Q4FY23 Review: NCC: Strong execution; healthy debt reduction

30 May 2023 , 11:43 AM

NCC’s strong execution for the 7th quarter in a row lends comfort on revenue growth. Margins have recovered from the recent lows as well. The Rs 502bn order book as of FY23-end provides the backbone for management’s 20% revenue growth guidance for FY24. Reduction in working capital drove debt down to multi-year lows of Rs9.8bn and is a key positive. Analysts of IIFL Capital Services upgrade earnings by 6-9% for FY24-25.

Strong execution for 7-consecutive quarters: 

NCC reported healthy 28% YoY growth in Q4 revenue and 34.5% YoY growth for FY23 with revenue of Rs133.5bn. This lends reassurance on execution of projects at hand. Q4 Ebitda margin at 10.6% continued to improve vs lows of 8.5-9.5% seen in Q4FY22-Q1FY23; indicating gains from healthy execution and stable RM costs. At 10.1%, full year margin was slightly better than 10% in FY22. Management guided to 20% revenue growth with stable margins for FY24; which would be commendable given a revenue base of Rs133bn.

Rs502bn order book provides growth visibility: 

NCC’s order book jumped from Rs393bn in FY22 to Rs502bn in FY23, despite strong revenue growth. This was driven by order inflow of Rs259bn in FY23, which includes Rs30bn executable portion of coal MDO works (from 51% owned SPV) and Rs42bn worth of JJM scope that was finalized post DPR approval. Order book is well diversified across sectors (see fig. 5 & 6) and is largely driven by central/state govt and PSUs. Management does not see any major risk of delays from Rs40bn order book from Karnataka. It expects to win projects worth Rs250bn again in FY24, aided by healthy project pipeline across sectors.

Fall in working capital drives healthy debt reduction: 

NCC ended FY23 with a working capital cycle of 118 days – lowest in the past many years, aided by strong collections and receipt of mobilization advance on new order wins. This drove gross debt down to Rs9.8bn – 0.1x ND/Equity. While we expect this to rise to a more normal level, debt will remain comfortable (0.2x ND/E for FY25) and is a key positive. Arbitration recoveries would present further upsides.