NBCC – A Cash Bargain !

National Buildings Construction Corporation Limited (NBCC) is a listed PSU which was established in the year 1960. It is a Schedule A ‘Mini Ratna’ company. Its business operations can be categorized into three main divisions:

1. Project Management Consultancy (PMC)

2. Real- Estate Development (Direct real-estate projects and re-development of government colonies via PPP mode)

3. EPC Contract

It has executed many landmark projects in diversified areas both at home and overseas market. It is a certified ISO 9001:2008 company in respect of Project Management and Consultancy division. Keeping an eye on its increased real-estate activities, the company is constantly engaged in increasing land reserves and has already created a substantial land bank (around 150 acres) all across the country.

Segment Wise Break-Up of Revenues (Rs. in lakhs)

Turnover FY 13 Break-Up FY 12 Break-Up YoY Growth
Real-Estate 52684.68 16.53% 18512.96 5.40%  184.58%
Infrastructure (EPC) 13314.35 4.18% 9947.67 2.90%  33.84%
Civil Construction (PMC) 252682.68 79.29% 314471.66 91.70%  -19.65%
Total 318681.71 100.00% 342932.29 100.00%  -7.07%

As we can infer from the above numbers that the company is increasingly shifting its focus to real-estate business. As per their Chairman, the real-estate share would rise to 30-35 per cent in the next 3 years.

Let’s see some historical financial numbers of the company. All the figures are in Rs. lakhs :

Particulars FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 CAGR
Net Worth 3017 4471 7332 15094 33532 45726 54653 65414 79549 95069 46.72%
Net Fixed Assets 987 1351 1308 1241 1283 1332 2514 2425 2332 2433 10.54%
Net Sundry Debtors 38181 38017 47513 48080 44757 77775 88213 86894 102418 91171 10.15%
Income Per Employee 25 31 52 62 85 87 127 138 161 151 22.12%
Debt Equity Ratio 4.15:1 2.8:1 1.08:1 0.44:1 00:01 00:01 00:01 00:01 00:01 00:01 NA
Income
A) Turnover 66062 77803 123570 145993 196999 204120 298198 312677 342932 318682 19.11%
B) Other Income 672 2356 8150 5438 5490 315 3807 10468 16650 16063 42.29%
Total Income 66734 80159 131720 151431 202489 204435 302005 323145 359582 334745 19.62%
Other Inc./Total Inc. 1.01% 2.94% 6.19% 3.59% 2.71% 0.15% 1.26% 3.24% 4.63% 4.80% NA
Total Expenditure 65194 76311 126515 138490 160335 179811 283747 301429 329664 303914 18.65%
PBT 1067 2523 3967 12435 41489 23995 17459 20963 28983 30164 44.96%
PAT 1497 1546 2804 8088 27983 15916 11650 14034 19017 20750 33.93%

Three important things can be inferred from the above data :

1. Profit after Tax (PAT) has grown at a healthy CAGR of around 34 % in the last 9 years.

2. The business is cyclical in nature and is affected by the construction activity happening in our country. However, the business have picked up well in the last 3 years after sliding for 2 consecutive years post March 2008. The last 3 years PAT CAGR is 21.22% which is excellent considering the dismal performance of our economy during the said time-period.

3. The company has considerably reduced the debt-equity ratio and is a debt free company since last 5 years.

Now, let’s do some balance sheet analysis to get a better picture (FY 13 numbers are being considered here)

Current Investments + Cash and Bank balances = 1,64,253.07 lakhs

Debt = Nil

Net Cash adjusted for debt as on 31.03.13 = 1,64,253.07 lakhs

No. of shares outstanding = 12 crs

Cash per share = Rs. 136.88

Closing price at BSE on Aug 23, 2013 = Rs. 117.40

Price adjusted for Cash per share = (117.40 – 136.88) = (19.48)

In other words, it means that the cash in the business is more than the price one is paying to buy it. One is getting all the other assets and an operational business free of any cost ! It’s like going into a retail store where the owner is willing to sell you his store for an amount which is less than the cash kept in the drawer at the cashier counter. He is not charging you for real-estate, inventory, goodwill, treasury reserves etc. Moreover, there is no debt in the business. Wouldn’t you jump at the deal and would think that how fool or irrational the seller is ?

