Working Capital Management: A Case on Nagarjuna

Construction Company Ltd (NCCL)

Introduction:

With the rising market uncertainty and increased government regulations, Hemant M
Nerurkar, the Chairman of NCCL is pored over the dilemma of whether the firm is executing
an optimal level of working capital management or it needed some changes in the way of
calculating it in order to achieve a strong position in terms of Liquidity, Operational
Efficiency and Overall Financial health.

The firm as well as the construction industry is facing an adverse market situation with rising
market uncertainty due to the introduction of demonetisation and GST by the Government of
India which has led to a successive increase in the demand structure. This has prompted the
firms to initiate efforts towards efficiently executing its operations and ultimately marching
towards having an efficient Working Capital Management.

The other firms in the market have also started putting in efforts towards efficient working
capital management further making him wonder what could be the best means of evaluating
the WC.

Although he was optimistic and relied on the current working capital management practices,
but he knew numerous examples of firms who had risked their future by relying on their
traditional working capital requirements.

The NNCL employees had completed all their fact gathering and were ready to provide the
analysis of WC requirements of the current period and project the overview thereof.

NCCL has been providing world class infrastructure support to India’s growing Industrial,
Retail, ITeS and Services sector. Apart from the construction business NCCL is into roads,
irrigation, railways, power, metals, mining etc. The firm, whose revenue form operations
have grown steadily over the years had a net operating revenue of Rs 8549.14 in March 2016.
Company Background:

NCC Limited (previously Nagarjuna Construction Company Limited) was established in

1978 as a partnership firm and converted into a limited company in 1990 with the main object
of taking over the business of erstwhile partnership concern M/s. Nagarjuna Construction
Corporate.

NCCL was promoted by Shri A V S Raju, Shri K I Narayana, Shri A A V Ranga Raju and
Shri A G K Raju.

NCC has progressed consistently over the past three decades. It is amongst the top 3
construction companies in India in terms of revenue.

NCC undertakes civil construction in segments such as buildings, roads, irrigations, power,
electrical, railways, metals and has also a presence in the Middle East where it is currently
undertaking works in buildings, roads and water segments.

Key construction projects taken are All India Institute of Medical Sciences at Patna and
Bhopal, Design and construction of Airports at six location in the state of Andhra Pradesh,
construction of Six Lane Agra Lucknow Expressway, Construction of Group housing
Yamuna Vihar, Development of IIM Raipur, IIT Patna etc.

Major Customers of NCCL are National Highway Authority of India (NHAI), Government of
West Bengal, U.P. Housing and Development Board, Steel Authority of India, Ministry of
Defence, Rail Vikas Nigam Limited, Government of Oman and many other Government and
Private authority.

NCC has 2 groups-

1. NCC Urban, a subsidiary of NCC, focusses on Urban Infrastructure projects such as

development of residential apartments, townships and complexes with advanced
building techniques. NCC Urban is an ISO 9001:2000, certified company with
operations in Vishakhapatnam, Goa, Guntur and Raipur. NCC Urban is executing
approximately 8.5 million sft. of built up area in luxury apartments and villa
segments.
2. NCC Infra is an infrastructure development company and a wholly owned subsidiary
of NCC. The company was incorporated in 2005. Undertaking the development of
infrastructure projects through Government concessions, NCC Infra primarily focuses
 on long term infrastructure projects that offer stable revenue streams. This group
specialises in roads, hydro electrical, non-metro airports and seaports project.

NCCL in News-

1. “Nagarjuna Construction Company Ltd has informed that the Joint Venture viz. Somdatt
Builders - NCC Joint Venture floated by the company along with M/s Somdatt Builders
Ltd has been awarded by the Superintending Engineer, State Road Project Circle at
Gandhinagar, Gujarat a contract worth Rs 993.80 million for strengthening and paving of
shoulders of SH 24, Rajkot-Morvi (Km 1/827 to Km 70/192).”
2. “Nagarjuna Construction receives 'Best Under a Billion' award from Forbes Asia,
Singapore”
3. “NCCL joins hand with NHAI -Nagarjuna Construction secures order from Sultanate of
Oman worth Rs 1180 mn”

Financial Highlights

During the year FY (18) new records were set with 12-month period turnover cr with an
EBITDA of as against the turnover of with an EBITDA during the previous year. The
strategy adopted by NCCL during this period was improving on operational and financial
performance, risk mitigation and also rationalisation of subsidiary businesses.

