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NCC: Well placed for steady growth

25 Sep 2023 , 11:19 AM

Recommendation: Buy; Target price: Rs 9200


With a well-diversified ~Rs646bn order book (4.5x book to bill), NCC is comfortably placed to deliver ~15% revenue Cagr over FY23-26, even amid the possible election-led disruptions. Large govt project pipeline across focus segments provides further growth support. The govt’s emphasis on timely execution (30%+ growth seen over FY22-23) is a key positive, which when combined with stable RM costs, will also help sustain margins at ~10.5%. NCC’s balance sheet is healthier vs historical levels, with D/E likely to hold steady at 0.1x over the medium term. BUY with TP of Rs181. 

Large well-diversified OB provides strong growth visibility: Backed by strong order wins over the past six quarters, NCC has seen its order book (OB) expanding to ~Rs646bn as on date (4.5x on trailing 12m revenue). Importantly, diversification in terms of end sectors has improved with pickup in govt capex spends. Focus on timely execution is visible in steady revenue growth of 30%+ over FY22-23. Combined together, this provides strong visibility for management target of ~20% revenue Cagr over the medium term; covers for possible election-led disruptions. Order inflow pipeline led by govt spends remains strong. 

Steady execution, stable RM costs to support margins: NCC saw a steady improvement in Ebitda margin through FY23, as RM price inflation moderated and pass-through clauses kicked in. Steady pickup in execution rate also helped. Management remains confident on sustaining the Ebitda margin trajectory at ~10.5% in a steady RM price environment. This is because the current OB includes projects won at healthy margins; the mix of revenue would be diversified, in terms of sectors as well as stage of execution of various projects. 

With D/E of 0.1x, balance sheet better placed: FY23 saw standalone debt level fall to Rs9.86bn – 0.1x D/E — led by contraction in operating cycle. While it increased to Rs13.06bn as at end 1Q, this seasonality is normal through the year. Over FY24-26, analysts of IIFL Securities expect debt to inch up (in absolute terms, to fund capex and WC needs, (assuming a stable cycle); but D/E should sustain at 0.1x. Possible inflows from the resolution of Sembcorp and Taka arbitrations will lower the debt levels.

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