When the same thing happens in the market, then why are people unable to accept that such a situation could exist. On the contrary, it is almost impossible that such a situation could exist in real life as people who do business on ground are smart enough to know its true worth. They wouldn’t sell a dollar for cent. But the unique thing about equity markets is that the price of a company which we see daily is decided by a bunch of people, most of whom are unaware of how to value a business. They just like to adjust their judgement about a company on short-term price fluctuations and a lot of macro economic gas which is circulated all around. On the contrary, most of the successful businesses are built on the excellence of its internal affairs whether in the form of processes, skills, products or services, brands, integrity in affairs, quality of management, financial prudence, visionary leadership etc.

Investing should be more business like and can be summarized in Warren Buffett’s words of wisdom, ” I am better investor because I am a businessman and a better businessman because I am an investor ” . I believe that bottom- up stock picking with a long-term foresight is a very effective and successful art of picking up stocks, Buffett and Charlie Munger are the most successful followers of this art.

In reality, things are not so simple and there are many cash bargains available in the market today. There is a high probability that people might fall into value trap while looking for bargains in the market. So, let’s dig deep and find out more about this company.

(All figures are in lakhs of Rupees)

Current Assets 31.03.13 31.03.12
Current Investments 10476.94 16627.26
Inventories 63243.89 45006.47
Trade Receivables 83029.56 93566.73
Cash and Bank Balances 153776.13 132519.7
Short-term loans and Advances 25594.26 41535.26
Other Current Assets 2896.41 2806.32
Total Current Assets 339017.19 332061.74
Current Liabilities
Trade Payables 82052.43 117734.42
Other Current Liabilities 160307.4 131908.78
Short-term provisions 8810.66 8734.47
Total Current Liabilities 251170.49 258377.67
Net Working Capital 87846.7 73684.07

These are some of the figures extracted form the balance sheet of the company. The net working capital is positive but if we take out the cash and other short-term liquid investments from the above table then it would look something like this :

Current Assets 31.03.13 31.03.12
Current Investments Nil Nil
Inventories 63243.89 45006.47
Trade Receivables 83029.56 93566.73
Cash and Bank Balances Nil Nil
Short-term loans and Advances 25594.26 41535.26
Other Current Assets 2896.41 2806.32
Total Current Assets 174764.12 182914.78
Current Liabilities
Trade Payables 82052.43 117734.42
Other Current Liabilities 160307.4 131908.78
Short-term provisions 8810.66 8734.47
Total Current Liabilities 251170.49 258377.67
Net Working Capital -76406.37 -75462.89

The reason why I have taken out cash and other liquid investments out of the picture is to get a more prudent view of the operational dynamics of the company. The company has kept a large amount of cash to meet its capex requirement, as it is increasing its land bank in the country. Otherwise, there is no need for the company to keep such a large amount of cash in its balance sheet. After taking out cash and other liquid investments, we can clearly see that the business have a negative working capital. Negative working capital means interest free access to money from suppliers, security deposits, advance from customers etc. It is a type of float enjoyed by businesses with an excellent underlying economics . In the case of NBCC the clients do pay around 10-20% as advance for a project. If we take a break up of other current liabilities then the picture would look like this :

Other Current Liabilities 31.03.13 31.03.12
Taxes and Labour Cess Payable 4113.96 7853.80
Earnest Money & Security Deposits 36528.39 36054.54
Advance from Clients 119665.05 88000.44
Total  160307.40 131908.78

As we can clearly see that the company is getting a large amount of money as security deposits and advance from clients. This confirms the superior underlying economics of the business. If we take the break-up of other long-term liabilities from the balance sheet, then it would be something like this :