Debt collection days have improved substantially from 102 days in FY (17) to 84 days in FY
(18). Excluding the cash and bank balances, the working capital days are 96 days as
compared to days in FY (17).

Demonetisation and GST regime

However, with introduction of GST and demonetisation, there has been an increase in the
market uncertainty and a need has arisen to efficiently manage the working capital.

In earlier tax regime, firms were required to pay service tax of 15% versus GST of 18%, this
additional tax component contributing to the increased cash flow requirements for the firm.
Also, with credit eligibility restricted to making payment within 180 days, firms would be
required to optimise procure to pay process to utilize the available input tax credit.

With demonetisation, the cash in hand is reduced which is reflected in bank balance and in
absence of cash there may be more credit sales leading to rise in sundry debtors. With this,
for meeting working capital requirements there will be more demand for bank borrowing if
there is demand for goods produced and interest rate is low.

As regards to the current liabilities there will be fewer advance payments as well as market
credit. So, the working capital gap will widen leading to increased need for bank balance.

About the Industry

Infrastructure/ Construction sector is a key driver for Indian economy and is responsible for
propelling India’s overall development. This sector enjoys intense focus from Government
for initiating policies that would ensure creation of world class infrastructure. Infrastructure
sector includes bridges, power, dams, roads and urban infrastructure. GOI has announced the
target of Rs 25 trillion (US$ 376.53 billion) investment in infrastructure over a period of three
years, which will include Rs 8 trillion (US$ 120.49 billion) for developing 27 industrial
clusters and an additional Rs 5 trillion (US$ 75.30 billion) for road, railway and port
connectivity projects.

The Construction industry in value terms is expected to record a CAGR of 15.7% to reach
$ 738.5 bn by 2022. Also, the industry contributes 55% share in the Steel industry, 15% in
the Paint industry and 30% in the Glass industry. The Construction industry in India is
expected to grow at 5.6% during 2016-20, compared to 2.9% during 2011-15. 

Infrastructure related activities witnessed a strong growth during the 2017-18 period with
national highway construction recording the highest percentage increase of 20 percent, with a
23 per CAGR between FY 14-18. Revenue growth has been strong over the years for
Railways with gross revenues increasing at a CAGR of 6.30 percent to US $44.5 billion in
FY18. For power generation, installed capacity increased steadily over the years posting a
CAGR of 9.1 percent in FY 17-18.

Key private players are-

 1. IRB (Infrastructure Developers Limited)
2. Ahoka Buildcon Limited
3. Hindustan Construction Company
4. Punj Lloyd
5. Larsen and Tourbo (L&T)
6. GMR Infrastructure Ltd
7. Adani Infrastructure Management Services Ltd.

The Key industry organisations are National Highway Authority of India (NHAI), Airports
Authority of India (AAI), Infrastructure Industry and Logistics Federation of India (ILFI),
Construction Industry Development Council (CIDC)

The market size stands at US $454.83 billion which needs to be spent over the next five years
with 70% of funds needed for power, roads and urban infrastructure segments. The Foreign
Direct Investment (FDI) received in the construction development sector form April 2000 to
March 2016 stood at US $24,19 billion. India is seeing significant interest from international
investors in the urban infrastructure space. The Asian Development Bank (ADB) has
approved US $ 631 million loan to develop the first coastal corridor, The Construction
Industry Development Board (CIDB) of Malaysia has proposed to invest US$ 30 billion in
urban development and housing projects, Airports Authority of India (AAI) plans to develop
city side infrastructure at 13 regional airports across India, with help from private players for
building hotels, car parks and other facilities, Government of India has announced highway
projects worth US $93 billion over the next three years.

