If NCC Ltd (formerly known as Nagarjuna Construction Co. Ltd) was to meet its stand-alone revenue forecast of Rs5,750 crore for fiscal 2011 (FY11), the company would have had to post a robust 40% year-on-year (y-o-y) rise in revenue in the March quarter. That would have been impossible.
Fortunately, when NCC had announced December quarter financials, it did indicate it is likely to miss the revenue guidance for FY11. So, investors were prepared for that.
But the company’s March quarter performance has failed to meet even those watered-down expectations. For the March quarter, stand-alone revenue fell by 5% y-o-y, mainly due to poor execution. For FY11, revenue increased by 6% to Rs5,075 crore, much below Street expectations and below the forecast mentioned earlier.
NCC’s revenue growth for the year was affected mainly on account of the extended monsoon, land acquisition issues and delay in payments from clients.
Higher costs, mainly a sharp rise in labour charges, led to a one percentage point decline in operating profit margin to 9% for the quarter. Net profit for the quarter was further hit on account of higher interest expenses. For FY11, operating margin slipped by half a percentage point to 9.6%, as labour charges, employee costs and other expenditure rose at a faster pace.
The company’s order inflow was also disheartening and stood at Rs6,827 crore in FY11 against its guidance of Rs10,000 crore. On a stand-alone basis, the order book as of 31 March stands at Rs16,180 crore, which translates into 3.2 times the revenue of the last fiscal. While that offers good revenue visibility, it is poor execution that seems to be bothering analysts.
After a disappointing fourth quarter performance, it’s not surprising that most analysts downgraded their revenue and earnings estimates for FY12. Chiefly, that’s to factor in the lower order inflows for FY11 (below NCC’s guidance and analysts’ expectations), slower execution and higher interest costs.
It’s well known that infrastructure stocks in general have underperformed the broader market and NCC is no exception. While that does make NCC’s valuations look attractive, rising interest rates are likely to have an adverse impact on the company’s profitability going ahead. That will be a key in limiting the stock’s performance in the near term.
We welcome your comments at firstname.lastname@example.org