Other Long-term liabilities 31.03.13 31.03.12
Earnest Money Deposits 4901.76 5024.42
Advance from Clients 3925.05 2564.68
Trade Payables 12179.39 12883.53
Employee Security Deposits 2.14 2.14
Total 21008.34 20474.77

We can again clearly see that in long-term liabilities also the company is getting a large chunk of money as float from suppliers and customers. That’s what makes this business attractive. The company can earn decent return from this surplus by investing in safe instruments. From the historical table(displayed above) we can see that the other income have increased at a CAGR of 42.29 % in the last 9 years. The reason is the large percentage of interest income in the total composition of the other income. If we break the interest income components of other income, the picture would be like this :

Components of Other Income 31.03.13 31.03.12
Interest income from Bank 9605.34 8570.63
Interest income from Staff 0.47 0.12
Interest income from PRW/Suppliers 2536.39 2603.79
Other Interest Income 1257.31 93.87
Total Interest Income 13399.51 11268.41
Total Other Income 14896.92 13461.63
Interest Income/Total Other Income 89.95% 83.71%
 (Rs. in lakhs)

This highlights that the large amount of interest-free float (advance from clients and security deposits) money which the company is enjoying is fetching them handsome returns in the form of other income. Since, in a real-estate business it takes around 2-3 years for a project to complete. Therefore, the company is parking that money into fixed income instruments after taking care of operational needs. The operational need is also being met by the large amount of trade payables and cash balance.

Let’s calculate few ratios to see how much return the business is generating :

Average Shareholder’s Equity = 95069.33 + 79549.46 (Rs. in lakhs) / 2 = 87,309.40 lakhs

Return on Equity (ROE for FY 13) = PAT/Average Shareholder’s Equity *100                                                                                                                                         = 20,749.88/87,309.40 *100 = 23.77 %

Return on Capital Employed (FY 13) = EBIT/(Total Assets – Current liabilities) *100                                                                                                                             = 30696.08/121732.64 = 25.22 %

Return on Invested Capital (ROIC for FY 13) = EBIT/ (Total Assets – Cash) – Current liabilities)*100 = 30696.08/(372903.13-164253.07) – 251170.49       = (72.19 %) or -72.19%

The return on invested capital is a negative figure because the company doesn’t require any capital on its own to run the business as the entire capital need is being taken care by current liabilities. The company doesn’t have to pay any interest on this amount. This negative working capital cycle makes this business wonderful from the perspective of the promoters as well as the investors.

Dividend for FY 13 = Rs. 3.75 per share

Dividend Yield @ CMP of Rs. 117.40 = 3.19 % 

Now, let’s do some valuation to find out the intrinsic worth of the business.

1. Multiple based Valuation Analysis

Particulars 31.03.13 31.03.12
Diluted EPS (in Rs.) 17.29 15.85
Earnings Yield at price of Rs. 117.40 14.73% 13.50%
10 years Govt. bond yields 8.50% 8%
Premium over bond yield 6.23% 5.50%
PE Ratio at price of Rs. 117.40 6.79 7.41
Earnings growth in the last 9 years 34.00%
Earnings growth in the last 3 years 21.22%

We can clearly see that the business is available at a hefty discount at current market price of Rs.117.40. Not to forget that the company is having Rs. 136.88 as net cash per share. It’s like a person has gone to a branded apparel store during sale season and he is purchasing a jeans free of any cost and also getting a complimentary t-shirt along with the jeans. People in general would jump at such a type of sale offer and would laugh at the insanity of the people who have devised such an obscene offer. But, when the same mis-priced opportunity is available in the market, majority of the investors do exactly the opposite of what they would have done in the apparel sale offer. It proves that the common sense in reality is very uncommonly found. Some of the largest amount of wealth have been created by people who has utilized common sense in taking business decisions. Not by people who invests high IQ in taking simple business decisions. Simplicity in thought process can be a great asset in the investment management business.

