Initiating Coverage Report

NBCC Ltd- Strong Balance Sheet Provides Visibility Recommendation-STRONG BUY Target Price- INR 224

Research Analyst: Anik Das Email- adas4@microsec.in

CESC LTD

Telephone- 033 3051-2020 Website- www.microsec.in

Table of Contents Topic Investment Highlights .. Company Background .. Investment Rationale .. Order Book .. Financial Analysis.. Business Strategy.. Peer Comparison .. Valuation .. Financial .. Disclaimer .. Page Number 03-03 04-05 06-07 07-08 09-10 10-11 11-12 13-13 14-17 18-20

-219th December 2012

Microsec Research

National Building Construction Corp Ltd

STRONG BUY
Market Data Current Market Price (INR) 52 Week High / Low(INR) Target Price (INR) Upside Market Cap (In INR Cr) 167.00 175/77 224 34.1% 2,004

Sector Construction
National Building Construction Corporation Ltd (NBCC), a public sector company, primarily provides project management consultancy services for civil construction to various state and central government ministries and departments. With an order book of INR 150 bn, 4.4x FY12 revenues providing revenue visibility over the next couple of years coupled with companys debt-free balance sheet with a cash surplus of INR 13.25 bn provides an attractive investment opportunity. A key trigger is revenue booking of real estate projects in Okhla and Gurgaon. Other positive factors include net cash per share of INR35 and negative working capital. The companys uniqueness in project management services to government projects, Scalable model, sustainable free cash flows, healthy return ratios and reasonable valuations provide room for further upside. Hence, we are initiating coverage on the stock with a STRONG BUY rating and a target price of INR 224 per share.

Investment Highlights
Unique business model with impressive financial track record-NBCC has a unique business model & provides project management & consultancy (PMC) services (Which constitutes 91% of revenues & 76% of PBT) across civil construction segments ranging from residential complex to institutional buildings, hospitals etc. for central & state government agencies. NBCC also has a Real Estate Development segment (6% of revenues & 18% of PBT).NBCCs strong relationship with its client & bargaining power with its sub-contractors has been the drivers of its robust cash generating business model. Also, companys debt free status and negative working capital cycle is a clear evidence of its superior business fundamentals. Order-backlog at 4.4x FY12 revenues provides strong visibilityWith an order backlog of INR 150bn or 4.4x FY12 revenues we see strong growth visibility for the company. Further NBCC bagged a massive INR45 bn worth PMC contract for the redevelopment work of Kidwai nagar (E) in Delhi which will pan across 86 acres entailing a total development of 12mn square feet to be executed over a period of 5 years. We believe the order will provide strong growth traction to NBCC beyond FY13e. In FY13 NBCC is likely to complete 2 real estate projects with saleable area of 2.4lac sq ft mainly comprising of a commercial complex in Okhla, Delhi. Debt free balance sheet with surplus cash, High return ratio-NBCC is a debt-free company with cash surplus of INR1325 crore. The significant cash surplus has been on account of better (negative) working capital management. The negative working capital has been on account of advances received from customers and retention margin from the subcontractor. It reported RoE and RoCE of 26% and 31% in FY12, respectively, backed by strong operating performance and asset light model.

Key Financials Highlights

Particulars Net Sales Growth (%) EBITDA EBITDA Margin (%) Net Profit Growth (%) Net Profit Margin (%) Diluted EPS (INR) P/E BVPS P/BV EV/EBITDA RoE FY09 2041 3.6% 153 7.5% 32 -89.0% 1.6% 13.26 12.90 38.11 4.38 (3.30) 40.16 FY10 2,982 46.1% 96 3.2% 117 265.6% 3.9% 9.71 17.61 45.54 3.67 (4.60) 23.21 FY11 3,146 5.5% 132 4.2% 145 23.9% 4.6% 11.69 14.63 54.51 3.06 (5.00) 23.38 FY12 3,448 9.6% 151 4.4% 184 26.9% 5.3% 15.85 10.79 66.29 2.52 4.50 26.24

