Rating Rationale
April 19, 2021 | Mumbai
NBCC (India) Limited
Rating Reaffirmed at 'CRISIL AA/Negative'
 
Rating Action
Total Bank Loan Facilities RatedRs.1750 Crore
Long Term RatingCRISIL AA/Negative (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Negative’ rating on the long-term bank facility of NBCC (India) Limited (NBCC).

 

Operating performance of the company was strained in fiscal 2020 with a large proportion of the order book being stuck on account of various reasons including tree cutting ban in Delhi for redevelopment projects and other government guidelines in view of controlling the increase in smog and pollution in Delhi including restrictions on mobility of vehicles and timings of construction activity. The situation was further exacerbated in the first half of fiscal 2021 with continued slow execution caused by unavailability of labour on account of the Covid-19 pandemic. Nevertheless, operating income and margin improved in the third quarter of fiscal 2021: revenue grew 53% quarter-on-quarter and 9% year-on-year, while the operating margin rose to 3.0% from 1.1% in the second quarter of fiscal 2021. 

 

The performance is expected to sustain over the medium term, driven by improvement in execution capability with labour availability improving to 95% of pre-Covid levels as well as revival in execution of high-value redevelopment projects. The stay on tree-cutting was reversed by the Supreme Court of India in February 2020, and execution has been progressing at a healthy pace. However, with the emergence of the second wave of the pandemic and restrictions on movement, including expected restriction on mobility of labour, the company’s credit risk profile may weaken. Hence, the company’s ability to maintain operational stability is a key monitorable.

 

NBCC is in the process of potentially taking over the stalled projects of Jaypee Infratech Ltd (JIL) subject to approval of the revised resolution plan submitted to Committee of Creditors on April 7, 2021, which will be a key rating sensitivity factor.

 

The rating continues to reflect the company’s strong market position in the project management consultancy (PMC) segment and its robust financial risk profile. These strengths are partially offset by modest operating profitability and exposure to risks related to saleability of real estate projects.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of NBCC and all its subsidiaries, except NBCC-RK Millen, HSCL-SIPL and Jamal NBCC International (PTY) Ltd as these companies do not have any transactions and NBCC has already provided for their losses.

 

Please refer Annexure – List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

  • Strong market position in the PMC segment: The company’s status as a public works organisation (PWO) and ‘Navratna’ company, enables it to secure orders from central and state government organisations on a nomination basis, rather than through competitive bidding. Focus on quality and timely execution of projects ensure repeat orders. NBCC is also designated as an implementing agency for several government schemes such as Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and Pradhan Mantri Gram Sadak Yojana (PMGSY). Following the successful implementation of the Moti Bagh and East Kidwai Nagar projects in Delhi, it is now redeveloping projects in Nauroji Nagar, Netaji Nagar and Sarojini Nagar valued at around Rs 22,000 crore. As these projects fetch higher margin, NBCC may undertake more projects in the future. The overall order book as on February 1, 2021, was Rs 62,000 crore, with order book-to-revenue ratio of 9 times, providing healthy revenue visibility over the medium term. 

 

  • Robust financial risk profile: Financial risk profile is aided by a strong capital structure and adequate liquidity. Liquidity was strong with cash and bank balance of Rs 4,716 crore as on December 31, 2020. Though most of the cash is earmarked for specific projects and cannot be used for other purposes, the company maintains healthy unencumbered cash balance of over Rs 750 crore at a consolidated level (~Rs 800 crore as on December 31, 2020). Although cash accrual was negative in fiscal 2020 this was an exception to the trend and a one-time phenomenon: NBCC has been generating cash accrual of Rs 150-200 crore since the past few fiscals against which it does not have any debt obligations; the accrual was lower on account of high tax incidence and high dividend outflow. Despite being in the highly capital-intensive construction space, the working capital cycle has been moderate, as the business model entails execution of PMC projects against customer advances. This also leads to sizeable liquid surplus, generating sizeable non-operating cash flow. 

 

Weakness:

  • Modest operating profitability: Operating margins have been declining over the past few fiscals on account of lower operating income due to stuck projects while overheads in the form of salaries, etc., remaining high. Additionally margins on PMC contracts have reduced to 5-7% as compared to 7-10% earlier. Operating margin for the 9 months ended December 31, 2020 remained subdued at 1.1%, primarily due to a weak first half. Nonetheless, operating margin improved to 3.0% in Q3 2021 supported by healthy order execution with 54% increment in the revenue from PMC business q-o-q. Margins were also supported by strong sales in the group’s real estate business, wherein most of the projects are complete and cost incurred. While margins are expected to improve further going forward supported by healthy execution of the order book, specifically high-margin redevelopment projects, they remain monitorable.

