NBCC's IPO: Should you buy or ditch?

The government is miles away from achieving its divestment target of Rs 40,000 crore for the financial year ending March 2012. So far, it has barely raised Rs 15,000 crore, most of which came from the 5 percent stake auction of ONGC (that too was a fiasco as, Firstpost reported earlier , LIC had to step in at the last minute and mop up more than 90 percent of what was offered).

The initial public offering (IPO) of National Buildings Construction Corporation will be the next, and the last, attempt of the government at divestment this financial year.

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[caption id=“attachment_251705” align=“alignleft” width=“380” caption=“The initial public offering (IPO) of National Buildings Construction Corporation will be the next, and the last, attempt of the government at divestment this financial year. Reuters”]  [/caption]

The IPO, which opens on Thursday (22 March), aims toraise Rs 120 crore. Ten percent of the company’s stake will be diluted, but the company will get no money in return. Since the government is selling its stake in the company, it will get the Rs 120 crore which is expected to be raised.

NBCC is a government undertaking under the Ministry of Urban Development and is in the business of undertaking project management consultancy (PMC) and civil infrastructure projects as well as real estate development. Its clients are primarily government departments and ministries, and currently has 219 projects. Its order book is worth Rs 10,600 crore.

It is also a debt-free company. CARE ratings has graded the IPO ‘4/5’, which indicates above-average fundamentals.

So, is it worth investing in the company?

Let’s consider its financial position first.Its net profit has fallen from Rs 280 crore in financial year 2008 to Rs 140 crore by the end of March 2011. The first six months of 2012 yielded a profit of Rs 75 crore. On an annualised basis, therefore, profit will be more or less flat for this year. Its net profit margin has also slumped from around 13.8 percent to 4.4 percent over the same period of time.

Its earnings per share was Rs 11.7 in 2011. If you extrapolate the six months’ earnings for the full year, the company should earn annual profit of Rs 150 crore for 2012. In that case, its earnings per share will be Rs 12.5.

The price band for the issue has been fixed at Rs 90-106 a share. Even at the lower end of the price band, the price is 7.2 times estimated earnings for 2012 (March-end). The operating margin of the company at 6.8 percent is also much lower than peers like Engineers India, which has an operating margin of almost 20 percent.

On the plus side, the company has a hefty cash balance of Rs 1,368 crore. There’s a risk that like Coal India, its cash could also be used to help the government’s funding needs (by making the company pay higher dividends) instead of being used productively.

Given that NBCC also has several public-sector clients, delays in payments and project execution are possible risk factors. The money raised in the IPO will also not be used productively since it will all be hoovered up by the promoter (government).

In other words, NBCC might not be an ideal choice for long-term investing.