I learned the concept of Debt Capacity bargain from Prof Sanjay Bakshi vicariously and wrote on MOIL using the framework.
NBCC is looking like a similar opportunity e.g. in March 2020 it was available at a market cap of INR 2880 crore for few days, My calculations using optimistic and pessimistic average cash flow from operations are below
My Assumptions are
- Any bank would be comfortable with a interest coverage of 3X or even less given its a Mini Ratna government-owned company
- Have taken interest rate of 6% based on the latest GOI bond raising
- INR 750 crores cash consolidated level based on credit rating report and also this figure is similar to FY20 balance sheet number
- All cash is considered as excess cash( hence added to market cap) because they have a policy of executing projects against customer advances, which is also followed for real estate and redevelopment projects
Some other considerations positive
- As a thumb rule in past investors have done well-buying business below 10 times their free cash
- Decent dividend yield
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they have an order book of INR 70,000 cr and counting. At 5% margin and assume they execute all the projects in the next 5-6 years, they will make at least 3,500 cr. In other words, their consolidated profits for the next 5-6 years = current market cap.
Some other considerations negative
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Execution risks are huge and cannot be ignored
- Pandemic worsens -the current requirement of labor at the site is around 40,000 and currently, they have 18,000, so at 40% speed the work is going on
- Margin pressure -Now, there is a change in GFR and PSUs are not getting work on nomination basis, they have to compete different PSUs, they have to compete for the work, so that is one of the reasons this percentage margin is going down
Overall I think it’s worth a swing