Stocks in the construction space have underperformed markets in the last couple of years. High debt, poor order book and delays in execution were some of the issues that plagued the sector.

Devoid of these concerns, National Buildings Construction Corporation, a state-owned company in which the government is divesting stake through an IPO, comes as a whiff of fresh air.

Investors with a perspective of three years can invest in this offer for sale by the government in NBCC, a construction project management service provider.

A debt-free balance-sheet, focus on consulting services, steady orders from government departments and good track record of execution make it a relatively safe play on the volatile construction sector.

The offer price of Rs 90-106 discounts the company's annualised FY-12 earnings by a modest 7.2-8.5 times. This is at a steep discount to larger public sector consultancy company Engineers India.

The business and offer

NBCC acts as a consultant from the stage of project conceptualisation to execution and hires a contractor to actually execute the work. It derives over 90 per cent of its revenue from project consultancy for civil construction projects. A small proportion also comes from executing civil infrastructure works for power projects and from real-estate development.

The government will dilute a 10 per cent stake in the company through this offer to raise Rs 127 crore at the higher end of the price band. The company's market capitalisation, on listing, will be about Rs 1,300 crore at the higher end of the price band. That's about half its FY11 sales.

Steady clientele

NBCC provides consultancy services for a range of civil construction works, including residential and commercial buildings, hospitals, and educational institutions as well as infrastructure works. The Ministry of Defence, Ministry of Home Affairs and the IITs are some of its clients. NBCC mostly gets repeat orders, even as prospective clients seek its services.

It is thus the default consultant for many of the projects that these ministries need to execute. This provides steady order flows and makes it immune to slowdowns. Unlike most construction companies, NBCC's revenues and profits did not slip in the 2008 crisis.

On the flip side, construction consultancy is not a high-margin business like engineering consultancy. After subcontracting the work, NBCC isn't left with much profit to take home. NBCC's margins on earnings before interest, depreciation and tax at a little less than 10 per cent, therefore, is lower thanEngineers India's over 25 per cent margins.

Construction consultancy will, however, continue to be the major driver of revenue, as it accounts for 97 per cent of the unexecuted orders worth Rs 10,600 crore in the civil works and power space. NBCC aims to focus onlarger projects of, say, Rs 100 crore and above, to scale-up margins. It is also surveying opportunities in overseas markets such as Mauritius. These measures may yield some improvement in terms of margins and ease client concentration.

NBCC also competes with players such as Gammon India in the power civil works space. While it has a little less than Rs 300 crore of orders in this space, a more serious entry into similar infrastructure segments, including road, may help boost margins. The company is already scouting for joint venture partners to play this space.

Another small, but promising, segment that NBCC is present in, is in real estate . This segment contributed only about 5 per cent of revenue in FY-11 but is growing. The company has current and forthcoming projects of 1.1 million sq. ft of saleable area, primarily in the residential segment.

NBCC is not a land bank play. But, then, it does manage to buy land at competitive and even low costs in government auctions. It is also likely to have little problem selling its projects, especially residential, as they are priced attractively and are mostly sold to government employees. The low-cost land also provides leeway for reasonable profit margins. A scale up in this segment can provide traction to profit margins.

Financials

NBCC's sales (excluding work in progress) expanded 21 per cent annually from FY-07 to Rs 2982 crore in FY-11. Net profits grew 16 per cent annually to Rs 140 crore over the same period. Being a consultant, NBCC has not found the need to borrow. This leaves it with enough room to leverage, if need be, for its real-estate business, which is typically more working-capital intensive.

The offer closes on March 27. Retail investors will receive a 5 per cent discount on the offer price.

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