BackFPO concerns overpower NBCC’s strong March quarter performance
The performance was driven by the mainstay project management consultancy division
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Investors gave the cold shoulder to National Buildings Construction Corp. Ltd’s (NBCC) strong performance in the March quarter. Consolidated revenues increased 26% and profit jumped 30% from the year-ago quarter.
The performance was driven by the mainstay project management consultancy division. As the company began to receive revenues from a redevelopment project in Delhi, operating margins at the division expanded to about 9%. In the previous three quarters, the division recorded an operating profit margin of less than 6%, analysts say.
This performance brought no cheer to investors. The stock fell on Friday. Though it recovered a bit on Monday, it is still lower than the pre-results levels. Along with the results, the company said its board approved the further public offer (FPO) of 10% of the share capital. The proposal comes amid reports that the government, which holds a 90% stake in the company, may divest 15% to meet the minimum public shareholding norm.
Both the plans still need to be worked on. But the FPO proposal came as a negative surprise to the Street. The company has no debt. With cash of ₹ 1,066 crore and shareholder reserves and surplus rising, many wonder if the FPO is required, especially since it will dilute earnings.
The company is putting up a strong defence. It expects the current order backlog to rise from ₹ 24,000 crore to about ₹ 40,000 crore once the government clears three redevelopment projects. Apart from this, it sees huge opportunities in the redevelopment projects from states and government arms such as civil aviation.
If the orders materialize as expected, NBCC would need to invest 5% of the construction cost initially, which comes to ₹ 2,000 crore. Based on the current market capitalization, a 10% FPO will raise close to ₹ 1,000 crore. Add this to the existing cash equivalents and the company would be comfortably placed to explore the emerging opportunities, the management told analysts.
While some analysts are still sceptical, the stock, after rising sharply in 2014, is trailing the broader market since the beginning of the current calendar year. The stock can rebound if NBCC manages to overcome the current FPO-related scepticism by delivering on the promise of stronger revenue growth.
The company aims to increase revenues in the current fiscal year by almost 30% to ₹ 6,000 crore. In 2014-15, revenues increased 15%. It hopes to continue to grow at a strong pace, riding on redevelopment opportunities. As execution of the redevelopment projects, which offer better returns, gathers pace, the management also expects margins to improve.
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