 

  • Exposure to risks related to saleability of real estate projects: Saleability and implementation risks in the real estate sector persist, as reflected by sharp fluctuation in incomes of players over the three fiscals through March 2021. Gauging the weak demand scenario, land acquisition has slowed down and projects demonstrating limited progress have been deferred. There was a slowdown in real estate sales in the first six months of fiscal 2021, but the company witnessed healthy recovery in the third quarter of fiscal 2021 supported by healthy saleability in the projects in Patna and Bhubaneshwar. The company has submitted a revised resolution plan to complete the stalled projects of JIL, which will remain a key rating sensitivity factor. 

Liquidity: Strong

Cash and cash equivalent were substantial at Rs 4,716 crore as on December 31, 2020, of which around Rs 800 crore is unencumbered. The company has nil debt and does not have any plans to contract debt in the near term. The policy of executing projects against customer advances, which is also followed for real estate and redevelopment projects, should keep liquidity comfortable.

Outlook: Negative

CRISIL Ratings believes the credit risk profile of NBCC will remain constrained on account of low profitability and slower-than-anticipated ramp-up in order execution.

Rating Sensitivity factors

Upward factors

  • Improvement in the operating profit before depreciation, interest and tax (OPBDIT) margin to 5% with higher execution of profitable redevelopment projects while maintaining the working capital cycle
  • Sustained growth in orders, providing medium-term revenue visibility

Downward factors

  • OPBDIT margin remaining below 2% beyond fiscal 2021
  • Weakening of business risk profile through lower order inflows or slow pace of execution
  • Weakening of capital structure or increase in working capital intensity.

About the Company

Incorporated in 1960, NBCC is a central government enterprise under the Ministry of Urban Development and is a Schedule A Navratna company. It was set up as a PMC to undertake civil and industrial infrastructure projects for central and state governments. Under this arrangement, projects are awarded on a nomination basis to NBCC, and the company assigns the projects to third-party contractors. The company also secures jobs from the government and public sector clients through tenders, and develops commercial and residential projects.

 

For the nine months ended December 31, 2020, profit after tax (PAT) was Rs 153 crore on operating income of Rs 4,165 crore, against PAT and operating income of Rs 16 crore and Rs 5,487 crore, respectively, for the corresponding period during the previous fiscal.

Key Financial Indicators (Consolidated)

Particulars

Unit

2020

2019

Revenue

Rs.Crore

8050

9876

Profit After Tax (PAT)

Rs.Crore

100

386

PAT Margin

%

1.2

3.9

Adjusted gearing

Times

0.0

0.0

Interest coverage

Times

37.0

107.5

 

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN

Name of instrument

Date of allotment

Coupon rate (%)

Maturity date

Complexity level

Issue size (Rs.Crore)

Rating assigned with outlook

NA

Bank Guarantee

NA

NA

NA

NA

1750

CRISIL AA/Negative

 

Annexure – List of entities consolidated

Names of Entities Consolidated

Extent of Consolidation

Rationale for Consolidation

NBCC Services Ltd

Full

Subsidiary

NBCC Engineering & Consultancy Ltd

Full

Subsidiary

NBCC International Ltd

Full

Subsidiary

NBCC Environment Engineering Ltd

Full

Subsidiary

Hindustan Steelworks Construction Ltd

Full

Subsidiary

HSCC (India) Ltd

Full

Subsidiary

NBCC Gulf LLC

Full

Subsidiary

NBCC DWC LLC - Dubai

Full

Subsidiary

Real Estate Development and Construction Corporation of Rajasthan Ltd

Partial

Joint venture

 

Annexure - Rating History for last 3 Years
  Current 2021 (History) 2020  2019  2018  Start of 2018
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Non-Fund Based Facilities LT 1750.0 CRISIL AA/Negative   -- 02-06-20 CRISIL AA/Negative 27-12-19 CRISIL AA/Negative 28-09-18 CRISIL AA/Stable CRISIL AA/Stable
      --   -- 24-02-20 CRISIL AA/Negative   --   -- --
All amounts are in Rs.Cr.
 
 
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 1750 CRISIL AA/Negative Bank Guarantee 1750 CRISIL AA/Negative
Total 1750 - Total 1750 -
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Construction Industry
CRISILs Criteria for Consolidation

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