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Tuesday, March 20, 2012

NBCC IPO Analysis Report



National Building Construction Corporation IPO Review



Issue Highlights
Issue Period: 22/3/2012-27/12/2012
Issue type: 100% book building
Issue Size: 127 crore (at the upper price band)
Price band: Rs. 90-106
Face value: Rs. 10
Lot Size: 60 shares
Maximum Retail Subscription Amount: Rs. 1,97,160 (31 lots)
Registrar: Bigshare Services Private limited
Industry: Construction
Listing: NSE, BSE
Discount for Retail investor: 5 % on the issue price

The Offer
Shares offered: 1,20,00,000 equity shares
Employee reservation:1,20,000 shares
Net public offer: 1,18,80,000 shares

QIB portion: not more than 59,40,000 shares
Non institutional Portion: not less than 17,82,000 equity shares
Retail portion:  not less than 41,58,000 equity shares


Objects of the Issue
Offer is disinvestment of 10% stake by the government. Company shall not receive any funds from the offer.

Industry overview:
Construction industry is classified into 3 segments-
(1)Infrastructure Development 
This sector involves construction of roads, rails, ports, irrigation, power, telecom etc. Infrastructure development plays a vital role in the growth of the nation’s economy and is usually undertaken by the government.

(2) Industrial Construction
This sector involves infrastructure development for industries.

(3)Real Estate Development
Real estate sector in India too is highly fragmented and dominated by regional players. In past this segment has faced  many headwinds like absence of central registry authority, non-uniform local laws, unavailability of proper bank financing, high interest regime etc. But during the recent years this sector is evolving with greater transparency and efficiency. Real estate sector is one of the largest providers of the employment in India.
Demand under real estate sector can be categorized under 3 segments-
(1)   Residential
(2)   Commercial
(3)   Industrial
Construction industry in India is highly fragmented , highly labor and capital intensive and poorly mechanized in comparison with its foreign peers.
Infrastructure development is a must for the growth of any economy and in India a lot still need to be done for the infrastructure development. Under 12th five-year plan much emphasis shall be given on the infrastructure development.

Company Profile
NBCC operates in the following verticals-
·         PMC (Project Management Consultancy ) for civil construction projects
Under PMC segment company provides management and consultancy services for  civil construction projects like construction of residential and commercial complexes, redevelopment of buildings and colonies, hospitals, educational institutions, infrastructure works for security personnel, border fencing etc.
Company also undertakes infra projects like roads, water supply system, water storage solutions.



Clients:
ESIC, Ministry of defense, ministry of home affairs, ministry of external affairs, MoUD, ministry of commerce and industry, ministry of corporate affairs ,Ministry of finance ,HUIDB,IIT Ruraki, IIT Kharagpur, IIT Patna, SVNIT and many more.

·         Civil infrastructure for power sector
Company provides engineering and construction services for power projects including design and execution of –
(1)   Civil and structural works for power projects
(2)   Cooling towers
(3)   Chimneys


Clients: NTPC limited, BHEL, APGENCO Limited, UPRVUNL,MAHAGENCO limited and  KPCL.      
·         
Real estate development
Under this segment, company undertakes residential projects (such as apartment and townships) and commercial projects (corporate office buildings and shopping malls). Real estate projects of the company are spread across 10 states in India.
Company boasts a robust land reserve of 125.2 acres (or 5.4 million square feet) as on Jan 2012 located in UP, Patna, Gurgaon, Kolkata, Kochi, Alwar, Lucknow.
Completed commercial projects include commercial complex at Vadodara, Cuttack, Agartala, Ghaziabad, Ahmadabad and New Delhi (Bhikaji Kama Place, Pragati vihar & Pushp Vihar).
Strengths
·         Robust order book of Rs. 1061 crore as on as at January 2011.
·         Besides it’s headquartered in New Delhi , company boasts 10 regional. Zonal offices across India.
·         Company undertakes projects 23 states and 1 union territory in India.
·         Company enjoys governments schedule ‘A’ PSU status.
·         Company boasts a robust land reserve of 125.2 acres (or 5.4 million square feet) as on Jan 2012.
·         Five decades of proven track record
·         Company has been awarded ISO 9001:2008 from the BIS for its PMC division
·         NBCC is debt free company
Risks
·         Contingent liabilities of the company (claims against the company not recognized as debts) are greater than the PAT (profit after tax).contingent liabilities include disputed tax liabilities and guarantees given by the company. Contingent liability for FY 2011 was Rs. 780.36 crore against the net profit of 140.47 crore for the same period.
·         Company significantly depends on the PMC projects and the same accounted for 93.4% of the total income in FY 2011.
·         As on Jan 2012 57 % of the company’s employee belongs to 3 different  unions.

 Financial Analysis
# All calculations at the upper price band of Rs. 106 using FY 2011 data

Parameter
Value
EPS
Rs. 11.7
Price to Earnings Ratio (P/E Ratio)
9.1
Price to Book Value (P/B Ratio)
1.9
Return on Equity (ROE)
21.4%
Profit  CAGR (4 Years)
15%
PEG Ratio
.6
Return on Capital Employed (ROCE)
33.2
Current Ratio
1
Net Profit Margin
4%
M-Cap/ Sales Ratio
.4
Operating Profit Margin
7%
M-Cap/Reserve
5.53


Comparison with Peers

# peer data for FY 2011 as per moneycontrol site.
# Price as on 20/3/2012

Company
NBBC
LITL
IVRCL
P/E
9.1
16.32
9.03
NPM
4%
4.7 %
2.76 %
ROE
21.4 %
8.2 %
7.95 %
PEG
.6
.41
3.25


 Inference


NBBC is the perfect example of typical state-run company in India, comfortably cocooned from the heat of the competition due to government privileges. Despite entering into the era of liberalization projects are bestowed with PSU’s as the first choice-in the name of ‘playing it safe’ or national security and more such reasons.
NBBC is debt free company (interest expense is due to interest payable on advances from clients, arbitration and court awards) and this gives another reason for it to perform better especially under high-interest regime. Contingent liabilities are around quintuple times net profit for the year 2011 but this threat may be overlooked as all contingent liabilities shall not turn up concurrently.
Despite being a company with 5-decades of proven track record company is not running efficiently with NPM of meager 4% only.Fundamentals of the company are average.
This company is not a short term bet and the possibility of the listing gains for retail investors too are not guaranteed especially under present post-budget subdued environment. Company having robust land bank and significant number of projects in hand, portrays better future prospects but it shall require time for the same to be reflected in the share price.Yes, those investors who can keep the stock for 4-5 years comfortably should think of applying for this IPO.

Disclaimer
Analysis is for the information purpose only. Though due diligence has been taken while preparing this report, analyst shall not be responsible for any error and shall not bear any financial liability to the users of the report.

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