Buy NCC, target Rs 159: HDFC Securities

HDFC Securities has a buy call on NCC Ltd. with a target price of Rs 159. The current market price of NCC Ltd. is Rs 116.75 Time period given by the brokerage is a year when NCC Ltd. price can reach defined target. NCC Ltd., incorporated in 990, is a mid-cap construction company with a market cap of Rs 7072.61 crore.

Investment rationale by HDFC Securities
 We value NCC’s standalone business at 9x Mar-20EEV/EBIDTA at Rs 149/sh and real estate at 0.5x equity invested Rs 10/sh. We have not valued Roads, Power and International business as these have been largely monetized or securitized.

 Our justification behind a lower multiple vs peers is (1)There could be recognition of provisions/ losses for its subsidiaries ranging between Rs 100-500mn over the next few quarters and international operations may surprise negatively in FY19E, (2) Historically margins of NCC have remained volatile due to its segregated order book.

 NCC has total group exposure of Rs 16.1bn to the subsidiaries of which real estate is Rs 12.5bn and Rs3.8bn is to roads/hydel power project. Total investment in subsidiaries is Rs 10bn and Loan is Rs6bn. Further, re-rating is contingent on real estate monetization.

The price has corrected recently. Further, re-rating is contingent on velocity of real estate monetisation. We adopt SOTP methodology and value NCC at Rs159/share (Standalone at 9x Mar-20E EV/EBIDTA – Rs149/sh, Real Estate – Rs 10/sh). We maintain our stance as BUY.