Investors should subscribe to the initial public offering of National Buildings Construction Corporation (NBCC). The government is offloading 10% of its stake in NBCC. No fresh shares are being issued through this offer. Strong order book, zero debt and its low-risk business model make the issue a lucrative proposition for the long term.
BUSINESS
NBCC operates in three segments: project management consultancy (PMC), civil infrastructure and real estate development. In the PMC segment, NBCC provides consultancy services for construction projects including buildings, hospital, roads and storm water drains. Through the civil infrastructure segment, it is involved in engineering and construction activities for power plants.
As of January 31, 2011, the company had a land bank of 125 acres. The company's order book in the PMC & civil infrastructure segments is over 10,000 crore, which is 3.4 times the FY11 revenue from the two segments. The company executes construction and power orders related to government bodies and agencies. These orders give a niche focus to the company's business in comparison with private players.
FINANCIALS
At the end of the September 2011 quarter, the company had net revenues of Rs 1,381 crore and net profit of Rs 75 crore. In the last five years the company's net sales have grown at a compounded annual growth rate (CAGR) of 26%, while its net profit has grown at a CAGR of 50%. The company has maintained an operating profit margin of 6-8% in the last five years.
VALUATIONS AND CONCERNS
The company almost entirely relies on the central government for new projects. Any slowdown in the award of new projects would hinder its growth prospects.
What is encouraging is that the government usually allocates funds to the company at the start of a project. These funds take care of its working capital requirements. As of December 2011, it had a cash balance of Rs 1,170 crore, which is 1.8 times its net worth. In addition, the company has a track record of paying dividends since the last three years. These factors would continue to be the strong reasons in driving the company's growth.
NBCC does not have a listed peer and hence a comparison is not possible. At the high end of the price band, the issue is placed at a P/E of 8 times and it has price to book ratio of 1.77. Companies in the construction sector with a comparable market capitalisation are trading at a P/B of 1.0 to 1.5. NBCC deserves a premium over them due to its healthy order book and low-risk business model.
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