Government Initiatives- The GOI is planning to boost the regional connectivity by setting
up 50 new airports over the next 3 years, investment of over Rs 7000 cr to develop the north
eastern region for better connectivity, Ministry of Urban Development has approved an
investment of Rs 19,170 crore for improving basic infrastructure in 474 cities in 18 states,
Budgetary allocation for Roads and Railways in the Union Budget 2016 has been increased to
Rs 218,000 crore (US $31.98 billion) with an aim to boost the private investment cycle.

Working Capital Management (WCM)

Construction, like any other business requires short term working capital for its existence and
when a construction project is started the availability of fund is limited and this could be from
the previous project undertaken, or the upfront advance given to the firm by the client.
However, with the limited fund the project cannot be completed, and overheads need to be
incurred besides paying salaries for the employees. One of the major costs incurred is against
procurement of raw material like cement, structured steel and other essentials for
construction.
This can cost much more than what the firm may have and is important to have an alternative
source of finding. To determine this Woking Capital Management plays an important role.

Factors that are required for estimating the working capital in construction projects are-
 Average credit period expected to be allowed by suppliers.
 Total cost incurred on wages and materials.
 Length of time the raw material remains in store before issued for production.
 Length of production cycle or work in process.
 Average period of credit allowed to customers.
 Length of sales cycle during which finished goods are to be kept waiting for sales.
 Amount of cash required to make an advance payment.

Liquidity (i.e. capability to meet current financial needs) is tightly linked with level of
working capital and owing to the specific character of construction industry, there is unique
approach to working capital management due to the legal and tax environment, need to
observe stock limits in logistic, need to compete for credit lines to pay for certain areas of
construction work. The liabilities of current nature are paid through current assets like
marketable securities, cash and cash equivalents. The faster an asset can be converted into
liquid cash more likely that the company will be able to pay debt.
Conventional W.C.= Current assets – Current liabilities

Non-Conventional W.C.= Non-cash Current assets – Noninterest-bearing Current

Liabilities

Conclusion
The CEO of NCCL is thinking about the ways in which working capital can be calculated and
how it can be managed and used for improving company’s earnings and profitability through
efficient use of resources, in uncertain times when demand is becoming more and more
variable and the government is imposing new regulations like GST and Demonetisation. The
CEO walks down the stairs to the meeting room where he has called the team to decide upon
the working capital requirements.

Exhibit 1: Consolidated Income Statement

  Mar'18 Mar '17 Mar '16 Mar '15

  12 mths 12 mths 12 mths 12 mths

Income        

Sales Turnover 8,390.64 9,000.57 9,527.25 9,512.89

Net Sales 8,390.64 9,000.57 9,527.25 9,512.89

Other Income -22.72 123.69 92.09 126.7

Stock Adjustments 107.02 -145.79 201.77 228.34

Total Income 8,474.94 8,978.47 9,821.11 9,867.93

Expenditure        

Raw Materials 3,162.23 3,280.12 4,149.99 4,836.32

Employee Cost 453.32 459.22 470.47 396.42

Other Manufacturing Expenses 3,726.85 4,108.66 1,072.24 3,210.19

Miscellaneous Expenses 275.88 337.06 3,039.60 298.6

Total Expenses 7,618.28 8,185.06 8,732.30 8,741.53

  Mar '18 Mar '17 Mar '16 Mar '15

   

  12 mths 12 mths 12 mths 12 mths

   