(Figure in Rs CR)
FY13E 3,930 14.0% 185 4.7% 221 20.1% 5.6% 18.45 9.27 80.50 2.07 2.20 25.10 FY14E 4,520 15.0% 221 4.9% 269 21.7% 6.0% 22.43 7.62 97.68 1.71 0.10 25.20

200 180 160 140 120 100 80 60 40 20 0

22-Apr-12 19-Sep-12 21-Jun-12 21-Jul-12 20-Aug-12 22-May-12 18-Nov-12 18-Dec-12 19-Oct-12

NBCC

SENSEX

Source: Company, Microsec Research Microsec Research

-3-

19th December 2012

Company Background
NBCC is a top rated project management & consultancy company with expertise in residential and commercial complexes, institutions, hospitals and other buildings, sewage treatment plants, roads; and civil infrastructure for power sector such as cooling towers, chimneys and other civil and structural works predominantly for State and Central government ministries, department & agencies and various public sector undertakings. NBCC is engaged in the business of (i) project management consultancy services for civil construction projects (ii) civil infrastructure - power sector and (iii) real estate development. In the PMC division, the company provides management and consultancy services for a range of civil construction projects such as residential and commercial complexes, redevelopment of buildings and colonies, hospitals, educational institutions, etc. As on January, 2012, NBCC has an outstanding order book of INR 110bn in this division. In civil infrastructure for the power sector, the company provides engineering and construction services for power projects, including design and execution of (i) civil and structural works for power projects (ii) cooling towers and (iii) chimneys. It has an outstanding order book of INR 6bn in this division. In the real estate development division, the company focuses on residential and commercial development. As on January, 2012, it had land reserves aggregating 125.2 acres with saleable and leaseable area of 10.7 million sq ft. It recently bagged a significant order of INR40bn for redevelopment of government colonies of east Kidwai Nagar (Delhi) which is spanning over 90 acres. Further, Management is confident of stable order inflow from various government agencies over the next 2-3 years.

NBCCs Business Model

-419th December 2012

Microsec Research

Overview Of NBCC

Profile of senior management team

I n v e s t m e n t

-519th December 2012

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Investment Rationale
Unique player with strong order bookNBCC is a unique player, which provides project management services to government projects. After its establishment in 1960, the company has established a relationship with different state and central government ministries, department, agencies and various public sector undertakings. The company has completed 54 projects in PMC and civil infrastructure for power segments. NBCC enjoys automatic nomination status for PMC civil construction projects related to government projects. Currently, it has an order book of INR 15,000 crore i.e., 4.4x FY12 revenues providing revenue visibility over the next couple of years. The order book consists of PMC division INR 11,000 crore and civil infrastructure for power sector INR 600 crore.

Scalable business model & strong brand recognition in central & state agenciesNBCC has a strong track record in the project management & consultancy field with strong brand recognition in the central & state government agencies. Over a period of time the company has achieved significant financial strength. Even after adopting a conservative strategy of not levering its balance sheet it has been able to achieve a 13% CAGR (FY08-12). With no debt, negative working capital & project pipeline the company will maintain the growth trajectory over future as well. Over the past five decades, its ability to successfully manage projects as well as maintain quality standards has helped in developing its brand as a trusted service provider. This provides NBCC with access to business opportunities especially in its PMC segment. It intends to continue to leverage the goodwill of its brand to enhance relationships with existing clients, seek new clients as well as diversify its business in allied sectors to help it grow its operations.

Debt free balance sheet with surplus cashNBCC is a debt-free company with a cash surplus of INR 1325 crore. This is a key differentiator as other construction companies in the sector are finding it difficult to grow their earnings currently. The significant cash surplus has been on account of better (negative) working capital management. The negative working capital has been on account of advances received from customers and retention margin from the subcontractor. Hence, the company generates significant other income, which contributes significantly to its bottom line.

Conservative policy provides comfortThe conservative accounting policy of recognising the contract revenues only on completed contracted method is also expected to result in significant ramp up of revenues for the Real estate division. In FY13, NBCC is expected to achieve completion of two projects entailing a saleable area of 2.4lac sq ft mainly comprising of a commercial complex in Okhla entailing 2.25lac sq ft which is expected to boost its Real estate revenues significantly.

