The stock price of NCC has tanked by over 51 per cent in the last three months, following the release of an AP government circular on cancellation of Rs 6,100 crore worth of orders, serving a hard blow to future earnings.

The stock, which dipped by 13 per cent in a single day after the AP circular was issued on May 29, has continued to tumble as investors’ concerns have accentuated after the June quarter earnings call. The management quantifying its exposures to the AP government’s projects, has only rattled investors more, as the pain is unlikely to abate soon.

On May 29, 2019, the AP Government, through a circular, ordered all departments to cancel construction and engineering orders in the state, sanctioned prior to April 1, 2019, on which work had not started. The circular also said orders where work had begun, but the expenditure incurred was less than 25 per cent of the original estimated value, would also have to be halted, until they were renewed.

Amongst construction companies in the state, NCC was the worst hit by this circular. While Rs 6,100 crore worth of orders stood cancelled simply by virtue of the circular, work on all other pending orders in the state – worth about Rs 12,500 crore - has also been halted. The circular had ordered that payments on halted projects will be made only after renewal of the projects sanctioned by the erstwhile Government (where expenditure incurred was less than 25 per cent).

Ongoing issues

The management of NCC had in its 1QFY20 earnings call stated that the company had to increase debt to the tune of about Rs 400 crore during the quarter, as payments on pending orders from the AP Government were stalled until fresh renewal of the projects. This apart, payments and project execution were also stalled in UP and Jharkhand due to on-going elections. Giving a guidance on the debt levels of the company, the management had highlighted that there could be a further spike, if it is unable to receive payments from these governments by the end of FY20.

The company’s existing order book – net of cancelled AP orders worth Rs 6,100 crore - stood at Rs 33,495 crore as on June 30, 2019. This includes Rs 12,500 crore of orders that have been halted for now in AP. Of these, Rs 6,500 crore worth of projects includes construction of the Assembly, Secretariat, High Court Buildings and MLA quarters in the proposed capital city of Amaravati, on which 30-50 per cent of work has already been completed. The remaining order book from the state comprises Rs 4,975 crore worth of projects from APTIDCO for the construction of affordable housing under PMAY and the rest -- Rs 1,025 crore -- from water, irrigation and other projects.

The management sounds confident of order renewals from the AP government, predominantly those in Amaravati - considering the stage of completion of the projects. But investors appear wary following the World Bank and AIIB withdrawing sanctions for the capital city project.

More pain 

The company is also witnessing issues in working capital management due to pending receivables from the state - worth about Rs 620-630 crore (after deducting mobilisation advances) as on June 30, 2019. This apart, the company is also facing payment delays in UP and Jharkhand due to elections.

Owing to these issues, the company’s debt increased by Rs 400 crore, leading to a 24 per cent YoY rise in finance cost during the first quarter of FY20.

The company’s fresh order flow was also weak and stood at Rs 636 crore in 1QFY20, as against the yearly guidance of Rs 14,500 crore. NCC’s topline declined by 7.3 per cent year-on-year to Rs 2,188 crore in the June quarter, and weighed by higher finance costs, its standalone PAT was down 21.6 per cent YoY to Rs 81.3 crore during the quarter.