Operating Profit 879.38 669.72 996.72 999.7

PBDIT 856.66 793.41 1,088.81 1,126.40

Interest 459.56 513.34 642.58 737.12

PBDT 397.1 280.07 446.23 389.28

Depreciation 171.51 202.55 248.25 276.59

Profit Before Tax 225.59 77.52 197.98 112.69

PBT (Post Extra-ord Items) 225.59 77.52 197.98 112.69

Tax 80.16 37.93 85.73 51.21

Reported Net Profit 145.44 39.59 112.25 61.48

Minority Interest 0 -23.28 -38.82 -6.01

Share Of P/L Of Associates 6.71 31.19 30.64 13.62

Net P/L After Minority Interest & 262.81 111.9 160.6 53.87
Share Of Associates
Total Value Addition 4,456.05 4,904.93 4,582.31 3,905.22

Equity Dividend 26.77 33.36 22.24 22.24

Corporate Dividend Tax 0 6.79 4.53 4.53

 Per share data (annualised)        

Shares in issue (lakhs) 6,006.47 5,559.32 5,559.32 5,559.32

Earning Per Share (Rs) 2.42 0.71 2.02 1.11

Book Value (Rs) 67.97 62.02 61.01 61.19

Exhibit 2: Balance Sheet

  Mar-18 Mar-17 Mar-16 Mar-15

12 months 12 months 12 months 12 months

       
EQUITIES AND
LIABILITIES
SHAREHOLDER'S        
FUNDS
Equity Share Capital 120.13 111.19 111.19 111.19

Total Share Capital 120.13 111.19 111.19 111.19

Reserves and Surplus 4,121.52 3,331.10 3,149.63 3,093.24

Total Reserves and 4,121.52 3,331.10 3,149.63 3,093.24

Surplus
Total Shareholders 4,241.65 3,442.29 3,260.82 3,204.43
Funds
NON-CURRENT        
LIABILITIES
Long Term 118.53 9.11 101.86 262.51
Borrowings
Deferred Tax 0 0 0 14.22
Liabilities [Net]
Other Long Term 124.31 75.45 49.74 53.47
Liabilities
Long Term Provisions 15.1 8.75 22.8 21.08

Total Non-Current 257.95 93.31 174.41 351.28

Liabilities
CURRENT        
LIABILITIES
Short Term 1,045.09 1,528.26 1,716.57 1,662.69
Borrowings
Trade Payables 3,388.19 2,868.82 2,771.05 1,765.56

Other Current 1,838.88 986.42 1,326.94 2,415.28

Liabilities
Short Term 28.81 24.94 5.92 33.91
Provisions
Total Current 6,300.97 5,408.44 5,820.47 5,877.44
Liabilities
Total Capital And 10,800.56 8,944.03 9,255.69 9,433.15
Liabilities
ASSETS        

NON-CURRENT        
ASSETS
Tangible Assets 747.83 589.95 580.18 627.35

Intangible Assets 1.58 2.25 3.73 4.93

Capital Work-In- 22.93 1.27 7.64 7.85

Progress
Other Assets 58.65 48.13 35.84 0

Fixed Assets 830.99 641.61 627.39 640.14

Non-Current 1,023.74 1,028.69 956.78 1,156.78

Investments
Deferred Tax Assets 179.25 135.42 81.45 0
[Net]
Long Term Loans 487.27 0 11.55 139.89
And Advances
Other Non-Current 355.59 253.49 204.35 147.6
Assets
Total Non-Current 2,876.84 2,059.20 1,881.52 2,084.40
Assets
CURRENT ASSETS        

Current Investments 0 0 0.23 0

Inventories 1,695.56 1,525.83 1,656.77 1,803.09

Trade Receivables 4,505.64 3,535.81 3,086.63 1,363.22

Cash And Cash 65.88 109.46 215.85 112.69

Equivalents
Short Term Loans 145.17 586.08 1,149.44 2,755.42
And Advances
Other Current Assets 1,511.47 1,127.65 1,265.25 1,314.33

Total Current Assets 7,923.72 6,884.83 7,374.17 7,348.76

Total Assets 10,800.56 8,944.03 9,255.69 9,433.15

OTHER        
ADDITIONAL
INFORMATION
CONTINGENT        
LIABILITIES,
COMMITMENTS
Contingent Liabilities 1,253.00 1,766.52 1,764.60 2,227.74