-619th December 2012

Microsec Research

Order Book
Order-backlog provides visibility at 4.4x FY12 revenues
NBCC has the preferred agency status for executing public works & Civil infrastructure for government of India & a strong order backlog of INR 150bn or 4.4x FY12 revenues .The company boasts a strong order book accretion of INR 45bn for redevelopment of Kidwai nagar (E) in Delhi which will pan across 86 acres entailing a total development of 12mn square feet. The project is to be executed over a period of 5 years.

Source: Company, Microsec Research

Segmental break-up of current order book-

Source: Company, Microsec Research

-719th December 2012

Microsec Research

Break-up of ongoing PMC projects-

Source: Company, Microsec Research NBCC has over the years, leveraged its PMC expertise in diverse segments of the civil construction such as residential and commercial complexes, institutions, hospitals and other buildings, sewage treatment plants, roads; and civil infrastructure for power sector such as cooling towers, chimneys and other civil and structural works. As of Dec12, its Order Book of the PMC projects comprising of 38% - institution segment, 44% - infrastructure segment, 14% - commercial construction and 3% - residential construction.

Real Estate Development- Profit booking a key trigger

NBCC is focused primarily on residential and commercial projects. It has land bank in Delhi, Khekra (UP), Patna, Kolkatta, Kochi, Alwar (Rajasthan), Ahmedabad and Lucknow. The existing land bank is a mix of land either owned or acquired on lease through government or acquired through auction. It also intends to secure land available with central and state government agencies for development through joint ventures projects. This model helps it to spread the risk of its real estate projects portfolio in addition to reducing its capital investment and beneficially utilising its PMC, sales and marketing capabilities. The business segment is mostly funded through internal accruals. It is currently working on three of its major projects in Okhla (1 project) and Gurgaon (2 projects). It has sold major portions in both the projects. Management expects to book part (50%) of the revenue from the Okhla project in 4QFY13e and the remaining in 1HFY14e. It plans to book revenue on the two Gurgaon projects in FY14e. These projects, so far, have been very successful, backed by strong prices in the NCR region.

-819th December 2012

Microsec Research

Financial Highlights
We estimate revenues to grow at 10% CAGR in FY11-14E to INR 4520 crore. Revenue growth will be fuelled by strong order execution and profit booking in the real estate project. Management expects a top line growth of 15% and an EBITDA margin of 4.8% for the next two Years.

Source: Company, Microsec Research

Source: Company, Microsec Research

Source: Company, Microsec Research

Source: Company, Microsec Research

-919th December 2012

Microsec Research

NBCC has reported RoE and RoCE of 26% and 31%, respectively, in FY12, backed by strong operating performance and asset light model.

In FY12, NBCC has reported a Dividend pay put ratio of 22%.For the last 5 years company has able to maintain a payout ratio of 20%.

Source: Company, Microsec Research

Source: Company, Microsec Research

Source: Company, Microsec Research

- 10 19th December 2012

Microsec Research

Key Business Strategy For NBCC

PMC to benefit from economies of scaleIn PMC segment, NBCC intends to focus on undertaking projects having a high order value (above INR 1 Bn). It intends to focus on redevelopment projects whereby old buildings, complexes and colonies are redeveloped. It aims to focus on establishing itself as a leading player in the large order size projects so that it can take advantage of these barriers to entry leading to lower levels of competition and higher profit margins.

High growth opportunities in the infrastructure segmentNBCC intends to take advantage of opportunities in the infrastructure space by Bidding for BOT / BOLT / BOOM projects under PPP mode. An additional advantage of BOT / BOLT / BOOM projects is that they offer long-term revenue streams. It also intends to leverage on its PMC and real estate development businesses to procure large infrastructure projects and to pursue strategic alliances with established domestic as well as international players, which will augment its prospects of securing such projects

Expand its real estate development businessNBCC intends to secure lands available with Central and State Government agencies for its real estate development projects and to continue to selectively enter into joint ventures agreements to increase the amount of land or land development rights available to it for development. This model helps it to spread the risk of its real estate projects portfolio in addition to reducing its capital investment and beneficially utilising its PMC, sales and marketing capabilities. Company to focus on quality and timely project delivery NBCC intends to continue to focus on quality and timely project execution thereby maximizing customer satisfaction in all its business segments.

