Shares of NCC Limited, one of India’s largest and most diversified construction companies, tanked by more than 14% on February 7, 2024, to touch an 11-month low of ₹203 a share. This was after the company’s Q3 results disappointed the analysts. Despite an increase in turnover, its net profit is declining, there are concerns about debt levels, and revenues will again be under threat by its future growth rate. This blog delves deep into the factors behind NCC’s recent performance, explores its impact on the stock price, and analyzes what investors can look out for ahead.
Overview of NCC Limited
NCC Limited is a leading infrastructure and construction company in India with a diversified presence across several key sectors, including buildings and housing, roads, water and environment, irrigation, metals, mining, and railways. Executing very large projects, the company remains a major player in the Indian construction and infrastructure development sector. NCC, over the past few years, has been under tremendous growth spurts, with recent hiccups aside. Its long-term performance has mainly been good in terms of producing a multi-bagger return during the last five years.
Crash: An Understanding of Numbers Behind NCC’s Q3 Performance
NCC’s third-quarter performance for the fiscal year 2024, which ended on December 31, 2023, was mixed and led to a sharp decline in its stock price. The company reported an increase in turnover, but its net profit took a huge hit. Let’s break down the numbers in detail.
Q3 Performance Overview
- Turnover: The company reported a turnover of ₹5,382.86 crore for Q3 FY24, including other income. This was an increase from ₹5,287.74 crore in the same quarter of the previous year, reflecting a modest 1.8% growth.
- EBITDA: NCC had reported EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization, of ₹540.90 crore for the quarter, which was higher than ₹505.41 crore reported in the corresponding period of the previous year. This reflects a 7% increase and indicates that the company has managed to control its operating costs to some extent.
- EPS: The basic and diluted EPS for the quarter was at ₹3.08 against ₹3.51 for the same quarter of the previous year. This downward EPS shows that though revenue is growing, in the quarter the profitability of the company was squeezed.
The bottom line was an improvement with the net profit having come in at ₹193.18 crore against ₹220.55 crore seen in the comparable quarter last fiscal. This marks a decline of 11.3%, which is one key reason why negative investor sentiment followed the stock into the quarter close.
Nine-Month Performance (FY24)
Though Q3 was not too great, in the nine months that ended December 31, 2023, the company was doing pretty well:
- Turnover: The turnover for nine months is ₹16,165.55 crore up from ₹14,440.86 crore for the same period of last year, thereby showing an increase of 11.9%.
- EBITDA: In the nine-month period, the company has reported an EBITDA of ₹1,361.76 crore up from ₹1,218.36 crore reported during last year that is up by 11.7%.
- Net Profit: Net profit for the nine months was ₹566.06 crore as against ₹471.53 crore in the same period last year, showing a healthy increase of 19.9%.
EPS: The basic and diluted EPS for the nine months stood at ₹9.02 as against ₹7.51 last year, indicating improvement in earnings over the nine months.
Debt and Margin Concerns
As attractive the nine-month positive growth has been in both revenue and net profit, fear has also hovered around the significant rising debt from NCC along with the adjustment that the firm is doing from revenue growth guidance as well as its margin from FY25 forward, which remains the significant negative force in share prices.
Investors have been alarmed by the management’s decision to revise their revenue growth projections and margin guidance for the next financial year, FY25. The revisions indicate that NCC may not be able to sustain its performance levels, especially when the infrastructure sector is expected to see increased government spending. The company’s rising debt levels also make it more vulnerable to fluctuations in interest rates and economic cycles, contributing to negative sentiment in the market.
Stock Price Going Down and How It Affects
NCC’s stock had been on a steady decline in the last seven months, decreasing by 43% from its value of ₹364.50 in July 2023 to ₹203 in February 2024. That has caused worries about the firm’s near term prospects, which is a concerning issue since it is one of the key recipients of India’s infrastructure development programs.
Even though this stock has declined sharply, the five-year return it provided is a multi-bagger of 320%. This shows the company’s ability to transform from a difficult period.
Looking at some of the reasons behind the drop in the price of the stock, one can point to bad quarterly results, rising debt levels, and a lack of transparency with respect to future revenue growth.
Challenges in the Indian Construction Sector
The infrastructure and construction sectors in India continue to face a myriad of challenges such as increasing input costs, labour shortages, and regulatory hurdles. Although the government has made huge investments in infrastructure development, large-scale projects are often delayed in execution, which leads to cost overruns and diminishing profitability for construction companies. The slowdown in economic growth, higher commodity prices, and changes in government policies will also pose significant challenges to such companies as NCC, heavily dependent on contracts from the public sector.
In the context of NCC, the diversified operations of the company span multiple infrastructure segments, such as roads, water and environment, irrigation, and railways. Through these diversified operations, the company had been able to weather some of the sector-specific challenges. However, the latest quarterly results indicate that NCC is finding it difficult to sustain profit margins in a competitive market.
1. Future Outlook for NCC Limited
The recent stock price crash has made investors quite restless, and there is a lot to see regarding the long-term prospects of NCC Limited. Here are a few things to watch for while looking forward:
2. Government Infrastructure Focus
Positive Background for NCC: The Government of India’s continued focus on infrastructure development including roads, airports, and urbanization projects creates a positive background for companies like NCC. The government has been pushing hard for economic recovery post-pandemic and is also promoting ‘Make in India’ initiatives to boost infrastructure demand in the country.
3. Project Execution and Cash Flows
Execution of its current as well as future projects, therefore, would be crucial for the future growth of NCC. The diversified nature of NCC order book in different infrastructure sectors has cushioned it during times of economic volatility. Debt management is also an area that needs to be improved as execution delays as well as cost overruns may affect profitability.
Debt management will be one of the critical factors in determining the financial health of the company going forward. With increasing interest rates and sustained inflation, companies with high debt levels will have to bear higher financing costs. If NCC can reduce its debt burden or better manage its working capital, it could mitigate some of the risks associated with its rising debt levels.
4. Focus on Sustainability and Green Projects
In recent years, the spotlight has fallen on sustainable or green infrastructure projects. NCC has shown promising strides with renewable energy projects, and such an emphasis may help it venture into new areas of growth. It can attract new clients, projects, such as green energy and infrastructure, by keeping in line with worldwide trends of sustainability.
Conclusion: Should Investors Buy NCC Stock?
Recent drops in the stock prices of NCC have brought considerable uncertainty, more so with regard to its latest weak quarterly results and increased levels of debt. The long-term prospects of the company are however optimistic with strong infrastructure development emphasis by India and diversified operations by the company.
For investors, the decision of buying NCC stock will solely depend on risk tolerance and an investment horizon. Short-term investors may want to wait until the company addresses the challenges and stabilizes its financial performance. For long-term investors, NCC might be quite attractive, with potential growth within India’s broadening infrastructure sector.
While the NCC stock is currently under pressure, with its best order book, contracts with the government, and diversified business portfolio, it appears to be promising that this company may recover in the medium or long term. As always, investors should stay informed about the company’s performance and be prepared to adjust their strategies accordingly.
0 Comments