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National Buildings Construction Corp.

Ltd (NBCC)
CMP : Rs 125


Target Price: Rs.185

April 1, 2013

Time Horizon: 1 Year

Executive Summary

This is a tactical call. We currently have a 1 year view on the company and recommend a BUY. We
do not view it as a long term compounding story at present.
Minimum 50% returns expected.
This can be a sizable allocation in the portfolio. At present, a 10% allocation of the overall
portfolio is recommended.
We are leaving some space to add more shares at lower prices, if the opportunity presents itself.

Basic Data
EV Rs.cr
FY12 Dividend

125.55 Rs.cr



52-week H/L


Malhar Complex, Dumas Road, Ichchanath, Surat 395007. Tel (0261) 305 5555, www.jainam.in, research.report@jainam.in

NBCC is a PSU, with 90% Government holding. The company operates in basically 3 business segments

Project management consultancy (PMC)

Biggest and most stable division. Accounts for over 90% of the total revenues.
Government ministries and departments have their own construction requirements, such as
constructing a new office building, constructing new staff quarters etc. By law, they are not
allowed to approach private sector entities for this construction. They requisition the Public
Works Department (PWD) to undertake this construction.
NBCC has been given PWD status by the Government. Hence, such ministries and departments
can also approach NBCC, instead of the overworked PWD to get their work done. This law
protects NBCCs business. Since no other entity is allowed to get into this business, there is
virtually no competition.
After getting orders, NBCC does not undertake any construction on its own, but outsources it to
private parties on tender basis. It merely supervises and manages the construction work and acts
as the nodal authority. For this, it charges a fee, ranging from 5% to 10% of the total contract

Malhar Complex, Dumas Road, Ichchanath, Surat 395007. Tel (0261) 305 5555, www.jainam.in, research.report@jainam.in

value. This business model ensures extremely low pressure on cash-flows, stable and steady
business and a clean balance sheet.
NBCC is not liable for any substandard / delayed work done by the contractor. The liability is of
the contractor. Similarly, NBCC passes any escalation in the contract work to the contractor,
ensuring fair terms for the contractor.
Currently, this division has an order book of Rs.16000 cr, which is more than 4x TTM revenues,
giving good visibility. It recently won a Rs.4200 cr project to redevelop Government housing
colonies in Delhi.

Civil Construction for power sector

In this division, the company provides engineering and construction services to the power sector.
The services include design and execution of civil and structural works, cooling towers and
In this division too, NBCC does not carry out any work itself, but subcontracts the work after
getting orders on a tender basis.
Currently the division contributes negligible portion of NBCCs revenues.

Real estate development

NBCC has a real estate division, which operates in both residential and commercial segments.
The company has a land bank of more than 130 acres, spread across various cities predominantly
in North India. The land is a mix of owned land and that acquired on lease from the Government.
Currently, the company has two ongoing residential projects in Gurgaon and a large commercial
project in Okhla. The company expects to book Rs.100 cr revenues and Rs.33 cr profits on the
Gurgaon projects in the present quarter.
The commercial project in Okhla has 2 lakh sq ft salable area. Since the company follows
completed contract method of accounting, no revenues or profit from this project have been
booked till now. On this project alone, there is potential to earn more than Rs.400 cr revenue and
Rs.150 cr profit. These are expected to be booked in FY14 and will act as a big trigger to the stock.
The company recently purchased 3 additional parcels of land measuring a total of 10 acres for
Rs.100 cr.
As more and more projects take off, this division will contribute substantially to the fortunes of
the company, although its performance will not be consistent due to the inherent nature of the

Malhar Complex, Dumas Road, Ichchanath, Surat 395007. Tel (0261) 305 5555, www.jainam.in, research.report@jainam.in

What we like about the company

The pseudo monopoly position of NBCC makes it a relatively recession and cycle-proof business,
with stable revenues and cash flows.
Advances that the company receives give them a tremendous float. On a market cap of Rs.1430
cr, the company carries cash of Rs.1300 cr. Out of this, Rs.350 cr is NBCCs own cash, while the
rest is advances received. The company generates more than Rs.200 cr of operating cashflow
every year.
While the main PMC business gives stability to the company, the real estate business gives an
additional kicker to the profitability. NBCC has been intelligently investing the cash-flows
generated out of the PMC business into its real estate business and reaping the profitability out
of the same, due to their continuous cash float.
The management has guided PAT of Rs.225-250 cr for FY14. If full revenues and profit of the
Okhla project are booked, the actual PAT will be far higher. At the current market cap of Rs.1430
cr, with Rs.350 cr of net cash, the company therefore looks highly attractively priced. We believe
that a market cap of Rs.2400 cr + (10x FY14 PAT) is easily possible, given the performance of the
company and the real estate revenue booking in FY14.
As a PSU, the company has to distribute minimum 20% of its profits as dividend. NBCC distributes
25%. Given the high profitability for FY14, a dividend of Rs.5-6 is very much possible. High
dividend gives good floor and support to stock price even in unfavourable markets .

What are the risks?

Capital misallocation is the biggest risk in the company. The companys promoter does not always
have profitability as the key decision making criteria! E.g. if the company is instructed by the
Government to invest its huge cash reserves in lets say a BOT project or a coal block, then the
entire float would disappear and this would lead to a massive derating of the stock. Although the
management has assured us in its concall that something like this will not happen, we should be
vigilant about the same.
The company had high contingent liabilities, in excess of Rs.1000 cr. Although majority of them
have been cleared, we continue to keep a watch on these.
The business model is such that there is large scope for corrupt officials to earn money under the
table! There are 16 pending cases of corruption against the companys officials. A high profile
case can derail the companys reputation and rating.
The Government currently holds 90% of the company, making an Offer For Sale necessary. It has
been seen that any news about an OFS leads to hammering of the stock price, so that the stock
can be subscribed to at lower levels. In the event of an OFS in NBCC, a temporary slide in the
stock price cannot be ruled out. However, we would view this as an opportunity to buy more!

Malhar Complex, Dumas Road, Ichchanath, Surat 395007. Tel (0261) 305 5555, www.jainam.in, research.report@jainam.in

Final advice

NBCC is a company which has become a pseudo monopoly due to Government regulations, which
will not change in the near future. The company has healthy revenue visibility, excellent business
model, healthy cash flow and dividend and highly attractive financials and valuations.
We advise investors to buy the stock at CMP, with a 1 year view. Post booking of the Okhla
project revenues, we anticipate a good run-up in price. We would extend our holding when we
review the stock in future, depending on the circumstances.
Investors should be prepared to see a slide in stock price if an OFS is declared by the
Government. Instead of panicking, such a slide should be used to buy more shares.

Malhar Complex, Dumas Road, Ichchanath, Surat 395007. Tel (0261) 305 5555, www.jainam.in, research.report@jainam.in

Research Team
Tejas Jariwala
Research Analyst

Sahil Modi
Research Analyst

Yagnesh Patel
Research Executive
yagnesh.patel @jainam.biz

Nirav Kansariwala
Research Executive

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Malhar Complex, Dumas Road, Ichchanath, Surat 395007. Tel (0261) 305 5555, www.jainam.in, research.report@jainam.in