- 11 19th December 2012

Microsec Research

Peer Comparison
ROE Order Book/ P/BV EV/EBITDA Sales EBITDA PAT EPS EBITDA PAT (%) D/E EPS P/E FY13E No of FY12 FY12 FY12 FY12 (%) (%) FY12 FY12 FY13E CMP P/E FY12 Bloomberg shares MCAP Sales FY12 FY12 6665 898 55 2 13.5% 0.8% 2.6 2.0 3 54 25.4 16.4 25.7 1393 3.3 0.5 7.1 6019 466 84 17 7.7% 1.4% 7.2 1.8 11 215 12.7 19.4 5.0 1067 2.4 0.9 6.6 5605 1465 497 25 26.1% 8.9% 21.5 3.7 29 210 8.2 7.2 19.4 4074 2.3 1.4 8.5 3723 716 644 19 19.2% 17.3% 38.0 0.0 20 225 11.8 11.5 33.7 7588 1.2 4.5 7.2 3592 466 67 10 13.0% 1.9% 4.7 1.8 15 81 8.5 5.4 7.0 567 2.5 0.5 5.9 2866 414 122 8 14.5% 4.3% 11.7 3.0 5 136 16.9 29.9 15.0 2049 2.6 2.0 12.7 3448 151 184 15 4.4% 5.3% 25.4 0.0 18 168 11.0 9.1 12.00 2016 4.4 0.0 4.6

Company NCC Ltd. Simplex Infrastructures Ltd. IL&FS Transportation Networks Ltd. Engineers India Ltd Patel Engineering Ltd. Sadbhav Engineering Ltd. National Buildings Construction Corpn. Ltd

Source: Company, Microsec Research, Ace Equity

- 12 19th December 2012

Microsec Research

Valuations
A PSU construction company with no debt and good cash resources on its books becomes very attractive. A good execution track record and a diverse range of projects seem to be the key to its success. With more government spending in infrastructure and with a sound order book, we have a rosy outlook for the company. It is also a good proxy for dividend play. The strong business model is depicted in its financial performance with negative working capital cycle clubbed with the return ratios which also signify its superior business model. Also the fact that NBCC has not relied on leverage to fund its growth reiterates our belief about the superior business model. At the CMP of INR 168 per share, NBCC is quoting at 9.1x and 7.5x its FY13E and FY14E price earnings (P/E), respectively. We believe NBCC is better placed than most of its peers. We assign a P/E multiple of 10x and arrive at a target price of INR 224 per share which reflects 34% upside over the current stock price of INR 168 per share.

Risk & Concerns

Dependence of Government for projectsThe Companys PMC and Civil Infrastructure for power sector segments are fully dependent on projects awarded by government entities. Accordingly, any change in the governments policy or in budgetary allocations may adversely affect its order book and future business prospects. Land & real estate related risksNBCC title and development rights or other interests over land may be subject to legal uncertainties and defects which may have an adverse impact on its ability to develop and market projects developed on such lands. Excessive dependence on PMC businessNBCC derived 91%, 93.4 % and 90.9 % of total income for FY 2012 and FY 2011 & 2010, respectively from its PMC segment. Any decline or delay in this segment might have an adverse impact on the future business prospect s and the financial condition.

