NBCC: Small PSU Construction Sub-Contractor. Avoid.

Report Date: Offering: Opinion:

March 24, 2012 Price Range is Rs 90-106, available from Mar 22-27 Government dependant, poor outlook, Avoid

NBCC Description and Profile

National Building Construction Corp is owned by GoI /Ministry of Urban Development. It provides project management consultancy (PMC) for civil construction projects for Central and State Government, civil infrastructure for power sector and real estate. Projects spread nationally address sectors like Hospitals (ESIC), Education Institutes, roads, irrigation, border fencing, etc. FY11 Revenues were Rs 3,127 crores, with Net Profit 140 cr and EPS 15.6. The net worth is 728 cr and has an order book of over ~10,000 cr. Dividend yield is about 3-4% at current IPO pricing. However NBCC is a small PSU as it is a Nodal agency that essentially subcontracts work to contractors like L&T, Ramky Infra, etc. In the sub-contracting, NBCC has back-to-back payments to contractors so that payments from customers are disbursed less margins. So debt is zero. Free cash on the books is 450 crores (about 35 per share). NBCC has consistently maintained ROE and ROCE of about 20% and 33%, respectively, during the last three years. With over 3 years order book in place, revenue visibility is fine, and debt is zero. All India presence, with some international operations starting up too. The construction / infrastructure sectors are in a boom phase with terrific multi decade growth. The Indian government has placed infrastructure spending at a high importance, per Budgets/ Plans. A number of government depts are comfortable dealing with a PSU, and place their orders with NBCC. A discount of 5% on the Offer Price is being offered to Retail Bidders As a nodal Agency, NBCC itself does not possess project execution capabilities. The quality of output of NBCC is dependent upon subcontractors. In this current competitive phase for construction, top firms are ready to work for NBCC. Once these pressures ease up in the next 2-3 years, the quality will fall. In the medium term subcontractors will themselves take up projects directly from Govt. departments, and NBCC will lose business. NBCC can be compared/ benchmarked against a number of firms. In Building construction, private sector firms are available at PEs ranging from 2-20 times with only larger high profile firms going over 6 times. In Civil Construction sector, large firms are in a range of 6-20 times, with the average at 14 times. Many firms in this sector are available cheaper than NBCC, offering ownership of a better business operation. My worry is whether the good-looking NBCC financials will hold up once it is a listed firm. The QoQ requirements of transparency of a listed firm are challenging, particularly for a government department run PSU. Why does the government need to do an IPO for NBCC? This Nodal agency for construction should continue doing its good work for government departments. Why should the unsuspecting public be

Key Strengths of NBCC and IPO offer

Key Weaknesses of NBCC and IPO offer

Strategic Thoughts around this IPO

NBCC IPO: Avoid

March 24, 2012

offered ownership in this business? (One rumor is that the Indian Government is testing waters before larger IPOs. This firm is then a bad choice in my opinion). In the 60s, the Indian government nationalized firms like Banks, LIC, SAIL, BHEL, BEL, Indian Railways etc. so that they can manage them and invest large amounts in new capacity (no one else could). Today the Indian government suffers from a monopolistic, legacy oriented thinking, and a mistrust of the private sector. In these modern times, private operators are far more efficient, capable and technologically advanced than PSUs in the same sector. Private sector can invest in heavy industry. The government should in fact vacate from sectors where private sector can do a better job. NBCC is clearly in one such sector. NBCC has a poor competitive position in the industry. In the next 5-10 years, it will lose its relevance, unless it learns to compete against the private sector firms, and execute projects end to end. See my reports of other firms in this space BGR Energy Systems and A Roads and Highways Developer (please Subscribe to receive this) Offer is of 1.2 crore equity shares for 10% of the firms equity, in price range Rs 90-106, available from Mar 22-27th. At the upper end, this values the firm at P/E of 6.8 times, and it will collect 127 crores, and the market cap of the firm will be 1200 crores. Rating agency CARE has assigned a grade 4/5 to the IPO. As on 24th Mar, the issue is 23% subscribed, primarily by Domestic Institutions. One hopes this firm is not another one headed for LIC NBCC IPO is not for the long term investor It is of course possible that NBCC may offer a listing pop. Conservative investors looking for PSU firms and safety for next 1-2 years may like to Subscribe. Interested investors should watch the subscription numbers on 26 Mar and take their decision.

IPO Offering Outline:

Opinion, Outlook and Recommendation

Public Reports
Here is a collection of public reports on this IPO by brokers and their opinions: No 1 2 3 4

Aditya Birla Money Hem Securities Edelweiss Swastika Investmart

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