CIF VALUE OF        
IMPORTS
Raw Materials 0 0 84.94 115.86

Capital Goods 0 0 27.66 24.29

EXPENDITURE IN        
FOREIGN
EXCHANGE
Expenditure In 0 0 3.11 1.63
Foreign Currency
REMITTANCES IN        
FOREIGN
CURRENCIES FOR
DIVIDENDS
Dividend Remittance - - 6.6 1.91
In Foreign Currency
EARNINGS IN        
FOREIGN
EXCHANGE
FOB Value Of Goods - - - -

Other Earnings - - - -

BONUS DETAILS        

Bonus Equity Share 20.67 20.67 20.67 20.67

Capital
NON-CURRENT        
INVESTMENTS
Non-Current - - 1.31 0.71
Investments Quoted
Market Value
Non-Current 1,204.01 1,089.99 1,082.61 1,156.78
Investments
Unquoted Book Value
CURRENT        
INVESTMENTS
Current Investments - - - -
Quoted Market Value
Current Investments 0 0 0.23 0
Unquoted Book Value
Exhibit 3: Data on Comparable

Company Net Sales Assets Contingent Inventory Cash/Bank Net

Name Liabilities Profit

  (Rs. cr) (Rs cr) (Rs cr) (Rs cr) (Rs cr) (Rs cr)

NCC 12,079.76 107.28 1138.87 512.96 298.96 563.91

Rail Vikas 10,060.07 -1738.62 20846.34 4.48 942.39 606.59

Simplex Infra 6,041.46 744.4 1850.26 773.88 110.58 122.56

Hind Constr 4,341.00 895.85 507.88 197.16 224.4 -1961.75

Punj Lloyd 4,059.49 -503.93 724.33 117.05 398.16 317.37

Ashoka 3,820.64 1733.28 3060.03 152.66 54.99 286.16

Buildcon

Sadbhav Engg 3,549.23 2531.22 1296.12 179.17 60.37 186.85

Gayatri 3,463.15 57.4 4639.82 357.41 326.55 210.77

Project

PNC 3,096.87 1739.28 3342 403.55 309.42 324.91

Infratech

J Kumar 2,787.09 1562.66 2596.01 918.68 471.29 177.07

Infra

ITD 2,283.46 705.35 2739.26 154.34 82.28 81.87

Cementation

Man 2,215.39 689.31 645.14 216.63 47.22 57.38

Industries

KNR 2,137.26 983.93 643.83 95.09 13.02 263.27

Construct
Exhibit 4: Management
MANAGEMENT - NCC

Name Designation

Hemant M Nerurkar Chairman & Independent Director

A S N Raju Whole Time Director

A V N Raju Whole Time Director

Renu Challu Independent Director

A S Durga Prasad Independent Director

Utpal Sheth Director

Name Designation

A A V Ranga Raju Managing Director

J V Ranga Raju Whole Time Director

A G K Raju Executive Director

S Ravi Independent Director

Utpal Sheth Director

Exhibit 5: Valuation

Market Cap 1030.64 Market Lot 1 Price/Book 0.21

(Rs cr)
P/E 2.29 Industry P/E 13.84 Dividend Yield (%) 8.88
Book Value 79.93 EPS 7.35 Face Value (RS) 2
(Rs)
Dividend (%) 75.00 P/C 1.61 Deliverables (%) 22.11

Exhibit 6: Cash Flows

 CASH FLOW OF NCC (in Mar-18 Mar-17 Mar-16 Mar-15
Rs. Cr.)
  12 months 12 months 12 months 12 months