- 13 19th December 2012

Microsec Research

Income Statement

National Buildings Construction Corpn. Ltd. Annual-Y-O-Y(%)- [INR-Crore] DESCRIPTION FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013E FY 2014E Net Sales 1970 2041 2982 3146 3448 3930 4520 Other operating income Net Sales & Other Operating Income 1970 2041 2982 3146 3448 3930 4520 % growth 34.9% 3.6% 46.1% 5.5% 9.6% 14.0% 15.0% Total Expenditure 1660.75 1887.98 2886.11 3014.30 3296.64 3746 4299 PBIDT (Excl OI) 309 153 96 132 151 185 221 EBDITA (%) 15.7% 7.5% 3.2% 4.2% 4.4% 4.7% 4.9% % growth 395.4% -50.5% -37.4% 37.4% 14.6% 22.3% 19.6% Other Income 112.52 93.94 86.75 85.41 134.62 154 190 Operating Profit 422 247 183 217 286 339 411 Interest (Net) 3.56 3.22 4.87 0.00 0.00 0 0 PBDT 418 244 178 217 286 339 411 Depreciation 3.09 3.07 3.12 3.21 1.96 3 3 PBT 415 241 175 214 284 336 408 Tax 135.06 80.80 58.10 69.29 99.66 114 139 Profit After Tax 280 32 117 145 184 221 269 Minority Interest Shares of Associates Consolidated Net Profit 280 32 117 145 184 221 269 PAT (%) 14.2% 1.6% 3.9% 4.6% 5.3% 5.6% 6.0% % Growth 246% -89% 264% 24% 27% 20% 22% Equity Capital Face Value (In Rs) No. of shares Adjusted EPS 90 1000 0 90 1000 0 90 1000 0 90 1000 0 120 10 12 15.34 120 10 12 18.45 120 10 12 22.43

3112 355.56 1294.78 1607.33

- 14 19th December 2012

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Balance sheet

(Figure in Rs CR)

DESCRIPTION SOURCES OF FUNDS: Share Capital Share Warrants & Outstandings Total Reserves Shareholder's Funds Secured Loans Unsecured Loans Total Debts Total Liabilities APPLICATION OF FUNDS : Gross Block Less: Accumulated Depreciation Less: Impairment of Assets Net Block Lease Adjustment A/c Capital Work in Progress Goodwill on Consolidation Investments Toll receivable account Current Assets, Loans & Advances Inventories Sundry Debtors Cash and Bank Other Current Assets Loans and Advances Total Current Assets Less : Current Liabilities and Provisions Current Liabilities Provisions Total Current Liabilities Net Current Assets Miscellaneous Expenses not written off Deferred Tax Assets / Liabilities Total Assets

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013E FY 2014E 90 0 245 335 90 0 367 457 90 0 457 547 90 0 564 654 120 0 675 795 120 846 966 120 1052 1172

0 335

0 457

0 547

0 654

0 795

0 966

0 1172

22 9 13

23 10 13

36 11 25

35 12 24

35 12 23

38 15 23

41 18 23

143

250

64

57

78

89

269 448 921 13 469 2119 1523 283 1805 314 0 3 335

196 778 910 9 581 2473 1876 302 2178 296 0 5 457

267 882 944 8 651 2752 2263 224 2486 266 5 547

409 568 1170 23 669 2839 1981 296 2277 562 4 -5 654

450 852 1325 28 727 3383 2496 176 2673 711 4 -8 795

470 850 1644 31 770 3765 2658 246 2904 861 4 966

480 850 1978 35 785 4128 2806 265 3071 1057 3 1172

- 15 19th December 2012

Microsec Research

Cash Flow

(Figure in Rs CR)

DESCRIPTION Profit before Tax Depreciation Interest/ Dividend Recd. Change in Debtors Change in Loans & Adv Change in Inventory Change in Other C/A Change in CL Income Tax Paid Net operating Cash Flow Change in Fixed Assets Change in Capital WIP Change in Investments CF from Investing Activities Change in Share Capital Change in Long term Debt Change in Short Term Debt Dividend Paid Interest Paid Tax paid on Dividend CF from Financing Activities Net Cash Flow from Business Add : Opening Cash Closing Cash

FY 2009 FY 2010 FY 2011 FY 2012 FY 2013E FY 2014E 241 3 -330 -112 73 4 372 -81 175 3 -104 -70 -71 1 309 -58 214 3 315 -18 -143 -15 -209 -69 284 2 -285 -58 -41 -5 395 -100 193 0 0 7 7 30 0 0 -42 0 0 -12 188 1170 1357 336 3 0 2 -43 -20 -3 231 -114 393 -3 0 -21 -23 0 0 0 -51 0 0 -51 319 1325 1644 408 3 0 0 -15 -10 -4 167 -139 410 -3 0 -11 -14 0 0 0 -62 0 0 -62 334 1644 1978

