Tuesday, August 21, 2012

NBCC - Fantastic business and 'sitter' valuation, but...

National Buildings Construction Company (NBCC) is a BSE, NSE listed PSU. The company came out with its IPO in March 2012 at Rs.106 per share. The current financials of the company are as under:

Seems great! I can almost see all the Graham fans salivating!!
Well, it gets even better!

Unlike a lot of companies, where cash is more than market cap, this company is not facing any problems on the business front.

The business:
NBCC's business is pretty straight forward. It operates in 3 segments;
1. Project Management & Consultancy: In this segment, the company does residential and commercial civil work for various Govt departments. e.g. a ministry wants to build a new building or a new housing colony is to be constructed for Govt employees, NBCC is appointed to carry out the work. NBCC itself does not engage in any construction activity, but outsources it to other parties on a tender basis. NBCC thus acts as a nodal agency for the Govt, providing project management and consultancy services. It gets anywhere between 6-10% of the project cost as its fees.
2. Real Estate Development: In this segment, the company owns land and acts as a developer, constructing and selling commercial and residential real estate. The company has land bank of 125 acres spread over various cities in Northern India.
3. Power Sector: This is a smaller business segment, where the company does civil work for power sector projects. e.g. construction of cooling towers, chimneys and such other structural work.

Consider the following additional points:

  1. Business is booming. The company has a current order book of more then Rs.10000 cr, while its FY12 sales stood at Rs.3500 cr. Being a Govt driven business, it is not as affected as other companies due to various negative macro factors.
  2. The business does not require a lot of capital, since NBCC itself does not do any civil work. It outsources the work. The company therefore generates excellent cash and gets large advances. Fantastic business!!
  3. One large commercial real estate project of the company at Okhla is nearing completion. It is expected that this project alone will generate revenues of Rs.400-450 cr and profit of Rs.180-200 cr! (Since accounting is done on completed contract basis, nothing has been booked yet).
  4. NBCC has been granted CPWD (central public works dept) status. Hence, it is eligible to get numerous Govt civil construction contracts, which are otherwise not open to other companies. 
  5. The company has a large land bank and numerous real estate projects in progress. More details on the same can be obtained here.
Now the obvious question..you have a company having cash on book greater than market cap. It also has a low-capital, virtually recession proof, assured business. It also has valuable assets (land). It pays full tax and gives decent dividend too. So why shouldn't one buy this left right and centre?! Well, before you do that, let me ruin your happiness by putting forth some more points!!
  1. The biggest problem I have with the company is that the company's promoter is an extremeeeeeeely irrational being. The promoter is known to take decisions which make no business sense. In this case, e.g. if the promoter 'directs' the company to put money into, lets say, a large BOT project..or the promoter 'directs' the company to put money into an ailing power project, or buy a coal block! Not only will this entire cash on books disappear, but the company will be additionally saddled with debt. When will this happen? Maybe never..maybe tomorrow! Improper capital allocation is the biggest risk..There will always be this hanging sword for investors in this company and good investing cannot be done with swords around! :-D
  2. The 'cash' that one sees on the books does not entirely belong to NBCC. About Rs.500 cr is the company's own money, while the rest comes from advances received. On this related topic, do read this excellent post by Prof Bakshi.
  3. FY12 contingent liabilities 'claims not acknowledged as debts' stand at Rs.1055 cr! Thats quite a lot! I couldn't get much info on the nature of these contingent liabilities.
  4. The business is virtually tailor-made for corruption!!! NBCC gets contracts and outsources them to others. A corrupt official can easily earn a bit 'on the side' in this process. If a large scale corruption scandal comes out, it will hit the reputation, valuation and market cap of the company! (There are corruption cases against 16 employees of the company already, as per the RHP).
  5. There were newspaper reports and talks about the company getting into power generation!! Boy that would be a real bad capital allocation decision, considering the excellent current business. Although the company has denied this, the RHP talks about the company's intentions to get into BOT/BOLT/BOOM projects. 


The capital allocation overhang will always remain in this particular stock. Market will always be edgy, expecting the company to piss off money into some unrelated business, just because it is 'directed' to do so. With an overhang like this, its difficult that the company will get premium valuations. The cheap stock will remain cheap and may become a typical value trap. If the company really does waste cash like it is feared, then one can expect the market cap to drift a lot down too!
In my opinion, if you want to make a lot of money, investing in this company is not for you. But if you want to avoid losing a lot of money, this company is worth a look for you. Whatever you may decide, in case you invest, it would be wise to always keep tabs on what the company is doing and how it is allocating its capital. It shouldn't happen that you wake up one fine day with a big loss in the stock, then you start investigating and then you find that the company has just blown money away. Being vigilant is a must!!

Cheers and happy investing!!

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Anonymous said...

They want to go into mining....


Neeraj Marathe said...

Hi Anon,
The company has already denied this in their first concall..

Rohit Chauhan said...

Hi neeraj
there so many NBCC's in the PSU space. look at OIL india, NMDC ...you name it. all have large amounts of cash, core biz generates high ROE

and all the same problem ...the one you highlighted as point 1 ....very very bad no.1 owner - GOI. i think this risk surpases all. one can be quite sure that something stupid will happen, if not under the current government ..then some one else. can you imagine the temptations babu and netas will have in such companies

i agree ..all these companies are perfect value traps. the compounded returns will be dividend yield + a few % point above that

Neeraj Marathe said...

Very true Rohit..

Equity Pundit said...

Hi Neeraj
Such companies which have no respect for capital can quickly go from net cash to net debt. While NBCC today is net cash, look at what happened to SAIL, MTNL. These were once strong balance sheets, which have now weakened materially (debt:equity more than 1x).

Equity Pundit said...

Hi Neeraj
You are bang on target. Companies like NBCC, which have no respect for capital, can over a period of time, quickly dissipate shareholder cash into negative NPV projects. MTNL and SAIL are striking examples of once fortress like balance sheets now turned into leveraged institutions.

Anonymous said...

Dear Neeraj,

There seems to be NO Core competence of NBCC. It is working more as a middle man earning its commission of every proj.

Karun Sandha

Neeraj Marathe said...

Hi Equity Pundit,
Ya, totally agree with u..very good observation..

Hi Karun,
:-) yup, totally true..they are special, without having to do anything to become special!! :-)

Unknown said...

hats off Neeraj, How do you manage so much Finance, I am feeling jittery, pls do share the secret behind this knowledge of stats and finance

Neeraj Marathe said...

Lol.. this is nothing great. Read blogs like prof bakshi's blog. Its amazin.
But glad u liked it.

Value4 said...

Good information!
Construction Companies

Anonymous said...

Stock has lost 27% value in last 1 month. Its now at 102.

Wonder if this gives a margin of safety. Need to check if anything materially changed for the business.
Do share any thoughts on thoughts.