Indian Government's 164% Capital Expenditure Increase Will Drive Future Opportunities

Key Takeaways

• NCC's strong project pipeline and large order book provide a solid foundation for substantial future revenue growth.
  
• Stabilization of government activity and billing cycles could improve cash flows, enhancing margins and boosting profitability.
  
• Geopolitical risks and regulatory challenges, coupled with increased debt and reduced profitability, threaten revenue predictability and financial stability.

Catalysts

Engages in the construction business in India and internationally.

• The Indian government's increased focus on infrastructure expenditure, with a significant 16.4% rise in total capital expenditure planned for FY '26, could drive significant future revenue growth for NCC, given its strong pipeline of projects.
  
• NCC's large order book, which currently stands at ₹55,548 crores, and a substantial prospective project pipeline of over ₹2.4 lakh crore, provides a strong foundation for future revenue growth.
  
• The stabilization of government activity post-elections and the expected normalization of the billing and payment cycles could lead to improved cash flows and margin enhancements, impacting net margins positively.
  
• The anticipated conversion of NCC's L1 status on projects totaling ₹9,000-10,000 crores into actual orders could bolster future revenue inflows.
  
• The commencement of large infrastructure projects, such as the interlinking of rivers and significant state and central government partnerships, presents opportunities for NCC to enhance its revenue and profitability in upcoming quarters.

NCC Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NCC's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.6% today to 5.5% in 3 years time.
• Analysts expect earnings to reach ₹14.5 billion (and earnings per share of ₹23.05) by about April 2028, up from ₹8.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹16.6 billion in earnings, and the most bearish expecting ₹9.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.2x on those 2028 earnings, up from 17.1x today. This future PE is lower than the current PE for the IN Construction industry at 22.0x.
• Analysts expect the number of shares outstanding to decline by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.39%, as per the Simply Wall St company report.

NCC Future Earnings Per Share Growth

Risks

• The downward revision of revenue growth from 15% to 5% indicates a slowdown in execution, impacting the company's overall revenue and potential top-line growth.
  
• The increase in debt from ₹1,005 crores to ₹2,415 crores reflects growing financial leverage, which could increase interest expenses and pressure on net margins.
  
• Payment delays, particularly due to electoral changes and approval processes, have led to higher debt levels and constrained working capital, affecting overall earnings and liquidity.
  
• The reduction in EBITDA margin from 10.1% to 8.77% indicates lower profitability, potentially influenced by lower turnover and fixed cost absorption, impacting net margins.
  
• The uncertainty and risk factors associated with geopolitical and regulatory changes, as well as execution challenges with state and central government projects, could affect future revenue predictability and earnings stability.

Valuation

• The analysts have a consensus price target of ₹296.769 for NCC based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹400.0, and the most bearish reporting a price target of just ₹212.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹264.0 billion, earnings will come to ₹14.5 billion, and it would be trading on a PE ratio of 19.2x, assuming you use a discount rate of 14.4%.
• Given the current share price of ₹219.8, the analyst price target of ₹296.77 is 25.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.