Why NBCC Lost 80% Of Its Market Value In Two Years

Investors were worried that the court’s decision would exhaust the construction company’s cash. That forced the firm to clarify that it will not invest any money of its own and the Rs 8,500 crore, including 8 percent project management consultancy margin, will be arranged by the Supreme Court. The apex court has so far disbursed Rs 7.16 crore.

The concerns about the builder, however, are not limited to funding of Amrapali apartments for thousands of homebuyers. The Navratna, a crown jewel for the government, has wiped off nearly 80 percent in investor wealth since its peak in November 2017. And the stock has tumbled 42 percent in the last two months. The reason: stalled projects in New Delhi because of delay in environmental and other clearances.

NBCC’s biggest business vertical is project management consultancy that contributes more than 90 percent to its revenue. This largely comprises redevelopment of roads, hospitals and medical colleges, institutions, offices, airports, bridges, and industrial and environmental structures. The state-run company takes up projects on behalf central and state governments and tenders these out to contractors. NBCC gets a management fee for each project, and also earns a commission for helping clients monetise parts of these projects.

Other businesses include engineering, procurement and construction contracts for making chimneys and cooling towers for the power sector; and building commercial and residential real estate. These two verticals don’t contribute much to its top line.

Order Backlog

The state-run company has a total consolidated order book of Rs 85,000 crore as of June, its management said in an investor call after the earnings for the quarter ended June. The standalone order books stands at Rs 68,000 crore.

Bulk of its consolidated order book comprises long-gestation redevelopment projects. Of these, Rs 35,000 crore worth of projects have been tendered out. And that’s where the problem lies.

These mostly include redevelopment projects in the nation capital besides two outside the city, according to the company’s management. “These are not under execution as on date…There has been a slight shortfall in this quarter (ended June).”

Though tendered out, NBCC won’t generate revenue from this Rs 35,000-crore order book in the ongoing financial year. The reasons for the delay range from court cases to lack of environment clearances.

According to the management, key projects tendered out but on which work is yet to begin:

• Kidwai Nagar redevelopment in Delhi: the Rs 400-crore project was facing legal hurdles on concerns that it wasn’t planned well.
• IIT, Bhubaneswar: Awarded in 2017, work yet to being for the Rs 1,000-crore project.
• Nauroji Nagar project: Redevelopment worth Rs 1,500 crore is still pending because of lack of environmental clearances.
• Healthcare projects: Work yet to start on projects worth Rs 1,000 crore—details not provided in the annual report.
• Border fencing in Rajasthan and along India-Bangladesh border: Work yet to begin on these two projects worth Rs 1,000 crore.

Other projects where either booking is pending or work is yet to start include Ayurvigyan Nagar redevelopment at All India Institute of Medical Sciences, Pragati Maidan redevelopment in New Delhi, and building AIIMS campuses in Chhattisgarh and Jharkhand.

Construction work is also yet to start on the World Trade Centre in Guwahati, for which a tender was allotted more than a year ago. And East Delhi Hub in Karkardooma, which includes a 100-storeyed tower, is also pending more than three years after it was first planned.

The management remains optimistic. Of the total order book, Rs 35,000 crore worth of tendered projects will be executed over five years, it said. “As far as revenue is concerned, the remaining order book is sufficient to provide necessary growth for the next three years. Essentially even if the projects do not pick up immediately, we do not anticipate any shortfall because of this.”

Edelweiss Securities, in its report, expressed doubt if the targets will be met. And early resumption of work on Delhi redevelopment projects is crucial, it said.

Poor First Quarter

The delay in order execution hurt NBCC’s first-quarter earnings. Revenue from operations declined 16 percent year-on-year to Rs 1,885 crore.

The mainstay project management consultancy business reported an 8 percent decline in revenue at Rs 1,802 crore. Profit fell 39 percent year-on-year to Rs 74 crore, dragged down by higher costs.

Revenue from the real estate segment declined 96 percent year-on-year to Rs 5 crore. This, according to the company, was due to “lumpiness” in the real estate sector. It, however, expects demand to increase due to tax incentives on affordable housing. The company had Rs 800 crore worth of inventory to be liquidated as on June 30.

Ebitda margin fell to its lowest since 2016.

This particular quarter has been a little off the target, Yogesh Sharma, executive director for engineering at NBCC, said in the earnings call. “We do not expect this to be repeated.”

Cash Position

The company’s cash balance—most of which comes from advances from clients— is worth Rs 4,000 crore.

NBCC, after its first-quarter, earnings said it does not invest its own money to execute its order book. The cash balance comprises either NBCC’s own balances or advances by clients, it said, adding that it has no bearing on its execution capability. “NBCC is a negative working capital company.”

The state-run builder, however, doesn’t have a full-time chief. The management expects chairman and managing director to be appointed by October-end.

Analyst Estimates

Edelweiss Securities has a ‘Reduce’ rating on the stock with a revised 12-month target price of Rs 32, implying no upside.

But about 57 percent of the 14 analysts tracking the stock have a ‘Buy’ rating, while 36 percent suggest ‘Hold’ and just 7 percent recommend ‘Sell’, according to estimates compiled by Bloomberg. The average 12-month target price based on nine forecasts is Rs 52.44 apiece, a potential upside of nearly 66 percent.