Einstein had the opinion that there are 5 ascending levels of intellect :

1. Smart

2. Intelligent

3. Brilliant

4. Genius

5. Simple

Yes, #5 was simple. In other words, WISDOM.

Wisdom brings simplicity, humility and clarity in the thought process. At the end of the day, we are all striving to be a little wiser person with each passing day in life.

2. Valuation using the DCF model

Average FCF for the last 3 years = Rs. 9064.29 lakhs ( Assuming that all the capex requirement would be taken care by the cash reserves and the float money)

Assumed conservative growth rates :

Years (1-5) = 15%

Years(6-10) = 10%

Terminal growth = 2%

Discount Rate = 10%

Outstanding Shares = 12 crs

Net Debt = Nil

Total PV of Cash Flows =  Rs. 25,282,528,792

Intrinsic Value Per Share = 211

Margin of Safety = 30 %

Net Intrinsic Value per share = Rs. 147.70

Closing price at BSE on Aug 23, 2013 = Rs. 117.40

Discount from Intrinsic Value = 21 % approx.

 Not to forget that the company is having Net Cash per share = Rs. 136.88

Also, a back of the envelope calculation shows that around Rs. 3000 crs worth of residential flats are presently under construction, the majority (around 80 %) of them in the NCR belt.

Flats under construction = 5000 flats

Assuming average size of each flat = 1200 sq. ft (super built up area)

Average Selling Price = Rs. 5000 sq. ft

Approx. Revenue = 5000*1200*5000 = Rs. 3000 crs

The company real estate business net margin is around 20 % . Therefore, approx. profit would be around Rs. 600 crs which is  almost three times the FY 13 overall PAT. Apart from that, the company is also working on various redevelopment projects in Delhi and Mumbai where return is around 10% but volume is large of around Rs. 5000-7000 crores.

 From the above analysis, we can conclude that the above investment has a very little downside risk and a significant  upside potential. People who have the patience and a long-term foresight can definitely invest in this company from a  5 years perspective. The company is increasingly focusing on the real-estate business and is well placed to grab the  opportunities which would come up with increased construction activities in the country.

Risks and Concerns

1. Large amount of receivables pending with the govt./PSUs. Some of them are pending for more than 3 years. Due to large amount of payables it is being offset ed but it definitely is a hindrance for efficient working capital management.

2. Slowdown in the commercial real-estate business. Recently, completed a commercial project in Delhi but couldn’t sell due to slowdown in demand.

3. The biggest challenge is to acquire land at a reasonable price. Thanks to the private builders due to which there are manipulations in prices. To counter this, the company is targeting land bank of the sick public sector companies. Since, the effort of the govt. is to help these companies revive on their own, they can generate substantial revenues through their land holdings.

4. Cyclical nature of the business. Populist government policies can also spoil the smooth functioning of the business.

5. Neck throat competition in the real estate sector. How many flats could the PSUs employees could absorb ? There are many private builders who are catering to the general segment.

6. Large geographical concentration in the NCR belt around 80 %. Although, the company has built around 150 acres of land bank all over the country.

7. Contingent liability i.e claims against the company not acknowledged as debt to the tune of Rs. 21,065.55 lakhs as on March 31, 2013. The company has filed counter claims against these claims amounting to Rs. 12386.89 lakhs.

Disclaimer : I am an existing shareholder of NBCC and my opinion about this company could be biased. Readers are advised to trust their own judgement before making any investment decision.

Please provide your valuable comment(s) and feedback so that I can improve upon my understanding about this business.

Advertisements

About Saurav Jalan
A Value Investor who is passionate about Knowledge and learning.

11 Responses to NBCC – A Cash Bargain !

  1. ey Saurav I liked your analysis of NBCC. Prime facie it looks like a bargain. Give me some time I would do my analysis and would like to share notes.