0 0 -138

-12 0 -107

2 0 186

0 0 0 -7 -3

0 0 0 -27 -5

0 0 0 -28 0

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Ratio Analysis
Particulars Profitability Ratios EBIDTA Ratio PBT Ratio Net Profit ratio Sales/Total Asset (Times) Return Ratios ROCE ROE Liquidity Ratios Debt / Equity Current Ratio Interest Cover(x) Investor Ratios EPS DPS Dividend Payout Ratio (%) BV per Share P/BV P/E EV/Sales EV/EBITDA FY09 7.5% 11.8% 1.6% 0.8 FY10 3.2% 5.9% 3.9% 1.0 FY11 4.2% 6.8% 4.6% 1.1 FY12 4.4% 8.2% 5.3% 1.0 FY13E 4.7% 8.5% 5.6% 1.0 FY14E 4.9% 9.0% 6.0% 1.1

61.6% 8.1%

35.8% 23.2%

35.6% 24.1%

39.1% 25.4%

38.1% 25.1%

38.1% 25.2%

0.0 1.1 1.4

0.0 1.1 2.7

0.0 1.2 2.3

0.0 1.3 NA

0.0 1.3 NA

0.0 1.3 NA

355.6 200.0 56.3 38.1 4.4 0.5 -0.4 -3.3

1294.8 258.9 20.0 45.5 3.7 0.1 -0.3 -4.6

1607.3 311.8 19.4 54.5 3.1 0.1 -0.3 -5.0

15.3 3.5 23.0 66.3 2.5 11.0 0.2 4.6

18.5 4.2 23.0 80.5 2.1 9.1 0.1 2.0

22.4 5.2 23.0 97.7 1.7 7.5 0.0 0.2

- 17 19th December 2012

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Microsec Research: Phone No.: 91 33 30512100 Email: microsec_research@microsec.in Ajay Jaiswal: President, Investment Strategies, Head of Research: ajaiswal@microsec.in Fundamental Research
Name Nitin Prakash Daga Naveen Vyas Gargi Deb Sutapa Roy Sanjeev Jain Anik Das Neha Majithia Soumyadip Raha Saroj Singh Vinit Pagaria Ranajit Saha Sectors IT, Telecom & Entertainment Midcaps, Market Strategies Agriculture & Pharma Economy BFSI Mid Cap Mid Cap Mid Cap Mid Cap Derivatives & Technical Technical Research Institutional Equities Institutional Desk PMS Research FPD Products Research Support Designation AVP-Research AVP-Research Research Analyst Research Analyst Research Analyst Research Analyst Research Analyst Executive Research Executive Research VP Sr. Manager Sr. Manager Dealer AVP Manager Research Asst. Manager Technology Email ID npdaga@microsec.in nvyas@microsec.in gdeb@microsec.in s-roy@microsec.in sjain@microsec.in adas4@microsec.in nmajithia@microsec.in sraha@microsec.in ssingh2@microsec.in vpagaria@microsec.in rksaha@microsec.in dmittal@microsec.in pdshah@microsec.in ssedani@microsec.in skedia@microsec.in sboral@microsec.in

Technical & Derivative Research

Institutional Desk
Dhruva Mittal Puja Shah

PMS Division
Siddharth Sedani Shrivardhan Kedia

Research: Financial Planning Division Research-Support

Subhabrata Boral

Recommendation Strong Buy Buy Hold Underperform Sell

Expected absolute returns (%) over 12 months >20% between 10% and 20% between 0% and 10% between 0% and -10% < -10%

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- 19 19th December 2012

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Disclaimer: This document is prepared by the research team of Microsec Capital Ltd. (hereinafter referred as MCL) circulated for purely information purpose to the authorized recipient and should not be replicated or quoted or circulated to any person in any form. This document should not be interpreted as an Investment / taxation/ legal advice. While the information contained in the report has been procured in good faith, from sources considered to be reliable, no statement in the report should be considered to be complete or accurate. Therefore, it should only be relied upon at ones own risk. MCL is not soliciting any action based on the report. No indication is intended from the report that the transaction undertaken based on the information contained in this report will be profitable or that they will not result in losses. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advisors, as they believe necessary.

- any Neither the Firm, nor its directors, employees, agents nor representatives shall be liable for20 -damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.
19th December 2012
Microsec Research