Union Budget's Increased Capital Expenditure Will Boost Infrastructure Projects

Key Takeaways

• Strong project pipeline and infrastructure focus suggest robust potential for long-term revenue and earnings growth.
  
• Post-election normalization is expected to improve cash flows and working capital efficiency, positively affecting net margins.
  
• Revised revenue growth guidance and increased debt levels indicate financial challenges, with execution delays and competition posing risks to cash flow and profitability.

Catalysts

Engages in the construction business in India and internationally.

• The Union Budget for FY '26 presents a significant increase in capital expenditure, with a rise from ₹17 lakh crore in FY '25 to ₹19.8 lakh crore in FY '26, which is expected to positively impact future revenue growth for NCC.
  
• NCC has a robust prospective project pipeline totaling over ₹2.4 lakh crore, which suggests strong potential for future revenue increase as these projects are secured and executed.
  
• Despite a temporary slowdown due to elections, NCC's major divisions such as Buildings and Transportation continue to report a healthy project pipeline, which could lead to an improvement in execution rates and subsequent revenue growth.
  
• The company's strategic focus on large-scale infrastructure projects, including potential future projects like river interlinking and smart meter installations, could enhance NCC's order book and drive long-term earnings growth.
  
• The anticipated normalization of political and payment cycles post-elections is expected to improve cash flows and working capital efficiency, which could have a positive effect on NCC's net margins moving forward.

NCC Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NCC's revenue will grow by 5.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.6% today to 5.6% in 3 years time.
• Analysts expect earnings to reach ₹14.8 billion (and earnings per share of ₹23.61) by about February 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 19.1x on those 2028 earnings, up from 14.6x today. This future PE is lower than the current PE for the IN Construction industry at 20.5x.
• Analysts expect the number of shares outstanding to decline by 0.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.7%, as per the Simply Wall St company report.

NCC Future Earnings Per Share Growth

Risks

• The company has revised its revenue growth guidance downwards to 5%, indicating a possible slowdown in revenue generation due to execution delays related to general elections and project payment cycles.
  
• There is an increase in debt levels from ₹1,005 crores to ₹2,415 crores, which could impact the company's financial stability and increase its interest burden, thus affecting net margins.
  
• The EBITDA margins have decreased in Q3 FY '25 compared to the previous year, attributed to lower turnover and fixed cost absorption, signaling pressure on profitability.
  
• There is a noted impact of delayed payment cycles and elongated billing on multiple projects due to political changes and elections, potentially affecting cash flows and working capital efficiency.
  
• The ability to maintain and attract skilled professionals and manage growth amid competition and economic fluctuations remains a risk, which could affect operational efficiency and thus affect earnings.

Valuation

• The analysts have a consensus price target of ₹301.583 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 ₹265.3 billion, earnings will come to ₹14.8 billion, and it would be trading on a PE ratio of 19.1x, assuming you use a discount rate of 14.7%.
  
• Given the current share price of ₹187.65, the analyst price target of ₹301.58 is 37.8% 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.