also, NCC has a presence at the international level through offices in Dubai (UAE) and Muscat (Sultanate of Oman).