NET PROFIT/LOSS 218.89 46.33 167.34 112.69

BEFORE
EXTRAORDINARY
ITEMS AND TAX
Net Cash Flow from 585.82 313.57 395.46 866.91
Operating Activities
Net Cash Used in Investing -188.33 375.57 192.51 -95.25
Activities
Net Cash Used from -453.46 -817.83 -551.13 -642.54
Financing Activities
Foreign Exchange Gains / 0 0 0 0
Losses
NET INC/DEC IN CASH -55.97 -128.69 36.85 129.12
AND CASH
EQUIVALENTS
Cash and Cash Equivalents 132.03 260.72 223.87 97.02
Begin of Year

Cash and Cash Equivalents 76.06 132.03 260.72 226.14

End Of Year

Exhibit 7: Financial Ratios

 
KEY FINANCIAL Mar-18 Mar-17 Mar-16 Mar-15  
RATIOS OF
NCC (in Rs.
Cr.)
PER SHARE RATIOS          
Basic EPS (Rs.) 2.99 0.57 2.17 1.23  
Diluted EPS (Rs.) 2.99 0.57 2.17 1.23  
Cash EPS (Rs.) 5.28 4.36 6.48 6.08  
Book Value [Excl Reval 72.97 67.93 66.86 66.97  
Reserve]/Share
(Rs.)
Book Value 72.97 67.93 66.86 66.97  
[InclRevalReser
ve]/Share (Rs.)
Revenue from 139.69 161.9 171.37 171.12  
Operations/Sha
re (Rs.)
PBDIT/Share (Rs.) 16.33 15.71 20.31 20.26  
PBIT/Share (Rs.) 13.47 12.07 15.84 15.29  
PBT/Share (Rs.) 3.76 1.39 3.56 2.03  
Net Profit/Share (Rs.) 2.42 0.71 2.02 1.11  
NP After MI And SOA / 2.81 0.57 2.17 0.97  
Share (Rs.)
PROFITABILITY          
 RATIOS
PBDIT Margin (%) 11.68 9.7 11.84 11.84  
PBIT Margin (%) 9.64 7.45 9.24 8.93  
PBT Margin (%) 2.68 0.86 2.07 1.18  
Net Profit Margin (%) 1.73 0.43 1.17 0.64  
NP After MI And SOA 2 0.35 1.26 0.56  
Margin (%)
Return on 4.13 0.91 3.55 1.58  
Networth/Equit
y (%)
Return on Capital 3.31 0.7 2.42 1.04  
Employed (%)
Return on Assets (%) 1.35 0.28 0.97 0.42  
Total Debt/Equity (X) 0.45 0.72 0.9 0.96  
Asset Turnover Ratio (%) 67.62 81.01 77.31 75.83  
LIQUIDITY RATIOS          
Current Ratio (X) 1.32 1.34 1.27 1.27  
Quick Ratio (X) 0.93 0.93 0.88 0.89  
Inventory Turnover Ratio 2.96 3.31 3.33 3.45  
(X)
Dividend Payout Ratio 15.87 126.7 18.46 41.27  
(NP) (%)
Dividend Payout Ratio 7.86 17.13 6.03 6.72  
(CP) (%)
Earnings Retention Ratio 84.13 -26.7 81.54 58.73  
(%)
Cash Earnings Retention 92.14 82.87 93.97 93.28  
Ratio (%)
COVERAGE RATIOS          
Interest Coverage Ratios 1.76 1.31 1.37 1.15  
(%)
Interest Coverage Ratios 1.76 1.31 1.37 1.15  
(Post Tax) (%)
VALUATION RATIOS          
Enterprise Value (Cr.) 9,089.00 7,180.54 7,259.59 9,447.41  
EV/Net Operating 1.08 0.8 0.76 0.99  
Revenue (X)
EV/EBITDA (X) 9.27 8.22 6.43 8.39  
Market Cap/Net 0.84 0.51 0.44 0.65  
Operating
Revenue (X)
Retention Ratios (%) 84.12 -26.7 81.53 58.72  
Price/BV (X) 1.73 1.32 1.24 1.83  
Price/Net Operating 0.84 0.51 0.44 0.65  
Revenue
Earnings Yield 0.02 0.01 0.03 0.01

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