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National Buildings Construction Corporation Limited (NBCC) is tapping the capital markets with an offer for sale of 1.2 cr shares in a price band of Rs 90-106. The issue had opened on Thursday the 22nd of March and would close on Tuesday the 27th of March.

Business
NBCC is a Government of India company whose main business is project management consultancy services for civil construction projects. NBCC receives orders from other PSU companies on basis of ‘Nomination’ and receives a consultancy fee. The terms of business are such that NBCC receives money in advance which they in turn pay to contractors. This makes the working capital cycle negative and the company actually enjoys advances which help the company earn some interest unlike other companies in the construction space which have a large working capital cycle. More than 90% of the revenue comes from this segment. The balance comes from two other activities where in one the company bids for and executes civil infrastructure in power projects and the second activity is real estate development.

The company is headquartered in Delhi and is under the Ministry of Urban Development. NBCC has a huge order book with pending orders in excess of Rs 10,600 crs. The average execution time for projects is between 24-30 months. The company has 141 ongoing projects and 78 forthcoming projects. In the year ended March 2011 the total income from operations was Rs 3126.77 crs of which 93.4% came from project consultancy, 4.6% was from civil infrastructure for power and 2% was from real estate.

The industry dynamics are in favour of NBCC with the thrust on infrastructure, whether it is roads, civil construction, hospitals or power projects. The Government is a big spender and NBCC is an automatic beneficiary in this aspect and gets its projects on a nomination basis. It bids only in the power sector and as mentioned above this segment forms just about 5% of its total revenues.

The revenues of the company have grown at a CAGR of 21% over the last five years and have more than doubled from Rs 1,509 crs in FY07 to Rs 3,230 crs in FY11. The company recognises revenue from real estate on completion of project and that being a small segment causes some lumpiness in the year that the project revenue is recognised. The company has been making decent profits and has been paying dividends.

Objects of the Issue
The objects of the offer are to carry out the disinvestment of 1.2 cr shares by the selling shareholder and to achieve the benefits of listing the Equity Shares on the Stock Exchanges. NBCC would not receive any proceeds from the Offer and all proceeds shall go to the selling shareholder.

Financials
As mentioned earlier the company’s primary business segment is project management consultancy and almost 93% of its revenues have come from this segment in the year ended March 2011. There is cyclicality in the business and in the monsoon months the business of construction slows down considerably.

The company is cash rich and has a negative working capital cycle. It therefore pays virtually no interest and that gives it an edge over others in the business of construction. The company has cash and bank balances and liquid investments of Rs 1400 crs as at 30th September 2011. The bulk of this would be advances from customers but this remains part of the cycle and continues to hover at these levels. The company has a dividend paying track record over the last five years. The dividend pay-out ratio has been 20% of profits.

The margins are on the lower side because of the nature of the business where because consultancy being negative working capital, clients pay less. A large part of this is made up from other income. The net margins have been in the region of around 4 to 5%. In the year when there is income recognition from real estate margins have spiked and improved to even 13-14%. This should not be taken as any indication but around 4-5% is very clearly a sustainable margin going forward.

Track record of Merchant Bankers
There are two merchant bankers and the record is as follows: –

IDBI Capital Markets Services Limited.
This banker has handled a total of 9 issues with 4 issues in 2009-10, 3 issues in 2010-11 and 2 issues in 2011-12. Of these total nine issues, 3 were trading at a discount 30 days after listing while 6 were trading at a premium. If we were to change the period to read as of the last trading day of the week or 23rd March 2012, only 2 issues are trading at higher than issue price while 7 are trading at a discount.

Enam Securities Private Limited
The banker has given a list of 10 issues handled by it while in the summary; details of 25 issues are given. Of these 8 issues were in 2009-10, 15 issues in 2010-11 and 2 issues in 2011-12. The summary states that of these 25 issues based on 30 days after listing 14 shares were trading at a discount while 11 shares were trading at a premium. If one were to look at the names of the ten IPO’s that have been given, only 2 of them are trading at a premium currently while 8 of them are trading at a discount.

Comparisons
NBCC believes that there are no companies in the similar line of activity. There are quite a few contractors who do real estate construction for others. Some of the names that come to mind include Ahluwalia Contracts, Man Infracon and Larsen & Toubro. Besides these there are companies who do a mix of both with construction and real estate development. Strictly speaking there is no comparison where a company gets 90% of its revenues from project consultancy and therefore this can be looked as a standalone company.

Valuations
The company had a net profit of Rs 140.34 crs for the year ended March 2011. This translates into an EPS of Rs 11.69. In the six months ended September 2011, the company has earned a net profit of Rs 74.97 crs translating into an EPS of Rs 6.25 for the six months and Rs 12.50 on six months annualised basis. The offer for sale at Rs 90-106 based on the full year ended March 2011 has a PE ratio of 7.7 times at the lower end and 9.06 times at the upper end of the price band. It may also be mentioned that there is a 5% discount for retail investors and eligible employees.

It may also be mentioned that the last few issues from the Government of India have not been rewarding for shareholders and they have lost money. Recent examples include the last PSU bank Punjab & Sind Bank, MOIL and FPO’s from Shipping Corporation and PFC. The last successful issue was Coal India. Valuations for NBCC could be said to be just about fair. One should not expect fireworks on listing.

Concerns
The biggest risk to NBCC is the volatility in raw material prices and for the price variation clauses. The price variation clause is dependent on the orders and the terms and conditions mentioned. In case the same is a pass through then there is no concern otherwise there could be a hit on NBCC.Another risk that could impact the company is if there is any change in the present nomination form of business that the company receives. Low floating stock of the company and its market cap could be constraints for the company and the fact that at best this would be a midcap company could impact its price movements.

Conclusion
NBCC is a mid-cap company from the Government stable with a solid assured business dependent on the Government. The size of the issue is small and the timing of the issue in the last fortnight of the financial year puts pressure on subscription. In case the issue catches fancy with two days for the issue to close, the subscription levels could make the issue unattractive as the allotment would be poor. There is another risk that investors are yet to experience and get accustomed to listing day norms where issues with an IPO sixe of below Rs 250 crs trade in the trade-to-trade category for the first 10 days. This lack of experience could affect level of subscription.The issue is subscribed 23% at the end of Friday and there are two days to go for the issue to close.

The issue is decent and offers scope for appreciation in the medium term. With trading volumes to remain subdued in the first 10 days, one must not expect fireworks on listing. If you are one who is content with making 15% in the next three to six months, this issue is for you, while if you expect a smashing debut on listing, it makes sense to avoid the issue and look at entering on listing.

SEBI Disclaimer: – I intend to subscribe to the above issue.