  2. Few quick observations — 1. If the business dynamics of the existing business are so good why would the company want to increase the share of Real Estate business when the real estate market is slowing down and you mentioned that company is finding it difficult the real estate project inventory in NCR Region. 2. You have stated that company has kept cash on BS to meet capex plans to build Land Bank, don’t you think this excess cash will disapear in near future. 3) The negative working capital is it because of the real estate business or EPC & PMC business. If it not largely because of Real Estate Business which i suspect (though i need to check) dont you think with increased real estate focus it will come down.

    • Saurav Jalan says:

      They are facing slowdown problems in the commercial real estate segment as compared to the residential segment. In the residential segment, the major chunk of their revenue will come from redevelopment projects of old government colonies. Such projects provide stable cash flows as the company gets Project Management Consultancy fees as 10% of the total cost of the project in phases. For eg : They are presently redeveloping an old government colony in Kidwai Nagar, New Delhi where the total cost of the project is around 4000 crs and they would get around 400 crores as project consultancy fees in phases in 4 yrs. This project would also contain around 13 lakh sq ft of commercial area. The commercial area would be leased to the Government PSU’s, departments and ministries. The cash flows from the commercial lease apart from the advances(20-25 %) of residential flats would be utilized to fund the construction of the residential segment. Here, I think only 400 crores would be the earning of the company as per their Chairman. The break up of funding of commercial project which would be leased to fund the residential project is not clarified. I guess they would build it from the commercial project advances only as the land cost is nil to them.

      In other cases, the company builds a greenfield real estate residential project. There NBCC takes around 20-25 % advance from customers and reaps profit margin on the flats sold which is slightly less than the private real estate players. The company spends very little on advertisements and have access to land from sick PSU’s also at a cheaper rate. All these things improve the ROIC of the company significantly.

      In nutshell, the company has been able to blend its expertise in PMC as well as real estate construction and is using a combination of both to grow the business. Both PMC and residential real estate construction are contributing to the negative working capital cycle as in either of the case the company is getting around 25% as advance money.

      Coming to the land bank issue, the company is conservative in acquiring land and would use only a portion of the cash reserves to acquire land each year. At present, their land inventory is around 150 acres spreaded all over India.

      They have completed a greenfield commercial real estate project in Okhla,New Delhi which is a prime area for office space. Due to slowdown, they have not been able to sell this project as per their expectations.This is their main concern.

      In East Kidwai Nagar redeveopment project, most of the commercial space would be leased to the Government ministries, departments and PSU’s. Hence, there is no question of slowdown impact.

      I guess their primary objective and focus on catering to the need of the government first, provides some stability to the cash flows.

  3. Manher Desai says:

    NBCC looks good to add at 110/112 and remain invested for long. Liked your blog very much.

    • Saurav Jalan says:

      Thanks Manher for your appreciation. NBCC is good at the price which you have mentioned but be conservative in your capital allocation as a percentage of your total portfolio. In my opinion, no matter how much margin of safety is there in NBCC but government companies have a lot of policy risks which cannot be visualized in numbers:) Keep sharing your valuable comments in my future posts also.

  4. Karthikraja says:

    Very insightful article. i am learning and your blog is helping me to leran a lot. keep doing your good work.
    Please share the companies which are Cash bargains in universe or almost cash bargain ( in Prof . Sanjay bakshi’s way)
    If you have time, can you analze a bank in details. it will help us to understand how to analyze the bank.

    • Saurav Jalan says:

      Thanks Karthik for your generous appreciation. I am a rookie investor/equity researcher and am on the learning path like you. Still, I will try my best to come out with an analysis of a bank.

  5. dhairya shah says:

    hi saurav,
    nice analysis please can add some more research here please.

    • Saurav Jalan says:

      Thanks Dhairya. I want to write some more research reports but I am not able to devote enough time to do so. I will try to come up with something interesting in the future.

  6. Hi Saurav, Gone through your research. Really you worked hard for this and you explained in a very detailed way. Will love to read such research in future as we were very late to read this blog and ride the growth.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: