National Building Construction Corporation (NBCC)idbidirect.cmlinks.in/Admin/Pdf/305840716_Dated...

1

National Building Construction Corporation (NBCC)

Analyst: Rohit Natarajan +91-22-4322 1209 [email protected]

07 April, 2016

A screaming multi-bagger waiting in the wings!

2

IndexNo.

Investment Rationale 3

How did NBCC evolve? 6

What is the Business Model? 7

What is unique about NBCC? 17

Is the sovereign advantage intact? 19

Are there problems with urban planning? 20

Are there urban planning issues? 23

Is Metro Rail Phase-III Project on time? 33

Can JJ/Slum clusters be an issue? 34

What if Delhi Real Estate Price Crash? 35

Does Real Estate regulation pose any risk? 37

How will Smart City benefit NBCC? 39

What is NBCC’s scope in housing for all? 44

Can NBCC count on Railways? 50

Are there other avenues? 55

Is the latest acquisition a worrying point? 56

Are there substitutes for NBCC? 58

Is market microstructure an issue? 59

Why do we think valuation is cheap? 60

Financial Summary 62

3

Investment Rationale:

Is NBCC still a BUY? National BuildingConstruction Corporation (NBCC) — is, still, amulti-bagger. Sadly, investors continue tooverlook radical changes. Further,conventional sell-side report often notdelves deep into the critical factors. The bigpicture: based on our research, we see at-least 100% upside for this stock. And throughthis eye-opening note, we will explain youwhy.

Are there structural problems with DDAorders? No, things are changing on ground.First, Delhi Chief Minister has cleared thesticking points through Delhi Slum and JJRehabilitation and Relocation Policy, 2015 inDecember 2015. Second, addressing theDelhi High court judgment and NationalGreen Tribunal comments, NBCC is re-designing the pipeline projects.

Third, redesigning of existing projects is notas quixotic as shelved BMC Mumbairedevelopment plans that mooted higherFSI. Our point: there is a delay; not acancellation. Fourth, DDA for FY17 hasproposed 33 new land developmentschemes and 18 new housing-relateddevelopment works for FY17. Thus, the DDA,can award Netaji Nagar, Thyagaraja Nagar,Kasturba Nagar, Vasant Kunj and theremaining 24 projects. Though the timelinefor non-disclosed projects is uncertain, thepotential order inflows are in excess ofRs.750bn. Thus, even excluding Railways,housing for all, smart cities, NBCC canachieve order book target of Rs.1tn before2020. This is 25% CAGR in order inflows—something even L&T can’t dream of.

4


What about railways? Housing for all?Smart cities? – Are they all talk and notrousers? And why should they benefitNBCC? No. There are few sticking points. Andthey are on its way to be addressed.Contention #1: Railway transit orientdevelopment is not fructifying. Answer tocontention #1: Projects in Mumbai requiresFSI — and higher powers for administrativeauthorities. Policy makers don’t have anoption to delay it. Contention #2: To availHousing for All Plan of Action subsidy,beneficiaries must first be part of themunicipal plans. Is the title of the slumdweller, anywhere in the country, clear?Answer to contention #2: Govt. is mootingGujarat/Charkop model. We haveincorporated other models mooted by NBCCand Govt.

Contention #3: We have been hearing smartcities for some time now. Where is thedevelopment? Answer to contention #3:Government incorporates the Land Valuebased taxation and higher FSI in “FinancialArchitecture for Smart Cities”. Further smartcities are happening at mission mode. Thereis an administrative difference for the workdone in central sponsored scheme andmission mode. So, two critical aspects aresolved. And NBCC is all set to reap thebenefits.

Orders are one thing; profitability is quiteanother. Is that the case?

No. And here is the reason why: First, AskShobbit Uppal, the Deputy managingdirector of Ahluwalia Contracts or MKrishnamurthi, the Chief Corporate affairs ofVascon and they will acknowledge thehardships of working with NBCC.

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Second, management themselves claims thatthey are working on superior business modelunmatched. And with sovereign backing, thecompetitive advantage is forever. Third,through high court judgments in litigation,we are convinced NBCC is the killer in thevalue chain.

What will, if any, be the impact ofadditional inventory offloaded by Govt.?

No, there is no impact. First, withGovernment owning 90% of the stake, andunmatched theme present before investors,market microstructure supersedesfundamentals. Now, as per Security Contract(Regulations) Rules, 1957, minimumthreshold of public holding is 25%. To complywith this rule, we speculate NBCC, withGovernment approval, will dilute its stakegoing forward.

However, using our models, the additionalquantity of inventory, market fears of fall inprices is overblown. Second, NBCC canpropose an FPO to raise seed money toinvest in redevelopment projects. But then,this money will make at least 25% projectIRR.

But everything is factored in price. Is it so?No, not at all. First, scalability of businessmodel is intact. Second, there is a visibility tothat. Third, the Return on equity is far aheadof cost of equity. Fourth, from impliedgrowth expectations, we see the potential ofNBCC to double over the next four years.Fifth, add focus on uncertain orders, the fairvalue may even triple. Sixth, across theindustrial value chain, there is hardly a stockthat can match this theme. Thus, over thenext four years, we will not be surprised ifthe stock runs ahead of Rs.2,000 a piece.

6

How did NBCC evolve?

Year Event1960 Incorporation of NBCC1970 Entered into power sector1977 Entered into overseas market

2001When company was in bad shape, Dr. Arup Roy Choudhary, after a long stint at DLF, took

over at the age of 44 as the CMD.2004 Won excellent rating from GOI.2005 Company was turned into profit making.2007 Paid maiden dividend, and started work on New Moti Bagh redevelopment2008 Schedule A PSU Status2012 Listed in BSE, NSE with issue price of Rs.106 apiece; issue size--10% stake for Rs.1.27bn2013 Dr. Mittal took over as CMD.2014 Accorded with Navaratna status.

Source: Company, IDBI Capital Research

Dr. Arup Roy Choudhary turned around NBCC; PSEB made him the

CMD of NTPC.

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What is the Business Model?

What is Project Management Consultancy?

First, NBCC sources projects throughnomination.

Second, NBCC prepares conceptual plans ordetailed project report. NBCC engages in-house technical experts to work on preliminaryestimates. Sometimes, they do seek advicefrom third-party consultants.

Third, NBCC executes a letter of intent /agreement / MoU with client. This emphasizesthe principal terms of engagement and fees.

Fourth, with final approval from client on “Billof quantities”, NBCC divides the work inseveral packages. Then, NBCC finalizestechnical and financial criteria. And eventually,the way for L1 bidding.

Fifth, NBCC seeks clearances, Govt. licensesand approvals. Sometimes, this is doneconcurrently or before the appointment ofcontractors.

Sixth, in this phase, NBCC monitors theproject– both for technical and financialaudit. Once done, the project is awardedcompletion certificate.

Seventh, even the defect liability period of12 months is passed on to the contractors.


Unmatched business model!

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Work done in Project Management Consultancy:

Project DeveloperProject Amount

(Rs.bn)

Re-Development of Kidwai Nagar (East) MoUD 42.7

Development of "Lake View complex" based on T.O.D DDA 12

PMGSY Works, Odisha Orissa State Rural Road Agency 12

Construction of Medical College at Mandi (Himachal Pradesh) Employee State Inusrance Corporation 7.6

PMGSY Works, Tripura Govt. of Tripura 7.2

Implementation of JNNURM-UIG Scheme in FaridabadHaryana Urban Infrastructure Development

Board 6.9

Construction of Medical College and hospital at Patna Employee State Inusrance Corporation 6.5

Construction of Mahanadi Institute of Medical Sciences, Talcher Mahanadi Coalfields 4.9

Construction works at IIT Kanpur campus IIT Kanpur 3.5

National Institute of Food Technology Entrepreneurship & Management, Ministry of Food processing & Industries 3


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What is EPC work?

First, unlike PMC, NBCC sources projectsthrough competitive bidding. Interestingly,management emphasizes that they wouldlike to work in “specialized” EPC works–where scope of nomination exists.

Second, client evaluates the tenders andissues a letter of intent to NBCC, ifsuccessful.

Third, NBCC splits the work and re-tenders itto sub-contractor.

Fourth, NBCC monitors on-work jobs andfinally, with client approval, the project iscompleted. Interestingly, the managementclaims to have defect liability period of 12months in the agreement with sub-contractors.

What is Real Estate segment?

First, PMC and EPC work is asset-light. Withsurplus profit from core PMC business, NBCCdiverted the profit in acquisition of landparcels across the country.

Second, sometimes, Govt. nominates NBCCto develop a certain plot. But the format, byand large, involves the property is registeredwith NBCC.

Third, company evaluates the need ofmanpower and material. Also, gets theclearances and licenses from Govt.

Fourth, NBCC appoints contractors throughopen tenders. With drawings andspecifications, contractors commences thework—actively monitored by NBCC.

Fifth, post completion, NBCC engages inmarketing and post-maintenance work.


We are not cheering the Real Estate model!

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Work done in EPC:

Work plans in Real Estate:

Project DeveloperProject Amount

(Rs.bn)

BoP Bongaigaon Thermal Power Project NTPC 3,207

Township main package For Lara Super Thermal Power Project NTPC 2,393

Construction of main and station draft cooling towers Mcnally Bharat Engg. Company 1,807

Construction of twin flue RCC Chimney BHEL 349

2X250 MW Parichha Extn Unit 5 &6 Uttar Pradesh Rajya Vidyut Utpadan Nigam 332

Real Estate Projects by NBCC Project Amount (Rs.mn)

NBCC Green View, Sector 37D, Gurgaon 3,241

Group housing complex, Gandhi Path, Jaipur 2,115

Group housing project, Sector 89, Gurgaon 2,002

State of the art building complex at New town, Rajarhat, Kolkata 1,796

Group housing complex, Gandhi Path, Jaipur 1,618

Group housing complex, Ghaziabad 1,582

Group housing complex, Naya Raipur 1,500

Group housing complex, Faridabad 1,040

Commercial cum residential complex, Ghaziabad 900

Commercial complex at Lucknow (U.P.) 650


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What is NBCC today?

NBCC

PMC

Institutional, Housing and Industrial

Water, effluent treatment, plant & solid waste management

Redevelopment work

Post completion maintenance work

Real Estate

Township and Residential apartments

Commercial

and Corporate building

E&C

Chimney & Cooling towers

Civil & Structural work for power

project


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Why does NBCC earn higher ROE?

First, NBCC works on miniscule working capitalcycle.

Second, incremental capital expenditure isminimal. NBCC clocks a revenue (PMC+EPC) inexcess of Rs.40bn over a gross block ofRs.415mn. Add, 5.5% EBITDA margins, an RoE inexcess of 20% is a cakewalk.

Is the higher RoE deployed back in highRoE business?

No.

We are not happy with the Real Estatemodel.

First, most of the real estate parcels areacquired in tier-II or non-metro areas.

Second, from cost of the land acquired topricing power of the end flats sold is a bigquestion mark.

Third, if this approach continues inperpetuity, this becomes a Real Estatecompany.

And for real estate themes, an investor cantake exposure to high-RoE housing financecompanies and high-RoE building materials.

(In Days) 2009 2010 2011 2012 2013 2014 2015

Sundry Debtors 139 108 66 99 94 118 133

Inventories 35 33 48 48 71 91 92

Loans and Advances 106 81 56 47 32 43 46

Creditors 335 277 267 264 274 262 256

Working Capital Cycle -55 -55 -98 -71 -76 -10 14

(%) 2009 2010 2011 2012 2013 2014 2015

Return on Equity 86.2 42.6 23.4 27.1 23.4 24.6 22.5


Higher exposure to Real Estate land led to higher inventory days. This will

not be the case anymore.

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What is the Business Model? Why are we worried?

All figures in mn, stated otherwise FY15 FY14 FY13 FY12

Land 6,838 5,349 2,082 684

Inventory 11,733 10,196 6,324 4,501

Land as % Inventory 58% 52% 33% 15%

Total Assets 47,639 42,072 37,290 36,372

Land as % Total Assets 14% 13% 6% 2%

Land Bank (Acres) 178 125

Incremental Land acquisition cost over four years 6,155

Incremental physical land acquired (Acres) 53

Cost of acquisition per acre 116

Input All figures in mn, stated otherwise

Land Bank (acres) 178

Permissible FSI with 25% plot factor 2

Built-up area to be sold (mn. Sq.ft) 15.5

Weighted average land cost per acre (Rs.mn) 38.4

Realization per sq.ft 3000

Construction Cost per sq.ft 1600

Output

Years 0 1 2 3 4 5 6

Land Cost -6838

Revenue 0 0 11631 11631 11631 11631

Construction cost 0 4962 4962 4962 4962 4962

Gross Profit 0 -4962 6668 6668 6668 6668

Fixed expenses 465 465 465 465 465 465

Profit before taxes -465 -5428 6203 6203 6203 6203

Taxes -154 -1791 2047 2047 2047 2047

Profit after taxes -312 -3636 4156 4156 4156 4156

Cash flows -6838.21 -311.70 -3636.48 4155.97 4155.97 4155.97 4155.97

Project IRR 12%


Land Bank model, in our calculation is not attractive at all!

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What is the Business Model?What if the real estate price crashes?

Realization per sq.ft (Rs.)

Constr

uction c

ost per

sq.f

t(R

s.)

Project

IRR 2600 2800 3000 3200

1600 4% 8% 12% 15%

1800 0% 4% 8% 12%

2000 -6% -1% 4% 8%

2200 -11% -6% -1% 3%

City Type Flat cost (Rs.) Area (sq.ft)

Avg.

Realization

(sq.ft)

Cochin,

Kerala Residential 4559400 1788 2550

Saharanpur,

Uttar Pradesh Residential 2520000 1100 2291

Patna, Bihar Mix 5269800 1219 4323

Where is the land bank distributed?

Is the Real Estate pricing attractive enough?


In a worse-case scenario, things does not bode well!

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With redevelopment projects on cards, company will not be foraying aggressively in Real Estate segment.

So, is redevelopment the next big thing?

And what if NBCC continues to invest in Land Bank?


If higher exposure to land bank model continues, stock might de-rate. But

then, management changes its stance!

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What is the Business Model? What if the high-RoE is ploughed back as seed money for redevelopment

projects where company can, arguably, make RoE in excess of cost of equity?

Total Project size (Rs.mn) 50000

PMC Gross margins 10.00%

Marketing fees 1%

Preferential dividend on seed money 15%

Execution Speed 0% 10% 20% 20% 20% 30%

0 1 2 3 4 5

Seed money -5000

Execution 0 5000 10000 10000 10000 15000

PMC Margins 0 500 1000 1000 1000 1500

Marketing fees (net of expenses) 0 38 75 75 75 113

Tax (@33%) 0 177 355 355 355 532

PMC segment profit 0 360 720 720 720 1080

Seed money and accumulated preferential dividend 0 0 0 0 0 10057

Total cashflows -5000 360 720 720 720 11137

Project IRR 25%

Debt Cost 14%

Debt/Total seed money 50%

Equity IRR 59%

Source: Company, IDBI Capital Research; Notes: We assume 20000 flats to be sold at Rs.2500/sq.ft. Construction cost is Rs.2500/sq.ft. Also, we assume NBCC makes 1% gross marketing margin s. Zero-coupon bonds can be issued for debt. Though Company has not mooted such an idea. Fixed continues as it is difficult to apportionate.

Killer Project IRR! Even with the most conservative assumptions!

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What is unique about NBCC? And what if the redevelopment project model is going to be the next big thing?

General Pool Residential Accommodation targets Central Government residential accommodations.They are under the administrative control of the Directorate of Estates in Delhi. Further, there areother 31 stations like Kolkata, Mumbai, Chennai, Chandigarh etc. DDA plans to redevelop 30 colonies.The quantum is in excess of Rs.1tn, we foresee.

(Rs.bn) FY17E FY18E FY19E FY20E

Opening Order Book 361.9 507.8 738 987

Order Inflow 222 340 400 400

Execution 77 110 151 188

Closing order Book 508 738 987 1199

FY17E FY18E FY19E FY20E FY21E

Netaji Nagar R.K Puram Lodhi Road Bharti Nagar Laxmibai Nagar

Kasturbha Nagar Sriniwaspuri Hanuman Road Rabindra Nagar Peshwa Road

Thyagaraj Nagar Mohammadpur Kaka Nagar Pandara Road Kalibari Marg

Sarojini Nagar Chanakyapuri Shahjahan Road DIZ Area

Tilak Lane BKS Marg

Vinay Marg Mandir Marg

Subramanya BhartiMarg North West Moti Bagh

Prem Nagar Aram Bagh

Albert Square Minto Road

Source: DDA, IDBI Capital Research

These are merely DDA Govt. colonies orders!

18

What is unique about NBCC?

What are the other PMC opportunities?

Year IIT Location Status2015 Dhanbad Announced

2015 IIT Tirupati Announced

2015 IIT Palakkad Announced

2015 IIT Chattisgarh Announced2015 IIT Goa Announced2015 IIT Jammu Announced

2015 IIT Karnataka Announced

Year IIM Location Status2014 Nagpur Announced2014 Sirmaur Announced2014 Amritsar Announced2014 Gaya Announced2014 Sambalpur Announced

2014 Visakhapatnam Announced2015 J&K Announced

2017 Telengana Yet to be announced

Year AIIMS Location Status2015 J&K Announced2015 Punjab Announced2015 Tamil Nadu Announced2015 Himachal Pradesh Announced2015 Assam Announced

Particulars Lower range Upper rangeIIT 120 150IIM 32 64

AIIMS 40 45Total (Rs.bn) 192 259


Its raining opportunities even in PMC segment

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Is the sovereign advantage intact?

Why should Govt. nominate NBCC? Is therea rule? What if the rule changes? Is there anexample?

The Govt. has notified NBCC as a PublicWorks Organization (PWO) explicitly. Thismeans NBCC is a construction agencycovered under revised Rule 126 (2) of GFRs.

What are the benefits of being this agencyunder this clause?

As per this clause, the GovernmentDepartment(s)/ PSUs and AutonomousBodies can award the works to NBCC onnomination basis.

Does NBCC has any other competitiveadvantage?

Nothing meaningful.

Then why should Govt. projects let NBCCmake 5-7% gross margins for the value of aproject?

First, NBCC calls itself a project managementconsultancy work. Second, thereby, anemployee is engaged in pre-construction,construction and post construction activity.Third, this enhances transparencies to theproject developer, typically Govt. agencieswhen they hire NBCC, by adhering the rulesprescribed by General Financial rules, CentralVigilance Commission Act, Central Bureau ofInvestigation Act and Right to Information Act.

Source: Company, Ministry of Finance, IDBI Capital Research

The Competitive edge for NBCC is written on wall!

20

Are there problems with urban planning?Are there structural problems with DDA orders?

No, things are changing on ground.

First, Delhi Chief Minister has cleared the stickingpoints through Delhi Slum and JJ Rehabilitation andRelocation Policy, 2015 in December 2015.

Second, addressing the Delhi High court judgmentand National Green Tribunal comments, NBCC is re-designing the pipeline projects.

Third, redesigning of existing projects is not asquixotic as shelved BMC Mumbai redevelopmentplans that mooted higher FSI. Our point: there is adelay; not a cancellation.

Fourth, DDA for FY17 has proposed 33 newland development schemes and 18 newhousing-related development works forFY17.

Thus, the DDA, can award Netaji Nagar,Thyagaraja Nagar, Kasturba Nagar, VasantKunj and the remaining 24 projects. Thoughthe timeline for non-disclosed projects isuncertain, the potential order inflows are inexcess of Rs.750bn.

Thus, even excluding Railways, housing forall, smart cities, NBCC can achieve orderbook target of Rs.1tn before 2020.

Source: Company, Media Articles, IDBI Capital Research

Things are changing with DDA; Is everyone turning a blind eye?

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Are there problems with urban planning?What is a redevelopment project?

Let us take the example of New Moti Bagh .

Once, it was home to some World-war IIstructure. And today, it is one of the Delhi'smost expensive areas. Occupying 143 acresto the south of Delhi, New Moti Bagh hasearned the moniker, "next best thing toliving in a Lutyens bungalow”.

The UPA Govt. sanctioned the project– whichwas conceived by MPD 2021-- in 2007. Onassigning it to NBCC, this project wascompleted in 2012.

There are 492 residential units in thecomplex. They are further split into: 116independent bungalows and 376 large sizedapartments. Even within the 116 bungalows,there are two types of bungalows: 14 Type-VIII (costing ranging from Rs.700mn- Rs.1bn.)and 102 Type VII bungalows with a cost ofRs.400-600mn.

Needless to guess, they are home (or Govt.quarters) for senior Indian bureaucrats.

Little surprise to our eyes, when the IndianUrban Development Minister, in 2014,handed over a cheque of Rs.3.3bn to theFinance Minister as surplus from New MotiBagh Project.

So, how was the New Moti Bagh projectfunding done? It all begin with a three acreparcel of land. The price: Rs.6.5bn. Paid byHotel Leela.

If this price is anything to go by, the totalland value of the 143 acres is ~Rs.310bn or~$4.6bn.

So, where did this idea emerge from?

Source: (1) Media articles, Company and IDBI Capital Research (2)http://pib.nic.in/newsite/PrintRelease.aspx?relid=105445

DDA and NBCC made money out of thing air!

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Are there problems with urban planning?What is a redevelopment project?

This is one type of redevelopment projectwhere land based instruments are used infinancing. Similar land based instruments ismooted in smart cities.

Total Area (acres) 143

Project Awarded (Year) 2007

Residential Units (Nos) 492

Project Completed (Year) 2012

Type-VIII Bungalows (nos.) 14

Type-VII Bungalows (nos.) 102

Residential apartments (nos.) 376

Type-VIII Bungalows (sq.ft) 121307

Type-VII Bungalows (sq.ft) 495976

Residential apartments (sq.ft) 1284125

Total buildable area sq.ft (mn) 1.90

Land sale to Hotel Leela (3 acres out of 143) (Rs.mn) 6500

Primary Construction cost (Rs.mn) 3613

Sub-contractor's margin (Rs.mn) 361

Construction cost including sub-contractor’s margin (Rs.mn) 3975

Construction cost including NBCC margin (Rs.mn) 4372

Surplus to Govt. (Rs.mn) 2128

Actual Surplus DDA handed over to Finance minister (Rs.mn) 3300

Deviation in surplus (Rs.mn) 1172

Source: IDBI Capital Research

DDA makes money with no investments! Totally self-financed

projects!

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Are there urban planning issues?What is a redevelopment project?

A model similar to Kidwai Nagar

Residential (mn.sq.ft) 4.5

Commercial (mn.sq.ft) 0.2

Total Area to be developed (mn.sq.ft) 4.7

Seed money from NBCC (Rs.mn) 2818

Total construction cost of Commercial (Rs.mn) 494

Per month Rentals/(Rs./sqft) 120

Yearly Lease from total commercial space (Rs./sq.ft) 356

Yearly Escalation in Lease 1.075

Present value of total lease for 30 years (Rs.mn) 4424

Residual seed money (Seed money from NBCC- Commercial construction cost) (Rs.mn) 2324

Residual Seed money plus present value of lease for residential construction (a) (Rs.mn) 6748

10% of Residential to be sold to Govt. (b) (Rs.mn) 4502

Total capital for residential construction (a+b) (Rs.mn) 11250

Viable for residential construction of mn sq.ft 4.5

Planned residential 4.50

Shortfall of construction for remaining units -

Target residential unit realization per sq.ft 10,004

Potential revenue for project 40,516

NBCC preferential capital (including dividend) 5,668

Contractors and NBCC gross margins profit 2349

Net proceeds before investments in social and other infrastructure to DDA 32,499

Project IRR for NBCC 21%


Even after the most conservative assumptions, East Kidwai style model

can make at least 21% IRR

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Are there urban planning issues?

So, where did this idea emerge?

The redevelopment project is a part ofMaster Plan of Delhi (MPD 2021. )

The process of planned development of theNational Capital began with enactment ofthe Delhi Development Act 1957, followedby the promulgation of the Master Plan ofDelhi in 1962 (MPD-62).

Source: Delhi Development Authority, IDBI Capital Research

Exhibit: Emphasis on Redevelopment in MPD 2021

Types of Project Units Phase upto 2011 Phase upto 2016Phase

upto 2021 Target upto 2021

Housing for Urban poor through Slum & JJ approaches '000 70-100 70-160 60-140 200-400

Houses as Independent Plots & Redevelopment '000 20-35 30-35 30-30 80-100

Group housing '000 84-190 84-300 72-270 240-760

Employer Housing '000 14-15 14-25 12-20 40-60

Unauthorized Regularised Colonies '000 15-150 25-105 20-90 60-300

Other Housing areas (Villages) '000 10-42 16-42 14-36 40-120

Exhibit: Master Plan for Delhi -2021

This model is merely a drop in the ocean!

25

Are there urban planning issues?What is the strategic plan for pricing?

We observe pricing plans are aggressive by DDA.

This will lead to downward trend in prices.

Source: Company, Industry sources, IDBI Capital Research

East KidwaiNagar Vasant Kunj Netaji Nagar

ThyagrajNagar Kasturba Nagar

State New Delhi New Delhi New Delhi New Delhi New Delhi

Order Size (Rs bn) 50 100 77.5 4.4 34.2

Area (acres) 86 240 111 14 53

ModelResidential + Commercial

Residential + Commercial




Project Duration 5 Years 5 Years 5 Years 5 Years 5 Years

Expected Commencement 2015 2017 2017 2017 2017

Porject Completion 2019 2022 2022 2022 2022

NBCC revenue10% PMC

Charge

10% PMC Charge + 1%

marketing fees

10% PMC Charge + 1% marketing

fees

10% PMC Charge + 1% marketing

fees

10% PMC Charge + 1%

marketing fees

Current Status FillExpecting Govt.

approvals

Expecting Govt.

approvals

Expecting Govt.

approvalsExpecting Govt.

approvals

Current residential units 2,444 2,772 131 2,521

Proposed residential units 4,608 7,295 282 4,321

Rs.mn/ residential unit 10.85 #DIV/0! 10.62 15.60 7.91

Zones Area Price RangeImpact

Sou

th D

elh

i

Anand Lok 45,000 - 55,000

East

Kid

wai

Nag

ar a

t R

s.1

0,0

04

per

sq

.ft

Vasant Vihar 28,500 - 37,000

Greater Kailash - I, II 27,500 - 36,000

Saket 23,500 - 28,000

Wes

t D

elh

i

Janakpuri 12,500 - 15,000

Will

DD

A k

eep

up

th

e an

te?

Paschim Vihar 12,000 - 14,500

Vikaspuri 10,000 - 13,000

Dwarka 8,000 - 12,000

East

Del

hi

Preet Vihar 16,000 - 20,000

Vivek Vihar 12,000 - 15,000

Mayur Vihar 11,000 - 12,500

Patparganj 10,000 - 12,500

Laxmi Nagar 8,500 - 10,500

Prices mooted by NBCC is remarkably attractive!

26


Are there problems with East Kidwai project?

Yes.

In 2014, with the case of Aman Lekhi & ORS vs.Union of India ORS., concerns have emerged up.

The petitioner argued, “if commercialisation andredevelopment of East Kidwai Nagar, asenvisaged, is allowed, it would amount tocreating an urban slum in the heart of the city.”

The Honourable High Court in it’s judgementmade it clear,

“…This Court takes judicial notice that theexisting infrastructure of road, water andelectricity in Delhi and, in particular, in SouthDelhi is already “severely overburdened…(contd)”

“…(contd)No material has been placed on recordto indicate that any proposal for additional road,flyover, underpass or augmentation of electricityor water supply has been approved by anystatutory authority in anticipation of theimpugned redevelopment plan.”

Dismissing the speculation of corporate rivalry,we believe, this is a classical urban planningdebate.

Also, then why did NBCC complete Moti Baghproject on time?

Further, is DDA immature enough to overlookclassical urban planning problems? And moreimportantly, are these problems restricted onlyto East Kidwai?

This is a critical trigger for NBCC and our targetprice.


This issue is past! NBCC fixed it with change in design!

27


Did DDA moot higher FSI?

Yes, they did.

As per Master Plan for Delhi 2021, “Vision-2021 is to make Delhi a global metropolis and aworld-class city, where all the people would beengaged in productive work with a betterquality of life, living in a sustainableenvironment.”

Delhi Development Authority planned 66% ofthe total geographical area. Arguably, themajor thrust vied for higher FAR/FSI.

Even Srivastava committee report addressedthe need for higher FSI,

“With increase in population and limited space,one has to shed the reluctance in goingvertical. If other world-class cities have sky-scrapers, why must we limit our constructionsto 4 or 8 storeys?”

Sr.no Land UseArea (Ha.)

Percentage to Total Area (Ha.)

1Total Geographical Area - NCT Delhi 148300 100

2 Built-up Area 70162 47

3 Natural Features 19509 13

4 Sub-Total (2+3) 89671 60

5Balanced land available in NCT - Delhi (1-4) 58629 40

6 Land to be kept reserved for:

Disposal of Solid Waste generated 10000 7

Metro Services / Utilities 10000 7

Agriculture zone in NCT Delhi 11000 7

7 Sub-Total 31000 21

8Proposed / Actual Land available for urbanization (5-7) 27629 19

9Total Urbanisable area 2021 (2+8) 97791 66


DDA is not run by Summer-trainees! They saw this coming!

28


What are the benefits of higher FSI?

Efficient use of buildable area.

Restricted FSI aggravates Welfare loss.How?

Definition: Assume mono-centric city. Aperson earns “y” as income working incentral business district. The distancebetween his house to office is “x.” A roundtrip cost to travel is “t.”

Total savings of individual: “y-tx.”

Further, he stays in a flat paying rent of “p”per square feet “q.”

Source: Alain Bertaud Consultancy, World Bank, Industry, IDBI Capital Research

But will higher FSI be a burden?

So, his net savings is: y-tx-pq.

Alain Bertaud of the World Bank opineshigher FSI leads to lower tx and pq. Thereby,maximum welfare.

Unrestricted FSI eases Realty prices. How?

Our reader may counter-argue: With higherstoreys, construction cost has to go up.Thereby, affordable real estate prices withhigher FSI is a myth.

Floor Space Index (FSI)

Sq.ft 1 2 4 8

Bu

ildab

le p

lot

are

a

1 1 2 4 8

2 2 4 8 16

3 3 6 12 24

4 4 8 16 32

5 5 10 20 40

FSI 1 2 4 8

Land Cost 7500 3750 1875 938

Construction Cost 2500 2750 3025 3328

Total Cost 10,000 6,500 4,900 4,265

Affordable pricing for real estate is on its way!

29

Are there urban planning issues?With higher FSI, can Indian real-estate prices crash?

Possible.

Variations in construction cost can be multifold.

But will higher FSI be a burden?

Elementary economics tells us price– inefficient market-- should be equal tomarginal cost.

So, what should be the ideal FSI?

Construction Cost $/sq.ftBelow 30

floorsAbove 30

floors

London 344 451

Melbourne 163 242

New York 200 251

UAE 125 256

Shanghai 116 149

Cost per square feetBelow 30

floorsAbove 30

floors

Substructure 10% 8%

Superstructure 20% 21%

Facades 17% 18%

Internal walls and finishes 10% 9%

MEP services 19% 17%

Lifts and Escalators 4% 7%

Prelims, OH&P 19% 20%

62122

3640

6286

107286

365389

0 50 100 150 200 250 300 350 400 450

Atlanta

Los Angeles

New York

Paris

Shanghai

Mumbai/Delhi


Marginal costing says real estate prices may fall

30

Are there urban planning issues?But then, did DDA overlook this aspect?

In the section, “SYNERGY BETWEEN

TRANSPORT AND LAND USE,”

The concept of the Master Plan for Delhi1962 was based on a poly-nodal, polycentric,distribution of work centres, largely based onroad transport nodes. A major fall-out of thishas been distortion between infrastructure,transport and land use. To achieve spatialbalance, development should take placeaccording to new corridors of massmovement.

What is the counter argument for Higher FSI?

The basic urban planning tries to minimize streetcrowding. Through a simple abstract illustration,we will explain you street crowding.

Imagine a locality. We define:

SC = street crowding = occupants/ street area.

IC = indoor crowding = occupants/ built-up area.

FSI = built-up area/buildable plot area.

PF = plot factor = buildable plot area/street area.

We say: SC = IC × FSI × PF

Keeping other things constant, higher FSI leads tohigher SC. The petitioner in Kidwai Nagar projecthas a point.

DDA has plans for higher FSI in remainingredevelopment projects. Will this be a cause ofconcern?

Source: Industry, IDBI Capital Research

Street Crowding is one point! But DDA has planned Transit oriented

development.

31



32


So, is there some work on “Mass Movement”?

On May 4th, 2014, Indian Express article statedthat East Kidwai Nagar project will be connectedto the South Extension and INA Metro stationsthrough an underground tunnel, besides beinglinked to the Barapullah elevated road.

“We are looking at connecting the housingcomplex with the South Extension and INA Metrostations through an underground tunnel. It willalso be linked with the Barapullah elevated road,”NBCC Chairman and Managing Director Dr AnoopMittal said.

Exhibit: Most of the projects will be beneficiary of DMRC-Phase-III


The progress of DMRC-Phase III helps NBCC– directly!

33

Is Metro Rail Phase-III Project on time?Project Details

Cost Escalation Rs. 377,360 million

Status Under Implementation

Ownership State Govt. - Commercial Enterprises

Industry Railway transport infrastructure services

Completion by Dec-16

Raw Materials

Type Substantial Expansion

Contract Basis

Forex component

Export commitment

Employment

Cost Escalation Rs. 232,360 million

Time Overrun 46 month(s)

Last Updated On 29-Mar-16

Project locationsBadli, North West Delhi, NCT of Delhi

Bahadurgarh, Jhajjar, HaryanaCentral secrtariat, New Delhi, NCT of Delhi

Dwarka, South West Delhi, NCT of DelhiGokulpuri, New Delhi, NCT of Delhi

Jahangirpuri, North West Delhi, NCT of DelhiJanakpuri (west), West Delhi, NCT of Delhi

Kalindi kunj, New Delhi, NCT of DelhiKashmiri gate, New Delhi, NCT of DelhiMandi house, New Delhi, NCT of DelhiMukundpur, North Delhi, NCT of Delhi

Mundka, West Delhi, NCT of DelhiNajafgarh, South West Delhi, NCT of Delhi

Shiv vihar, New Delhi, NCT of Delhi

Civil Contractor Era Infra Engg

Hindustan Construction Co

Italian-thai Deveplopment Public

JKIL

LT

Pratibha

Sadbhav

Shanghai Urban Construction

Supreme Infrastructure

Equipment Siemens

B M E L Infra India Ltd.

Corsan Corviam Constructions Sa

What is the status now? DMRC’s Delhi Metro RailPhase-III Project to complete by December 2016.With DMRC phase-IV, DDA has wider plans to coverDwaraka and outer part of Delhi.

Source: CMIE, IDBI Capital Research

Phase-III delay was past! Its on its way for completion!

34

Can JJ/Slum clusters be an issue?

Is working with DDA risky?

If majority of JJ/slum clusters are with DDA,will it not risk execution of projects?

Delhi Chief Minister has cleared the stickingpoints through Delhi Slum and JJRehabilitation and Relocation Policy, 2015 inDecember 2015.

The nodal agency for this policy is DUSIB(Delhi Urban Shelter improvement Board).

Rehabilitation of JJ clusters will be similarmodel to Kathputli Colony.

Rehabilitation should be completed withinfive years.

Relocation will be in rare cases. (Example ofrare cases: Court order, encroached a streetor road, encroached a specific publicproject.)

To our understanding, NBCC is not dealingwith work in JJ clusters.

Land Owning Agency No. Of JJ Clusters %

Cantt. Board 12 1.8%

CPWD/L&DO 42 6.1%

DDA 352 51.4%

Delhi Govt. 56 8.2%

DUSIB 98 14.3%

MCD 58 8.5%

NDMC 5 0.7%

Others 10 1.5%

Railway 52 7.6%

Source: Govt. Agencies, IDBI Capital Research

To our understanding, NBCC is not

dealing with work in JJ clusters.

35

What if Delhi Real Estate Price Crash?Will DDA go bankrupt – say if there is a downtrend in Delhi Real estate prices? And does this impact NBCC?

First, DDA has a pedigree for developingproperties that is 5-6x the land bank of DLF, thelargest in NCR.

Second, DDA is a Govt. entity.

Third, NCR has 180k homes oversupply. Withcurrent pace, it would take 5 years to sell theunsold inventory. There are chances of pricecorrection.

Fifth, even if the price crashes, the equilibriumprice has to be equal to marginal cost of high riseflats.

The beauty is DDA has the legroom to pricingaccordingly. And thereby, DDA can absorb thisfall.

Unsold inventory is strong in non-New Delhi region in 2013…

…2014 and 2015 as well.

Source: Industry, JLL, IDBI Capital Research

Micro market reveals unsold

inventory is in Non-New Delhi

region

36

What if Delhi Real Estate Price Crash?Will DDA go bankrupt – say if there is a downtrend in Delhi Real estate prices? And does this impact NBCC?

Third, NCR has 180k homes oversupply. Withcurrent pace, it would take 5 years to sell theunsold inventory. There are chances of pricecorrection.

Fifth, even if the price crashes, theequilibrium price has to be equal to marginalcost of high rise flats.

Vacancy rate(%) Q4CY12 Q1CY13 Q2CY13 Q3CY13 Q4CY13 Q1CY14 Q2CY14 Q3CY14 Q4CY14 Q1CY15 Q2CY15 Q3CY15 Q4CY15

CBD 5 8 8 10 9 9 9 9 7 6 7 5 4

CBD - Others 5 8 8 10 9 9 9 9 7 6 7 5 4

SBD 21 21 23 24 28 28 28 27 24 22 24 24 24

South 9 9 9 9 9 10 10 10 10 10 10 10 10

Gurgaon - CBD 9 12 10 14 13 10 10 6 3 2 3 4 4

Gurgaon - Others 33 40 38 37 40 32 33 34 35 36 35 40 40

Noida 18 31 36 31 30 32 34 33 32 30 33 30 31

Overall 21 28 28 27 29 25 27 27 27 26 27 29 29


We have factored in this

oversupply!

37

Does Real Estate regulation pose any risk?Will NBCC be covered under new Real Estate (Regulation and Development) bill?

Though we have not come across documents thatspecifies the bill’s power over developmentmanagers, we still give the skeptics the benefit ofdoubt.

What if a development manager like NBCC is partof new Real Estate (Regulation and Development)bill?

To our knowledge, the treatment of force majeureis still unclear.

Usually, in development agreement, there is aforce majeure clause built in.

In Puri Construction vs Larsen and Toubro, theclause read like,

“The Developer shall not be deemed to be indefault if the performance of its obligationshereunder is delayed or prevented by conditionsconstituting force-majeure which shall include …”

“…but not be limited to any laws, order bye-laws, rule or direction of any Government orMunicipal or statutory agency or otherauthority, restrains, injunctions from any courtof law, withdrawal of permissions, non-availability of construction materials strikes,fire or any act of God, as also the prevailingreal estate market conditions or any otherreason or cause whatsoever beyond and thereasonable control of the Developer Allperiods, hereunder fixed shall be deemed tohave been extended by the periods equal tothe periods of delay on account of theconditions constituting force majeure."

Source: High Court documents, IDBI Capital Research

Real Estate Regulations does not

redefine “Force majeure”

38

Will NBCC be covered under new Real Estate (Regulation and Development) bill?

No, we are not drawing conclusions out ofdistant ratio-decidendi. Even NBCC uses forcemajeure in its agreement.

Consider this: In a State Consumer Disputeredress case: Amitava A Acharjee vs. NBCC, 2011,we learn,

“As regards the grouse seeking compensation,the complainant has referred to Clause 11 of theGeneral Terms and Conditions which reads asunder:-

NBCC shall endeavour to give possession of theApartments to the allottees within 33 monthsfrom the date of allotment of the Apartments.The possession will be given after clearing of alldues in respect of the Apartment including stampduty and registration charges as applicable.

However, if NBCC fails to so deliver (except dueto force majeure), the allottee will be paidcompensation as mentioned here in under.

Force majeure shall, inter alia include non-availability or irregular availability of essentialinputs, delay by the contractors/constructionagencies employed/to be employed, litigation,acts of God, delay in getting service connection,statutory approval, completion/occupancycertificate or such other reasons beyond thecontrol of NBCC.”

Source: High Court documents, IDBI Capital Research

Does Real Estate regulation pose any risk?

Even NBCC uses it in development

agreement!

39

How will Smart City benefit NBCC?

What is NBCC targeting for Smart Cities?

A replicable model which will act like a lighthouse to other aspiring cities.

The four types of model Govt. identifies are:(1) Retrofitting– more than 500 acres; (2)Redevelopment– less than 50 acres (KidwaiNagar model); (3) Greenfield– more than 250acres (GIFT City model); and (4) Pan City– useof technology, information to improveservices.

A Special Purpose Vehicle will implement theproject at the City level. Here, State and ULBwill have equal share. Further, at no pointthey will have minority.

Majority of Board voting rights, thoughChairperson will be from State, rests withMoUD. More importantly, the CEO will beappointed by MoUD.

Can there be problems with this model?

Lack of executive powers: Land acquisition iswith State authority.

Lack of manpower: With limited manpower,the SPV can end up like MMRDA vs. BMC.

Lack of state representation: With this powerdistribution, State can arm twist Centre.

Source: Govt. of India, IDBI Capital Research

NBCC is pre-qualified for Smart

cities!

40


What is the source of Finance for Smart Cities?

Other than conventional ULB financing meanslike-- Property Tax, Profession tax, entertainmenttax, advertisement tax, Octroi and entry tax,Govt. has mooted ideas– Land basedinstruments, municipal bonds, borrowing frommultilateral, NIIF, convergence with other Govt.schemes.

We believe land based instruments will open thechunky revenues.

How FSI can help?

Messrs Devesh Kapur, T.V.Somanathan andArvind Subramanian once argued for “chooseyour FSI” policy,

In this proposed policy, every builder canchoose his/her FSI. Of course, this comes withan important rider. What it is, you may think.The builder should pay for FSIs beyond thecurrent limits. For what, may you ask? This willoffset the marginal cost of providinginfrastructure. Now, city planners have tocalculate the ‘long-run marginal cost’ ofadditional infrastructure. This calculation isfeasible, albeit not easy. Once done, cityplanners may levy tax on incremental FSI. Then,the authority would mop up funds. Further,those funds will finance the needs. Simple.

Year

End User auctioned by

MMRDA Price per square meter (Rs.)

1993 Unknown 30000

1995 Diamond Bourse 42500

2000 Citibank 86000

2006Convention

Center 153000

2007

Commercial complex and car

park 504000

Source: Media, Govt. of India, IDBI Capital Research

Financing smart cities is strong!

Both MMRDA and DDA has done

it.

41


What is the source of Finance for Smart Cities?Executing authority Project description Sale agreement and proceeds Use of proceeds for infrastructure

Mumbai Metropolitan

Regional Development

Authority (MMRDA) is

responsible for development

planning and

major infrastructure

investments in Greater

Mumbai region.

Bandra-Kurla is a 553-acre

site, originally developed from

marshland to be a secondary

“suburban” commercial and

office node to relieve congestion

in central Mumbai. It has

now become a valuable location

for commercial activity

and new commercial investment,

rivaling the traditional economic

center around the Stock exchange.

Two successful land sale auctions

took place in 2006–07. A total of 13

hectares of land were sold for

~US$1.2bn.

However, in a 2008 auction only

three of five parcels reached the

minimum bid threshold. About20

hectares of developable land remain

available for sale.

Government authorities announced

that sale proceeds would be used

principally to finance MMRDA’s

capital

investment plan, primarily the rail

transit program being developed in

collaboration with the World Bank

under the Mumbai Urban Transit

Project.

However, there has been no

disclosure

or public commitment as to the

exact use of funds.

Exhibit: Government incorporates the above ideas in “Financial Architecture for Smart Cities”

Source: Govt. of India, IDBI Capital Research

The proof of the pudding is in

eating!

42


Is “Mission mode” way more efficient?

Had it been a central-sponsored scheme,without an SPV/mission mode, we wouldhave turned bearish on smart cities.

But then, it is not.

First, each SPV/mission earmarks scarceadministrative resources, power andattention.

If not, would it result in overburdening?

Yes, in fact, one of the problems with theproliferation of Centrally-SponsoredSchemes was that they essentially burdenedthe district magistrates (DMs) with more andmore work.

Is there a way to improve administrativecompetence?

Yes, take Bihar for instance. Here, NitishKumar, the Chief minister, at the beginningof his second term, observed that his DMswere in charge of implementing over 5,000schemes. This entailed an average scrutiny of100 files a day.

Segregation of powers: In 2011, through anexecutive order, he reduced the DM'sauthority. Here, the departmental officialunder a DM - sometimes as many as 50 in adistrict - would be responsible for signing offon files relevant to their departments.

What did it result into? Articles point outmore responsive and accountable localadministration in Bihar.

Source: Media, Govt. of India, IDBI Capital Research

Powers are segregated for smart

cities!

43


The first 20 out of 100 cities identified. NBCC has approached everyone.

Bhubaneswar Devangere NDMC (New Delhi) Udaipur

Pune Indore Ahmedabad Guwahati

Jaipur Coimbatore Jabalpur Chennai

Surat Kakinada Vizag Ludhiana

Kochi Belgaum Solapur Bhopal


NBCC has already initiated the

talks!

44

What is NBCC’s scope in housing for all?

What is NBCC targeting in Housing for all?

The need for affordable housing is widely known.

Each state is planning on three models: (1)Rajasthan Model; (2) DDA Land pooling model; (3)Gujarat/Charkop model.

First, Rajasthan model: Drafted an extensive; PPPpolicy for different types of development: (1) Landowned by the government; (2) Land owned bydeveloper; (3) Acquisition of land by thegovernment; (4) Slum rehabilitation.

Results of Rajasthan Model: Housing unitswith market price of INR1,500 per sq ft wereoffered at a cost of INR 850 per sq ft forEWS/LIG category and INR1,000 per sq ft forMIG.

Typical flat cost: EWS is Rs.240k; LIG is Rs.375k;MIG is Rs.700k.The policy facilitatedconstruction of about 235k houses in 77 cities.

Second, DDA pooling model:

The current population: 17mn. The existinginfrastructure capacity: 15mn. Expectedcapacity of 2021 population: 23mn. What doesit entail? At least 50,000 acres.

Where are the constraints? Restricted financialcapacity of DDA to acquire huge land parcels;Unwillingness on part of the land owners; Lackof transparency in the acquisition process .

Particulars (Mn units) Urban Rural Total

Current Housing shortage 19 40 59

Required housing units by 2022 29 25 54

Total need 48 65 113

Source: KPMG study on affordable housing, Industry, Company and IDBI Capital Research

NBCC is pre-qualified for Housing

for all– at least for the work done is

anything to go by!

45


How will land pooling work?

Two categories of land pooling: 2 to 20hectares; above 20 hectares

We believe land based instruments will openthe chunky revenues.

FAR allowed to DE: Residential 400;Commercial 250.

Additional 15% residential FAR (above 400) isreserved for EWS housing.

DE to develop 500 EWS houses for every 10hectare.

Example:Project: Sardar Patel Ring Road

Ahmedabad Urban Development Authority(AUDA) conceptualized the plan to developSardar Patel Ring Road.

The Sardar Patel Ring Road is a 76 km arterialring road planned in 2002. With pooling method,the project minimized the need for landacquisition. Only a stretch of 13.1km wasacquired for the project, the rest was takenthrough the pooling route.

Land category >20 hectares 2-20 hectares

Land returned to Developer 60% 48%

Residential 53% 43%

Commercial 5% 3%

PSP 2% 2%

Source: Academic papers by Swati Sharma, IDBI Capital Research

Land pooling is the next big thing!

In Gujarat, it did wonders!

46


Increase in

Map Landholdings for a designated area

reorganize land parcels or plots,provide access to each land parcel or plot

set aside land for

public uses by taking a

portion from each

landholding

1

2

3

appropriate increments in landvalues for infrastructure development. Detailed infrastructure is designed and cost estimates are prepared.

4

Infra provision without additional cost

5


47


Example:Project: Sardar Patel Ring Road

The project was divided into 3 phases:

– Phase 1: Two-laning of the entire stretch ofthe ring road and construction of 4 lanesfor major stretches. (completed in 2006)

– Phase 2: construction of 4 lanes expandingthe earlier 2 lane network

– Phase 3: construction of flyovers andunderpasses at major intersections withnational highway, state highway andimportant roads. The project also includesservice roads, bicycle tracks, and exclusivebus lanes for Bus based Rapid TransitSystem (BRTS) and walkways on both sides

Public Private Partnership for RoadInfrastructure Development, AUDA

How was it financed?

An amount of Rs.2.3bn was required for theconstruction of phase 1 of the project.AUDA: AUDA invested Rs.1.3bn from its ownresources. Further, consortium of six bankslend the balance amount of Rs.1bn.

What is the Project Returns? First, tollcollection: from the ring road amounts toRs.10mn per month. Further, through valueCapture, AUDA reconstituted approximately1 km wide belt adjacent to the ring road.

Out of the total land acquired for the project60% was returned to the land owners, 20-30% was used to develop amenities likeroads, schools and gardens, and the rest wassold as separate plot. Due to development ofinfrastructure the land value of adjacentplots increased and AUDA earned about Rs.6bn through the sale of plots.


With Land pooling, it is minimal

land acquisition!

48


What is Gujarat/Charkop Model?

Even within Gujarat Model, there are fourtypes to deal with affordable housing.

The first is under the Regulations forRehabilitation and Redevelopment of theSlums, 2010. It is aimed at rehabilitation ofslums. Similar to the SRA model of Mumbai,the public sector does not build or financeanything, its only involvement is throughregulations and incentives such as additionalFSI.

For the scheme to be approved forconstruction, a society of individual slumdwellers must be formed and 75 per cent ofthese individuals must agree to the scheme.This scheme is only viable where the landvalue is very high.

The second scheme is under the Regulationsfor Residential Townships Act, 2009. Itrelates to private developers who want todevelop residential townships. The targetarea of township should be at least 40 acres.

The third scheme is --within township landshould allotted to Govt. Though Govt. paysthe market rate, they also finance theinfrastructure development.

The fourth scheme is the Urban Land Ceilingand Regulation Act. Gujarat Govt. hasrepealed the Urban Land ceiling andRegulation Act and transferred surplus landto local bodies at nominal rates.

Source: KPMG, Economics and Political weekly, IDBI Capital Research

If not land pooling, there are other

models ready on table!

49

What is NBCC’s scope in housing for all? NBCC has signed an MOU with Rajasthan

Govt. Management is contemplating EastKidwai Nagar model with an initial capitaloutlay of Rs.5bn

15 States have signed Memorandum ofAgreement (MoA) with the Ministry ofHousing & Urban Poverty Alleviationcommitting themselves to implement sixmandatory reforms essential for making asuccess of the housing mission in urbanareas.

State Number of cities/town

Chattisgarh 36

Gujarat 30

Kashmir 19

Jharkhand 15

Kerala 15

Madhya Pradesh 74

Odisha 42

Rajasthan 40

Telengana 34

Total Cities/towns 305

1Doing away with the requirement of separate Non Agricultural Permission (NAP) in case land falls in the residential zone earmarked in the Master Plan of city or town;

2 Preparing or amending Master Plans earmarking land for Affordable Housing;

3 Putting in place a single-window-time bound clearance system for layout approvals and building permissions;

4Doing away with approvals below certain built up area/ plot size in respect of Economically Weaker Sections and Low Income Groups;

5Legislating or amending existing rent laws on the lines of the Model Tenancy Act circulated by the Ministry of HUPA ; and

6To provide additional Floor Area Ratio (FAR)/Floor Space Index/Transferable Development Rights (TDR) and relax density norms , for slum redevelopment and low cost housing.

Source: Govt of India, IDBI Capital ResearchNBCC is all set to reap!

50

Can NBCC count on Railways?

What is the scope of Railway?

On 18th February, 2015, over the conferencecall, we asked Dr. Mittal on Railway landmonetization plans.

To this, he replied, “See, we are in discussionwith railway authority to develop their landparcels, not only in Mumbai in entire country,and particularly in Mumbai we had one landparcel, I mean approximately 10 acres to 11acres in Bandra next to railway station. Sowe are in discussion with them, but I meannothing concrete has emerged till now. So letus speak, but nothing has done.”

Post railway budget FY17, we wrote, “Shouldone look at asset monetization seriously?”

We have been here; seen this; done that. Toshore up the coffers, Indian railways havebeen talking about selling or developingrailway-linked land plots–for some time now.The proof of the pudding is in eating. Rosyprojections from Mumbai and Delhi railwayplots continue to remain on paper. Shouldthe tide change, the sole beneficiary is NBCCIN.

Source: Govt of India, IDBI Capital Research

Dr. Mittal is already in talks with

Railways! But we remain cautious.

51


Are the regulations in place?

On 18th February, 2011 Govt. passed an Act.

“The Standing Committee has also given itsview that in many places railway property isbeing encroached upon by the people andabout 2,300 hectares of railway land, whichis under encroachment, is mostly in metrocities. Most of the lands have beenencroached in and around metro cities andurban areas. The encroachment upon therailway property in rural areas is less.”

With these words, The Railway Property(Unlawful Possession) Amendment Bill, 2011,was passed in the upper house as an Act.

Even digitization of records is in place.

“Indian Railways have also digitised detailsof vacant plots of land measuring more thanone acre to chalk out the blue print formonetisation of its vacant land,” as perMinister of State for Railways, Manoj Sinha,in a written response to a question in theRajya Sabha in the winter session 2015.

Source: Govt of India, IDBI Capital Research

Despite legislations and digitization

of records….

52


Case Study: Sarai Rohila Railway Station

Rail Land Development Authority planned forcommercial development of 38 acres ofrailway land around Sarai Rohilla RailwayStation in Delhi. The station is centrallylocated--4 kms away the Connaught Place.The plans included Luxury residentialapartments, commercial/ shopping areas,railway housing, railway service building &common facilities, hospital/school and otheramenities, club with gymnasium and sportsfacilities.

RLDA held open auction for a 90-year landlease in 2010. Parsvnath Developers Limited,the selected developer, bided Rs.16bn forthe project, and paid Rs.3.3bn as an upfrontdown payment.

…And now…

"The development agreement with the RailLand Development Authority (RLDA) forimplementation of the project at SaraiRohilla-Kishanganj, New Delhi, through itsassociate company, Parsvnath Rail LandProject Private Ltd stands terminated due tocertain disputes between RLDA and PRLPPLand the disputes arising under thedevelopment agreement are pendingadjudication before tribunals," the companysaid in a regulatory filing on February 13th,2016.

Source: Media IDBI Capital Research

…Projects have failed.

53


Case Study: Mumbai TOD plans.

Consider Mumbai local trains. Travelling inMumbai local trains is a grueling task. Whydoes it happen? They are struggling formeaningful capital expenditure. The westernand central railways, from their latest annualreport, we learn the RoCE is less than 5%. Sad,that is less than some of the bank’s depositrates. More painfully, that is nearly half ofHong Kong Metro trains. And that’s bad.

What is the reason? In Mumbai, Fare boxrevenues, that is, revenues made out of mereticket selling, contribute 93% of the totalrevenue.

Figure: The time is now—Mumbai needs highershare of non Fare box revenues.

How Mumbai railways increase non-fare boxrevenues? (1) A Japanese Metro style transitlinked real-estate development. Has Governmentthought on this? We learn, MMRDA is thinking onthis since 2013. The progress is tepid, but ourhopes are not; (2) Higher FSI for nearby railwayplots and value unlocking—a CIDCO model; (3)higher advertising revenues and operationalefficiency to squeeze profits.

93%

67%

59%

7%

33%

41%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Mumbai

Tokyo

Hong Kong

Non-Fare box Revenues Fare box revenues


Source: Industry, MRVC, IDBI Capital Research

Even Mumbai TOD plans made no

progress.

54


Railways may unlock Rs.146bn opportunities in the near term.

Summary of commercial sites

entrusted to RLDA Nos. Area (Hectares)

Total no. of sites entrusted 60 590.0

Commercially amenable sites -where RLDA can

take action 35 139.0

Details of sites to be proposed 6 41.0

Sites with encumberances 19 410.0

Sites de-entusted by Railway Board 42 326.0

Commercially amenable sites--addressable market for NBCC Nos. Locations

Total Nos of Sites 35With MRVC 3 Thane, Bhandup & Mulund

Developer Fixed 5

Gaya, Delhi Sarai Rohilla, Bangalore PF Road, Gola ka

Mandirm, Vijaywada

Consultancy/Valuation in progress 7

Nagapattinam, Mahalaxmi, Amritsar, Katra, Secundrabad,

Vizag, Phoonse

Consultancy tenders to be invited 14

Ajmer, Jodhpur, Agra, Jhansi, Shamtaganj, Jaipur, Hazari

Bagh, Lalgarh, Bandra, GuntkalTenders for commercial bids to be invited 4

Aurangabad, Chennai, Salem & Gwalior

Tenders for consultancy under finalisation 1 GandhinagarTenders for consultancy tender invited NILTender invited for commercial site & underfinalisation. 1 Nizamabad

Source: RLDA ,IDBI Capital Research

Thereby plans remain merely on

cards!

55

Are there other avenues?What are other avenues being looked at?

NBCC signed an MoU with NAWADCO in Sept’14 todevelop Waqf properties. NAWADCO identifiedseveral Waqf properties including one in Delhi, twoin Rajasthan, six in Madhya Pradesh and seven inKarnataka, which would be developed asinstitutional and commercial projects.

NBCC signed a MoU with Air India in December2014 to monetize the surplus land. Air India has106 properties in the country.

Further, re-development can unlock some ofAir India properties is an attempt topotentially unlock the value of ~Rs50bn overa period of 10 years.

Also, NBCC is in seeks to monetizedevelopment of sick PSUs’ land banks.Company will follow a model similar to AirIndia.

Govt. has plans to appoint NBCC inredevelopment of real estate parcels forPrinting press.

Similar to AIIMS project of Rs.58bn, companyis scouting other institutions.

Though NBCC has incorporated "NBCC GulfLLC" in the Sultanate of Oman with 70%equity participation, the stream of orderinflows are still unclear.

Registered Waqf properties (units in 000's) 490

Current Annual Income (Rs.bn) 1.63

Potential Annual Income (Rs.bn) 120

Estimated Land Bank('000s acres) 600

Market value of Land (Rs.bn) 1,200

So, if not railways, there are many

more!

56

Is the latest acquisition a worrying point? First, Why did this happen? In the past,

Govt. had plans to merge four public sectorundertakings.

We believe this is in continuation of theearlier plans. The companies which are beingconsidered for merger are National BuildingsConstruction Corporation (NBCC), HindustanPrefab Ltd (HPL), National ProjectConstruction Corporation Ltd (NPCC) andHindustan Steelworks Construction Ltd(HSCL).

The Board for Reconstruction of PublicSector Enterprises (BRPSE) has constituted atask force to examine different options,which may include project-based consortiumfor business bids.

As per BRPSE, “All these companies in oneway or other are engaged in constructionactivities and possess synergies.

A combined entity by way of merger maycreate a giant company and are capable ofbecoming a navratna firm."

National Buildings Construction CorporationLtd has informed BSE that the Board ofDirectors of NBCC have accorded in-principleapproval for takeover after restructuring itsBalance Sheet. This would involve waiver offLoans with interest up to the date oftakeover and providing further contributionfor contingent liabilities.

HSCL was established in 1964 as aconstruction organization under the Ministryof Steel, Govt of India. It diversified into aversatile infrastructure portfolio all over thecountry. It became the major player inimplementation of integrated steel plants. Ithas been a pioneer of Infrastructure projectsin the North Eastern regions includingProjects under Bharat Nirman Programme ofGovt of India .

The acquisition is by and large

synergistic!

57

Is the latest acquisition a worrying point?

What about financials? HSCL’s target orderbook was supposed to be Rs.85bn by the endof FY16. We are not clear if the orders offinalized. Further, order intake is primarilyaimed at SAIL and NMDC’s capacityexpansion program. Roads and bridgescontribute 12% of the total order book. Thetotal income is Rs.15bn in FY15. Though thiscompany is net loss at Rs.81mn, theoperational profit was Rs.1.1bn at the end ofFY15.

Other than SAIL, NMDC, Roads, Is HSCL adiversified business model? Granted, HSCL isone of the three PSUs identified by theMinistry of External Affairs to carry out theconstruction and repair of 50,000 low-costhouses in Sri Lanka. This was as a part of thecommitment of Govt. of India forresettlement of Internally Displaced Persons.Scheduled for initiation soon, the project islikely to usher in a new era of overseaspresence for the company, company hascommented in the past. Further, thiscompany has signed an MOU with theTogolese Republic for implementation ofHousing projects bears the testament offaith imposed on HSCL by the countriesoverseas also.

Debt on the target company is a

concern. However, NBCC has

asked Govt. to absorb it.

58

Are there substitutes for NBCC? Orders are one thing; profitability is

quite another. Is that the case?

No. And here is the reason why: First, AskShobbit Uppal, the Deputy managingdirector of Ahluwalia Contracts or MKrishnamurthi, the Chief Corporate affairs, ofVascon, and they will acknowledge thehardships of working with NBCC.

Second, management themselves claims thatthey are working on superior business modelunmatched. And with sovereign backing, thecompetitive advantage is forever.

Third, through a litany of high courtjudgments in litigation, we are convincedNBCC is the killer in the value chain.

Project Owner (DDA)

Project Consultant (NBCC)

Contractor(AHLU, LT, PEC)

Housing Finance (SBI, Dewan

Housing)

Materials and Building equipment

(Kajaria, Asian Paints, Cera

Sanitary ware)

If you want to play Housing, play

NBCC. Nothing else. Simple.

59

Is market microstructure an issue? What will, if any, be the impact of

additional inventory offloaded byGovt.?

• No, there is no impact.

• First, with Government owning 90% ofthe stake, and unmatched themepresent before investors, marketmicrostructure supersedesfundamentals.

• Now, as per Security Contract(Regulations) Rules, 1957, minimumthreshold of public holding is 25%. Tocomply with this rule, we speculateNBCC, with Government approval, willdilute its stake going forward.

• However, using our models, theadditional quantity of inventory, marketfears of fall in prices is overblown.

Second, NBCC can propose an FPO to raise seedmoney to invest in redevelopment projects.

But then, this money is ring fenced with returns ifnot matching, exceeding the cost of equity. Andmore importantly, this is not cash guzzling strategylike L&T.

Market impact Cost NBCC IN LT IN

6 mo avg. Daily Volume (#shares) 49,424 3,32,796

Buying quantity (#shares) 10,00,000 10,00,000

Impact factor 4.50 1.73

Daily volatility 2% 1%

Market impact 9.0% 1.7%

Bid-ask spread 0.05% 0.05%

Traded volume impact 9.0% 1.8%

Total outstanding shares (mn) 12 931

Total free float (mn) 1.2 931

Total buying quantity 1.00 1.00

Buying quantity as a % of free float 83% 0%

Free float impact 54% 2%

Total Market impact cost 63% 3.6%


With stickiness in float, big ticket

purchase is clearly not a smart

thing.

60

Why do we think valuation is cheap?

Why the valuation is still cheap?

• First, scalability of business model isintact.

• Second, there is a visibility to that.

• Third, the Return on equity is far aheadof cost of equity.

• Fourth, from implied growthexpectations, we see the potential ofNBCC to double over the next fouryears.

• Fifth, add focus on uncertain orders, thefair value may even triple.

• Sixth, across the industrial value chain,there is hardly a stock that can matchthis theme. Thus, over the next fouryears, we will not be surprised if thestock price achieves the target price ofRs.2,000.

(Rs.bn) FY17E FY18E FY19E FY20E

Opening Order Book 361.9 607.8 838 1087

Order Inflow 322 340 400 400

Revenue 77 110 151 188

Closing order Book 608 838 1087 1299

Gross Margins 7% 9% 10% 10%

Gross Profit 5.4 9.9 15.1 18.8

Employee Strength 2547 2797 3047 3297

Per Employee annual expense 1.1 1.16 1.28 1.41

Total employee expense 3 3 4 5

Fixed expenses 0.77 1.10 1.51 1.88

EBITDA 1.9 5.6 9.7 12.3

Other Income 2.4 3.4 4.3 5.2

Depreciation 0.0 0.0 0.0 0.0

PBT 4.3 8.9 14.0 17.5

PAT 3 6 9 12

PE Multiple for core business 30

Fair value of PMC Business 351

Fair value of Real Estate Business 45

Total fair value of the company 396

Discounted Target Value(Rs.bn) 226

Market Cap Today (Rs.bn) 113

Upside 100%


If everything goes by plans, the

stock has a long way to go

61

Annexure: On Employees Is Employee a major concern?

• First, Focus will be on newer, lower costemployee addition who will substitutehigher cost, older employees.

• Second, NBCC will focus on ticket size ofthe project.


Employee structure 2015 2014

Number of employees 2047 2149

Average Past Service 24.26 24.26

Average Age 49.96 50.01

Average remaining working life 10.04 9.99

Employee Structure Total nos.

Gourp’A’ 738

Gourp’B’ 118

Gourp’C’ 1155

Gourp’D’ 36

Total Employees 2047

Employee productivity is not a

concern!

62

Financial Summary

Y/E (Rs mn) 2015 2016E 2017E 2018E

Net sales 46,741 59,829 77,130 89,749

growth (%) 14.8 28.0 28.9 16.4

Operating expenses (43,848) (55,879) (71,795) (83,210)

EBITDA 2,894 3,950 5,335 6,539

growth (%) 20.7 36.5 35.1 22.6

Depreciation (23) (19) (20) (21)

EBIT 2,870 3,931 5,315 6,518

Interest paid (414) - - -

Pre-tax profit 3,928 4,918 6,876 8,444

Tax (1,146) (1,607) (2,329) (2,916)

Effective tax rate (%) 29.2 32.7 33.9 34.5

Net profit 2,783 3,311 4,547 5,528

growth (%) 8.3 18.9 37.3 21.6

Shares o/s (mn nos) 120 120 120 120

Income Statement Balance SheetY/E (Rs mn) 2015 2016E 2017E 2018E

Net fixed assets 262 304 304 304

Investments 1,460 1,460 1,460 1,460

Other non-curr assets 195 195 195 195

Current assets 45,316 55,820 71,090 84,234

Inventories 11,733 14,752 19,864 23,113

Sundry Debtors 17,043 16,228 20,498 23,851

Cash and Bank 10,665 19,595 24,178 29,648

Loans and advances 5,874 5,245 6,551 7,622

Total assets 47,233 57,779 73,050 86,193

Shareholders' funds 13,384 15,774 19,121 23,449

Share capital 1,200 1,200 1,200 1,200

Reserves & surplus 12,184 14,574 17,921 22,249

Curr Liab & prov 33,806 41,962 53,886 62,701

Current liabilities 32,843 40,979 52,829 61,472

Provisions 962 983 1,057 1,229

Total liabilities 33,849 42,006 53,929 62,744

Total equity & liabilities 47,233 57,779 73,050 86,193

Book Value (Rs) 112 131 159 195

63

Y/E (Rs mn) 2015 2016E 2017E 2018E

Adj EPS (Rs) 23.2 27.6 37.9 46.1

Adj EPS growth (%) 8.3 18.9 37.3 21.6

EBITDA margin (%) 6.2 6.6 6.9 7.3

Pre-tax margin (%) 8.4 8.2 8.9 9.4

ROE (%) 22.5 22.7 26.1 26.0

ROCE (%) 23.0 26.9 30.4 30.6

Turnover & Leverage ratios (x)

Asset turnover (x) 1.1 1.1 1.2 1.1

Leverage factor (x) 3.6 3.6 3.7 3.7

Net margin (%) 6.0 5.5 5.9 6.2

Net Debt/Equity (x) -0.8 -1.2 -1.3 -1.3

Working Capital & Liquidity ratio

Inventory days 92 90 94 94

Receivable days 133 99 97 97

Payable days 273 268 269 270

Adj EPS (Rs) 2015 2016E 2017E 2018E

PER (x) 40.9 34.4 25.0 20.6

Price/Book value (x) 8.5 7.2 5.9 4.9

PCE (x) 40.5 34.2 24.9 20.5

EV/Net sales (x) 2.2 1.6 1.2 0.9

EV/EBITDA (x) 35.6 23.8 16.8 12.9

Dividend Yield (%) 0.5 0.7 0.9 0.9

Cash Flow Statement Financial RatioY/E (Rs mn) 2015 2016E 2017E 2018E

Pre-tax profit 3,928 4,918 6,876 8,444

Depreciation 24 19 20 21

Tax paid (1,107) (1,607) (2,329) (2,916)

Chg in working capital (2,822) 6,582 1,236 1,141

Cash flow from operations (a) (1,547) 9,912 5,803 6,690

Capital expenditure (61) (61) (20) (20)

Chg in investments (455) - - -

Cash flow from investing (b) (24) (61) (20) (20)

Equity raised/(repaid) - - - -

Debt raised/(repaid) - - - -

Dividend (incl. tax) (719) (922) (1,200) (1,200)

Chg in minorities - - - -

Cash flow from financing (c) (702) (922) (1,200) (1,200)

Net chg in cash (a+b+c) (2,273) 8,929 4,583 5,470

Valuations

Financial Summary (Contd.)

64

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