Trapped in Andhra politics, this smallcap is readying to rally as risks ebb
The smallcap stock has lost 25 per cent of its market value in last one month.
The smallcap stock has lost 25 per cent of its market value in last one month after the construction and engineering company saw cancellation of Rs 6,100 crore worth of orders by the newly-formed YS Jaganmohan Reddy-led government in Andhra Pradesh.
The impact was visible in June quarter, as the company’s order book fell to Rs 33,495 crore from Rs 41,000-odd crore at the end of March quarter. With this, the order book now stands at 2.8 times trailing 12-month revenues.
The company still has Rs 12,500 crore exposure to Andhra projects. That includes Rs 4,980 crore of orders under PMAY scheme, Rs 6,500 crore orders from Amravati Capital project and Rs 1,025 crore order from the state’s water and irrigation department.
Analysts said the possibility of cancellation of the remaining orders is low. They expect exposure to subsidiaries to fall by FY20 and expect the working capital cycle to improve. They are pencilling in Rs 400-700 crore inflows from favourable arbitration proceeds. Potential reward outweighs risks, they said.
“NCC has seen significant de-rating amid uncertainty over the balance Andhra order book. Our channel checks with local government officials suggest work of significant importance will start in next three months. We ascribe low probability of further project cancellation for NCC in AP. Debt levels may remain at current levels, though realisation from Andhra receivables may take time,” said HDFC Institutional Equities.
The brokerage expects the ongoing arbitration with Sembcorp to potentially unlock Rs 400-500 crore of cash inflow for the firm. It has ascribed a target of Rs 154 on the scrip, suggesting up to 140 per cent upside potential.
The construction company has guided for revenue booking of Rs 11,000 crore in FY20, without considering AP orders. It has guided for an Ebitda margin in 11.7- 12 per cent.
The company said bank guarantees for the cancelled projects are likely to be released, while the state has asked for extension of bank guarantees for several ongoing projects, which are stuck as of now due to the government’s order.
The government is in the process of reviewing the projects and NCC expects a resumption in next 2-3 months, Reliance Securities said.
“We cut our one-year forward target EV/Ebitda multiple to 6.5 times (from 7.5 times earlier) mainly to consider the ambiguity over its balance AP order and increased exposure to subsidiaries. However, current valuations factor in the afore-mentioned concerns. We believe any positive development on these fronts will result in healthy bounce in the stock,” it said, suggesting a price target of Rs 125 for the stock.
For June quarter, NCC’s profit fell 21.6 per cent to Rs 81.30 crore as payment delays in government projects increased buildup of working capital requirements and led to higher interest outgo.
Revenues for the quarter fell 7.3 per cent to Rs 2,187.70 crore. The company secured Rs 635 crore worth orders in June quarter and executed orders worth Rs 2,261 crore.
“We believe the company’s diversified segment and geographical presence would help it navigate the Andhra mess. We are building in lower order accretion and revenue, and higher working capital requirements, leading to a 12 per cent downward revision in FY20 EPS estimates," said Edelweiss Securities.
The brokerage has maintained a ‘buy’ rating on the stock with a revised price target of Rs 111.
Meanwhile, NCC’s gross standalone debt jumped by Rs 400 crore to Rs 2,400 crore in June quarter. This was largely on account of non-receipt of Rs 400 crore work executed in Q4FY19. The company expects debt to reduce to Rs 1,800 crore.
Analysts also expect to see some debt reduction, but not significantly. “The non-receipt from debtors was on account of payments stuck from AP government (Rs 200 crore) and from UP & Jharkhand governments (Rs 200 crore). NCC expects to receive the dues from UP and Jharkhand soon as these were stuck primarily due to elections. We remain conservative on the recovery from debtors, especially from the AP government and expect overall standalone debt at Rs 2,200 crore by FY20E end,” ICICIdirect.com said.
The brokerage said it would closely monitor the working capital cycle of NCC, which deteriorated to 139 days in June quarter from 104 days in March quarter.
The scrip traded around Rs 60 on Monday, down 2.41 per cent.