NBCC Stock price is Falling; Why?

National Building Construction Company Stock Overview Feb 2019

National Building Construction Company (NBCC) (India) Limited is a blue-chip Government of India Navratna enterprise and a Central Public Sector undertaking which trades publicly in the market. The company’s present areas of operations are categorised into 3 main segments, i.e. Project Management Consultancy, Real Estate Development and Engineering Procurement & Construction (EPC) Contracting. From 2014 to 2017, the company displayed a phenomenal growth. But after 2017, a downtrend has started for the company.

A lot of questions were raise on this, if this is such a good company then why the share price of NBCC Ltd is going down.

NBCC Company Overview

NBCC Ltd is Public Sector Unit (PSU). Government holds more than 70% of the stake in the company. NBCC is public works organization. So, from the government projects received to the company, 80% of the projects are for Project Management Consultancy. These projects are acquired through nominations, that is the government (central as well as state) nominates NBCC Ltd for the projects.

That is why the order inflow to the company is very strong. The company has an order inflow of 80,000 Cr. The company charges consultancy fees of around 10%-11% of the project value. Thus, it can be seen that the earning visibility of the company is very strong. The best thing about the company is that it is a ‘0-debt’ company.

NBCC – Real Estate Aspect

NBCC is present in the real estate sector and after demonetization the real estate sector is going through a lot of volatility. Now, the company is also getting more construction projects. There is a key risk here as the projects received here are in the form of sub-contracts. And though they have received sub-contracts, but the responsibility of completing the projects is completely on NBCC. This is a risk of the company.

NBCC Ltd also has an execution risk. This is so because it is in the real estate sector. And the company is going more and more into real estate development. Some of the projects of NBCC in Delhi have not received clearances. Now, the company has said that they have received the clearances in January-February and the works will start soon. So, the real estate exposure, that is the construction exposure of the NBCC Ltd. is increasing and this is raising some risks to the company.

NBCC Stock Price Movement

In early 2014, the share price of NBCC Ltd. was close to Rs. 9. And in late 2017, the share price of the company went up to almost Rs. 138. In this period, the stock gave returns of almost 1400%+. From there, now the share price of NBCC Ltd. has come down to Rs. 50 (Feb 2019)

Financial Aspect – Recent Issues

The earning visibility of the company looks very good. The PSU sector helps the government in the reforms and during the election time the clearances of these reforms take the back seat so that can be a short term risk.

Also, in 2016-17, the Accounting Standards were changed because of which the revenue numbers changed and resulted in an impact on Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA). So, the impact was more of an accounting entry rather tan any business risk. The numbers of revenue or operating profit or net profit have experienced a YoY growth in the last 3 quarters.

Hindustan Steelworks Construction Limited (HSCL)

HSCL was established in 1964 as a construction organization under the Ministry of Steel, Govt of India. Now it has become a subsidiary of NBCC (India) Ltd. from 1st April 2017, under control of Ministry of Housing and Urban Affairs. It diversified into a versatile infrastructure portfolio all over the country. It became the major player in implementation of integrated steel plants.

This is a subsidiary of NBCC Ltd. in which the company hold 51% stake. There was a strike going on in that company. Because of the strike by the workers, in Q2FY18-19, the numbers from HSCL could not be added to the consolidated numbers of NBCC Ltd. An thus, the numbers looked negative.

Housing For All – Long Term Positive

Pradhan Mantri Awas Yojana is an initiative by Government of India in which affordable housing will be provided to the urban poor with a target of building 20 million affordable houses by 31 March 2022. The biggest benefiter of this initiative can be NBCC Ltd as the government nominates them for 80% of their projects.

Summary

• The fundamentals of the company are strong.
• NBCC Ltd. has very strong earnings visibility. The company is stating that their order inflows will go up to 1 lakh Cr by the end of this year.
• All the competitors the company has a lot of debt on them, with very few having Debt-to-equity ratio less than 1. But NBCC Ltd. is a 0-debt company.
• At the current share price of Rs. 50 and in the risk-to-reward ratio, the stock of the company looks attractive.
• The downtrend experienced here can be taken as cyclical downtrend.

Notes: –

• The numbers that are used are approximate and have been rounded for presentation purposes.
• We are not in any way saying that this is a bad company, or the stock of this company is bad.
• We are also not suggesting anyone to immediately go and buy this stock or invest in the stock markets.
• Only an analysis has been presented here.